Coeur Mining Inc (CDE) 2006 Q1 法說會逐字稿

Good day everyone and welcome to today's Coeur d'Alene Mines Corp. oration first-quarter earnings 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, sir.

Thanks. Hello everyone. I'm Scott Lamb, VP of Investor Relations for Coeur d'Alene. Thank you for joining us on the call today to discuss our results for the first quarter of 2006. In accordance with our standard practice, the call is also being broadcast live on the Internet through our website at www.Coeur.com where we also posted the slides that accompany our prepared remarks. The slides and the audio replay of the call will be available for two weeks afterwards on our website.

I hope you had a chance to see the press release. I would like to point out that beginning this quarter, we are providing some additional disclosure on each of our minds in the press release and in the 10-Q, specifically data on tons, grade, and recovery. We're doing this at least in part to be responsive to feedback from analysts and investors and we certainly hope you find this additional information helpful.

Today's presenters include Dennis Wheeler, Chairman, President, and Chief Executive Officer; Jim Sabala, Executive VP and Chief Financial Officer, and Don Birak, Senior VP of Exploration. Also with us today is Harry Cougher, Senior Vice President of North American Operations.

As always, I need to tell you that any forward-looking statements made today by management come under securities legislation in United States and Canada 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.

Thanks, Scott, and welcome everybody to today's call. Coeur, thanks to the effort of many people, reported superlative financial results for the first quarter. Not only did our net income of $14.3 million set an all-time quarterly record, but it also represents sector-leading net income from operations. Our comparisons to a year ago's quarter seem favorable in almost every category.

In particular, we reported a 31% increase in silver production from continuing operations with total silver production of 3.3 million ounces, a 39% increase in our metal sales, a decline in our cash cost per ounce of silver to $3.94 below our corporate objective of $4 an ounce from continuing operations, and 8% decline in corporate G&A, record quarterly operating cash flow of 17.2 million, and encouraging results from exploration in both Cerro Bayo and Kensington.

Coeur's record-setting performance in the first quarter was largely due to several factors, beginning with our increase in silver production, of course assisted by higher realized prices for both silver and gold. We were also successful in reducing overall cash operating cost per ounce to $3.94 and cutting overhead expense by 8%. These factors combined contributed to the 39% increase in metal sales and record levels of income and cash flow.

The groundwork the people at Coeur have done over the last two years specifically to improve operating efficiency and add low-cost production has prepared the Company to benefit from these current strong market conditions, and we do expect to see a continuation of strong performance and improvement in trends over the course of 2006. With that, I am going to ask my colleague, Jim Sabala, the Chief Financial Officer, to provide summary comments on each of our properties. Jim?

Thank you Dennis. If you're looking at the slides on our website, I will just hit the highlights. At Cerro Bayo, silver and gold production were below the levels of a year ago period because as planned, the mine concentrated on lower grade veins during the quarter. The lower veins and the associated reduction in the gold byproduct credit, along with inflationary cost increases, were largely responsible for the increase in silver cash cost per ounce. Cerro Bayo's mine plan calls for work to be focused on higher grade areas for the balance of 2006 and for production to return to historical levels.

At Martha, silver and gold production both increased approximately 42% due to higher ore grades and tons milled. Cash cost per ounce of silver declined due to the higher production. At Rochester, silver production was up modestly compared to that of a year ago while gold production increased 15%. Cash cost per ounce declined by 31% as compared to that of a year ago period.

At the Endeavor mine in Australia, silver production more than doubled from the level of the fourth quarter of 2005 as the mine continued its steady recovery from an uncontrolled rock fall in October 2005 that limited mining activity. At a silver cash cost per ounce of $2.13, Endeavor was the lowest cost mine in Coeur's systems during the first quarter of 2006. Year ago comparisons for Endeavor are not meaningful since we did not have this interest in the year ago period.

At Broken Hill, also in Australia, silver production was 557,000 ounces in the first quarter of 2006 with a cash cost per ounce of $2.89. As is the case with Endeavor, year ago comparisons for Broken Hill are not meaningful because the mineral interest was acquired in the third quarter of 2005.

Turning to the balance sheet for just a minute, the Company had $374 million in cash and short-term investments as of March 31, 2006. Capital spending during the first quarter of 2006 totaled almost $28 million, most of which was spent on the Kensington gold project in Alaska and the San Bartolome silver project in Bolivia. I would now like to turn it back to Dennis for summary comments on these two projects.

Thanks, Jim. In Bolivia at San Bartolome, we witnessed some excitement in the market last week when the stock reacted to news reports out of Bolivia regarding nationalization of the oil and gas assets in that country that spilled over to mining as well. We have confirmed in our meetings with Bolivian the officials and from official news reports that these events do not impact Coeur.

Subsequent news reports from the Bolivian press offered an additional measure of assurance in this regard in quoting government officials as saying they do not in any fashion intend to nationalize mining interests, specifically mentioning San Bartolome. Ultimately, this is not surprising to us given that the government already holds title to the mineral rights at San Bartolome. And, of course, we continue to have our safety net in the form of an [OPEC insurance] policy that insures our investment regarding political risk.

At the end of today, we are confident that the project will continue to move forward as planned. Our capital investment San Bartolome totaled almost $2 million during the quarter, and of course you'll recall that San Bartolome requires a total development CapEx of $135 million with about $122 million of that still to be spent.

Coeur is aiming to complete the project began producing silver near the end of 2007. And in advance of the anticipated resumption of full-scale construction this July, we have continued to focus on construction of access roads to and around the site, grading of the mill site, preparation of the ore stockpile area, movement of some ore to the stockpile and construction of our fencing around the perimeter of the plant site area.

At Kensington, we're moving forward with our aggressive construction schedule. Capital investment totaled just under $24 million during the quarter, which brings our cumulative development CapEx there to about $68 million on the project, which has a total development CapEx cost of $190 million. We aim to complete the project and start producing gold towards the end of 2007.

To date, we completed extensive underground work to prepare the mine for operation. Above ground, we built the camp for our construction workers, installed the water treatment plant, [docked] facilities and completed much in the grading and site preparation for the construction of the mill. In incoming months, most of the work will focus on construction of the tailings dam in [Palma area and the bill].

We continue to have a very active ongoing and successful exploration program, and I'll let Don Birak, our Senior Vice President of Exploration, describe that in his remarks now. Don?

Thank you, Dennis. The Company's exploration program continues to produce positive results. In the first quarter, the major part of the field season of our Cerro Bayo and Martha properties, we completed over 82,000 feet of core and reverse circulation drilling, the majority of that conducted at Cerro Bayo. In my remarks today, I'll focus on Cerro Bayo and on Kensington.

Starting with Cerro Bayo, last year we embarked on a program which has been successful in discovery of several new veins and vein extensions with [Marsala Soeur] and Cascada being two good examples. I'll discuss Cascada today. You may recall we discovered high-grade silver and gold mineralization at Cascada late in 2005. Since then, we commenced delineation of the new discovery and exploration in the area around Cascada for blind extensions for new veins.

This map shows the service projection of the Cascada vein and the new Cascada Norte, both of which are largely covered by sediment and consist of a main vein along with some parallel veins. The location of discovery hole [MH108] was 3.37 meters grading over 65 grams per ton of gold and over 1500 grams per ton of silver is shown in the center of the new block.

The next slide shows the cross sectional view of Cascada Norte and Cascada. There we see a longitudinal section looking west of the silver in Cascada and Cascada Norte. [The] horizontal mineralized zone is around 100 meters in vertical (technical difficulty) indicated strike of the total system of over 600 meters long. The message here is that we're seeing very high-grades across the vein system.

Data from this last quarter's core drilling at Cascada Norte mineralized horizon are listed in slide 20 for your reference. Again, the [encouraging] aspect of Cascada Norte is high grade nature and the favorable vein intercept [width at] several of the drill holes, which will promote efficient stope development.

Dennis mentioned the exploration program at Kensington, so I would like to turn to that next. Late last year, we commenced underground core drilling designed to upgrade Kensington's large inferred and indicated mineral resources and result in an increase (technical difficulty) of approximately 35 feet of core was completed in the program through the end of January. After a short hiatus, drilling recommenced in March and it continues today from stations accessed from the 850 elevation (inaudible).

In this first slide you can say all the zones in the main Kensington area that comprise the majority of the projects, mineral resources and mineral reserves. Zone 30, which is accessed from a drift on the 2050 elevation, is expanded for your reference in a table of the current inferred mineral resources of all the zones, zone 30 and zone 30 B-2 is included. Zone 30 is one of the highest grade zones in the deposit with the large inferred metal resource tonnage and contained gold [alloy] inventory.

Moving in on the northern part of zone 30, the B-2 area, you can see the outline of the target area, the outline of additional inferred mineral resources in the red blocks, and the drilling completed to date on this target. [Data] from each hole that cut B-2 [of] core and [true widths] and composited gold grades are shown as well as the drill hole pierce points. This data is a good example of the program's overall goal to upgrade inferred metal resources (technical difficulty) and we are encouraged by the program's results so far. Now I will turn the meeting back over to Dennis.

Thanks, Don. As most of you know, exploration is a key element of our strategy. And on the subject of strategy, I would just like to comment on the pending sale of our interest in Coeur Silver Valley. As I think most of you know, we have signed an agreement to sell 100% of our shares in Silver Valley for $15 million in cash. We expect the sale to close by June 1st of this year.

We think this sale is really a perfect example of Coeur's commitment to redirect our growth strategy to towards lower cost, longer life silver assets that will generate high margin cash flow and profits for our shareholders, one of the main legs of our strategy.

Our view of the silver and gold markets remains bullish. Industrial demand for silver is strong and continues to grow, while mine supply is relatively flat and above ground stock of silver relatively low. In addition, the new Silver ETF seems to be off to a good start with active trading at an estimated initial purchase of 30 to 35 million ounces of silver. All of this seems to us to indicate an ongoing very robust market. And of course many of you are familiar with the gold market where jewelry demand remains firm and due to geopolitical dynamics, we expect gold prices to continue to respond favorably.

Looking ahead to the balance of this year, we expect silver production to be above the level of 2005 at very favorable cash cost per ounce. We're looking forward to a very productive year with strong earnings in cash flow at today's metal price, further increase in our mineral reserves and steady progress on our two development projects at Kensington and San Bartolome and continued evaluation and efforts regarding external growth opportunities. And we're thankful for your interest in Coeur today. Scott?

Okay, thanks Dennis. Operator, we're ready to go to Q & A.

(OPERATOR INSTRUCTIONS) John Bridges, J.P. Morgan.

I was just wondering if you could give us some guidance on the Australian projects, what sort of profile you expect out of those going forward. We know Endeavor has come back, so hopefully that's steady. There was some talk about growth at Broken Hill into some more reserves there. Anything going on there?

Yes, this is Harry Cougher. And yes, the Broken Hill people are -- production and is on track at about a -- 2.2 million ounce per year rate, as well as they're continuing their efforts in the North mine in exploration as well as stepping out beyond in other areas north of the North mine. Yes, they are developing a fairly aggressive exploration program.

What do you think of that? Because Broken Hill has quite a -- got of quite a history; there is quite a lot of mineralization there.

Yes, there is. Maybe Don Birak can respond to that, but it's -- most of the production now as you know is coming from the main part of operations and they are -- and they're stepping out and favorable rock types that the old ore bodies were in.

Do you think the high silver prices could turn those exploration projects around?

Maybe I will comment on that. This is Don Birak. I think what we've seen at both of the properties, particularly at Broken Hill, is a significant resource -- mineral resource there that includes the North mine that Harry talked about. So opportunities to expand the reserves and provide for new silver production on both properties is very good.

Okay thanks guys. Good luck.

(OPERATOR INSTRUCTIONS) David Martin, Deutsche Bank.

Congratulations on a good quarter. A couple of things. First of all, coming back to your comments about the overhead reduction, I believe you quoted an 8% number. I was wondering what -- what was in that decline as it relates to Silver Valley moving to discontinued operations or is that -- not impact those numbers?

Yes, David, that doesn't impact the numbers hardly at all. That is a decentralized operation which administers itself. One of the things that really impacted it this quarter, I think we're getting much better at a lot of the compliance related costs that have been heaped on companies by Sarbanes-Oxley, and we were much more efficient there. And that combined with just overall keeping a tight hand on the purse led to the decline.

Okay. And also, can you explain be income tax line and I guess give us some guidance on how we should model that line for the rest of '06?

Sure. You'll see a tax benefit on the income tax line, and that results from the fact that the Company has net operating loss carryforwards from the low metals prices environment we had a few years ago. As a result, our current income tax provision is offset by the benefit.

Now, this is extremely complex accounting because when companies are required to do in the United States is forecast, over our proven and probable reserves, estimated profitability; and then adjust our deferred asset receivable to reflect the expected benefit that we would receive. So the overall accrual is impacted by expectation of future operations, which includes operating costs, mine life, and estimated metals prices.

I can tell you that we have enough what's called valuation allowances that we would expect to be able to continue to book benefits for the next year and a half, all other things remaining constant. And that would be contingent on continuing to expand mine life, continuing to report good profitability from good operating costs. And of course, if anything were to change that outlook, we would go to a tax provision. But overall, with operations as they are, we would expect to continue to report a benefit in the magnitude you've seen for about a year and a half.

Yes, okay. And lastly, I just wanted to go back to your comments on Bolivia. Could you give us a few comments -- clarifications on your operating agreement in the country, whether it be -- what are your lease costs, your royalty payments, how those are calculated and whether you may see any potential changes to those?

Jim Duff?

Yes, I am going to request that you get back to Scott Lamb with regard to some of that detail. Most of our agreements are held with the cooperativas. We do have an agreement also with, [Comabol] with regard to their interest. And they do vary, so I think rather than take up the time of all of the participants here today on that specific breakdown, I would request that you get back to Scott.

Okay. I can do that. Thanks.

Michael Dudas, Bear Stearns.

Good morning gentlemen. Dennis, want to commend you guys for being -- getting your releases and discussions out with Bolivia last week. Further on that topic, could you maybe discuss a little bit about the relationship with the cooperativas and the local citizenry and how that might impact potential variability in some of these agreements, or the fear factor going forward relative to your specific deposits and your investment there?

With regard to San Bartolome I would say that the people of Coeur have done an excellent job developing, over a number of years, solid community relations and government relations there. We do enjoy total support from the cooperativas in the Potosi region. And I can tell you that there's also I think a consensus between the federal mine unions and the cooperativas with regard to matters such as taxes, for example, that also give us comfort as we sit here today.

We have solid support from the governor or the prefect of Potosi, and I think as you have seen from the news releases out of Bolivia and the officials in the country and other sources of ours, that the unfortunate remarks that turned into comments with regard to mining last week and did disrupt clearly Coeur's market performance until clarified, were in fact not representative of the future for mining in Bolivia and San Bartolome.

[Rich Kirschner], [Briggs Kirschner].

I want to follow up on this discussion of San Bartolome and Bolivia. Your Company says it expects to proceed with full-scale mine development July 1. And I just note that the announcements from various government officials do not speak of nationalization, [they] speak of higher royalties in the new government controls in the mining sector, as well as there's some discussion of taxes.

And I'm wondering if your Company is concerned that it's sending the wrong message to the Bolivian government by pushing ahead with the plans for mine development regardless, whether they really should be -- whether you really should be so positive given that new government policy outside of the area of nationalization may be quite hostile to Coeur.

Let me -- you inserted several things there that I want to comment on. First of all, I want to talk about your comments about any suggestion that we are going ahead without consideration of the risk, in effect. The reason that we are taking the posture that we are today is because we are confident with the clarifications of the government, of its policies which had been consistent since -- or prior to the comments of last week that led to this added speculation.

So, we have had a very prudent approach to the development of San Bartolome in terms of our total spending profile over the last year and a half waiting for the elections and the political climate to stabilize and the outcome to bring certainty, so -- I think we've done exactly the right thing there.

With regard to taxes, Jim has made some comment on taxes. Everything that we have heard out of Bolivia tells us that the discussions that are being held are centered around a tax regime very similar to that of the country of Chile, which may result in a 5% change in the corporate tax structure. But that is credited in the complementary tax regime and coupled with that would be certainty for the tax regime for mining. So we are sitting here today because of the support base I already described, fully intending to move forward with our planned construction profile in July.

(OPERATOR INSTRUCTIONS). [Dan Slack], Private investor.

I'm wondering about the money you borrowed from Deutsche Bank two years ago to the tune of $180 million. It's 1.24 interest payment. Have you tapped into that? If not, why are we hanging onto that loan? It seems -- it cost us the last two years almost $1 a share.

This is Jim Sabala. I will respond to that. First off, it is not a loan. It was the issue of debenture which was placed on the market, so that security is out there and the Company has the money on its balance sheet.

Secondly, as we sit here pending the development of our projects, it is true we're paying 1.25%, but we're earning about 5% on the arbitrage on that money in the market right now. So there is no drag on the shareholders as a result of that debt instrument being outstanding. And furthermore, as we put that money into assets such as San Bartolome and Kensington, we'll report the profitability and the rate of return on those assets which will far exceed the carrying cost of that debenture.

Thank you. I have another question. In Barron's this week there were two people, analysts that projected silver at $18 to $20 a pound by the end of the year. You want to confirm that?

We don't make price forecasts here at Coeur in terms of future market behavior. We have taken a very prudent approach, I think, in terms of evaluating projects. For example San Bartolome is premised on a $6.50 silver price. I made some general comments about why we believe the silver market has behaved as it has today. But I wouldn't make a specific comment to those price ranges. We'll be fine at Coeur if it happens.

[Ellen Grant], Private investor.

I am a fairly long-term Coeur holder, and as such have done very well with the stock. But it seems to me that there still is a clear gap between reality and perception which is a nice way of saying that there are a number of people who are still negative on the Company and the stock. And I -- my main interest in asking this question is I -- you're at a certain disadvantage being based in United States rather than in Canada because so much of the analyst support that other entities in the indexes enjoy is from Canadian analysts. Some of the best analysts in the sector are definitely in Canada and very few of them cover Coeur yet. I'm wondering what you're doing to basically increase analyst coverage, which I think would be a big boost to the stock.

I think you've unfortunately had several incorrect facts in your dialog here with me, but I am going to take a few minutes to respond. First of all, the Company has compared ourselves to every one of the silver producers over the last two years and Coeur's share price over the last two years and again over the last 12 months has responded more favorably than any of the stocks in the primary silver space, including the Canadians.

Secondly, with regard to your incorrect comment about analyst coverage, we have today about seven of the major analysts in the space that are covering Coeur, including two who are on today's call. We have three including -- we have three of the major institutions that cover the Company in Canada that are very well-known names in addition to the gentlemen that are on the call here today.

So maybe I would suggest that you could follow up with Scott Lamb and maybe he can give you some further current updates with regard to the Company that will get you where you need to be here today.

I didn't mean that to be a negative comment. I meant that in fact, some of the other entities in the XAU for example are covered by 15 analysts and Coeur is not covered by anywhere near that many as of yet.

This is Scott. We're working on that and we're picking up analyst coverage at a pretty good pace. And we're out talking to people trying to boost that number, so stay tuned and I think you will see the number moving up.

Great, thank you.

That does conclude today's question-and-answer session. I will turn over the conference back to our speakers for any closing comments.

Thank you operator. Ladies and gentlemen, we appreciate your joining us here today. We feel very good about Coeur's leading financial performance in the sector for the first quarter. We continue to believe the Company is poised for a trend of solid operating performance under current market conditions, and we believe we have the right strategy and the right story in place to deliver significant long-term value for our shareholders as we have the last few years. And we thank you for your attention here today.

That does conclude today's conference. Again, we do appreciate your participation. You may disconnect at this time.