Coeur Mining Inc (CDE) 2006 Q2 法說會逐字稿

Good day, everyone. Welcome to the Coeur d'Alene Mines Corporation second quarter earnings call. [OPERATOR INSTRUCTIONS] At this time I'd like to turn the conference to Mr. Scott Lamb. Please go ahead, sir.

Good day, everyone. I'm Scott Lamb, VP of Investor Relations for Coeur and thank you for joining us on the call to discuss the Company's results for the second quarter of 2006. In line with our standard practice the call is also being broadcast live on the Internet through our website at coeur.com where we've also posted the slides that accompany our prepared remarks. A telephonic replay of the call will be available through August 7th. And we also post the audio in the archive section of our website.

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

I 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 out of the way, I'd like to turn the call over to Dennis.

Thanks Scott. Coeur again reported all time record quarterly results for the second quarter of 2006. This is our third consecutive quarter of record-setting results. And broadly speaking, the Company's recent success has resulted from the interception of hard work by the team at Coeur and opportunity. In particular, our planning efforts over the past three years to lower our costs and grow our production have positioned the Company to benefit handsomely during the current period of strong demand and robust pricing. We think the second quarter results provide ample evidence of this.

Our record quarterly income of just over $32 million including the onetime gain from the sale of Coeur Silver Valley. Strong and record quarterly operating cash flow of $32 million. And ignoring Coeur Silver Valley still record quarterly income of $20 million. We experienced a 24% increase in silver production from continuing operations. And 3.5 million ounces of total consolidated silver production. Our efforts to further impact cash cost resulted in a 38% decline in cash cost per ounce to $3.03 for our continuing operations. We recognized a 61% increase in metal sales. And on the exploration front, a 20% increase in silver reserves at the Broken Hill Mine in Australia. The higher silver production and lower cash costs combined with higher realized prices to produce these results.

Also, during the quarter, we completed the profitable sale of our 100% interest in Coeur Silver Valley, a major part of our strategy to focus our growth on lower costs, longer life mines. The transaction generated $15 million in cash for the Company. And importantly, at the same time, eliminated the highest cost mine in our system where silver cash cost of production, despite significant efforts, were recently running at more than $10 per ounce. The transaction has already contributed meaningfully to the significant reduction in the Company's overall per ounce silver cash cost.

In other words, I give hats off to the well execution by the Coeur team of this transaction which fulfilled our expectations. With that, I'll turn it over to my colleague, Jim Sabala, the Chief Financial Officer, for summary comments. Jim.

Thank you, Dennis. If you're looking at the slides on our website, I'll just go quickly through the key points, starting with slide No. 8. At the Rochester mine in Nevada silver cash costs per ounce declined by 66%, relative to the year ago quarter due to a 27% increase in gold production. Silver production was down modestly due to the short-term impact of heavy rains that affected silver in the solution flow. However, we're already seeing the assay values in that solution increase during the summer months commencing in July. At the Cerro Bayo Mine in southern Chile, silver production was 53% above the level of the first quarter of this year as grades returned to more typical levels as planned. At $1.82 silver cash cost per ounce in the second quarter of 2006, was the lowest in the Coeur system and was significantly below that reported for the first quarter of this year.

Silver production was 14% above that of a year ago due to an increase in the tons milled. Gold production declined relative to the year ago period due to lower grades which were expected to improve over the course of 2006. At the Martha Mine in Argentina, silver production was sharply above the level of the first quarter of 2006 primarily because the operation encountered grades for both metals that were much higher than forecast in the mine plan. Silver cash cost per ounce increased relative to the year ago period due to higher royalties which were contractually linked to the higher market prices which we're currently enjoying.

At the Endeavor Mine in Australia, silver production was above the level of the second quarter of 2005 because year-ago results reflected only one month of production data following Coeur's acquisition of this interest in June of 2005. While production rates at Endeavor have not yet fully recovered from the rockfall that occurred in October 2005, Coeur currently expects production levels to return to normal levels during the fourth quarter of this year. Cash projection costs in the second quarter of 2006 was above the level of a year ago due to higher smelting and refining charges associated with the increased market value of silver deductions charged under our smelting and refining contracts. Our investment in Endeavor last year has already generated a cumulative return of $3 million in cash to Coeur.

At the Broken Hill Mine, also in Australia, silver production was a little over 528,000 ounces, with a cash cost per ounce of $3.27. Cash production costs per ounce was above that level of the preceding quarter for the same reason I cited at Endeavor and that's higher refining and smelter charges associated with the increased market value of silver deductions charged under the smelting and refining contracts. I would also note that year ago comparisons for Broken Hill are not meaningful because that mineral interest was acquired in the third quarter of 2005. In addition, as Dennis mentioned, Broken Hill reported that proven and probable silver mineral reserve ounces increased 20% to 18 million contained ounces as of June 2006, 15 million ounces contained at year end 2005.

You heard Dennis say that we completed the sale of 100% of our shares in Silver Valley to US Silver Corporation for 15 million in cash. We recorded a gain of $11.2 million on that transaction. Turning to the balance sheet for just a minute, on slide number 13, the Company had 393 million in cash and short-term investments as of June 30, 2006.

In fact, at the end of the second quarter of 2006, the Company's balance sheet was stronger than any time in its history. Capital spending during the first quarter of -- during the second quarter of 2006 totalled 26 million, most of which was spent on the Kensington gold project in Alaska. On the subject of Kensington, I'd like to turn it over to our Senior Vice President of North American Operations, Harry Cougher. Harry.

Thanks, Jim. At Kensington we're really excited to see how quickly the construction is moving along. We have more than 200 contractors on-site and another 80 or so permanent employees. So the place is really teeming with activity. One of the many encouraging things about Kensington is the overwhelming level of support this project has in and around Juneau. A recent independent survey of public opinion, for example, showed that more than three quarters of area residents agree that this project is important to the local economy.

For those of you who are following the slide show, if you want to jump ahead to the next few slides, you'll see some recent photographs of the site. Slide 15 is an aerial view of the construction of the Mill Building taken just a few weeks ago. Slide 16 shows the foundation work being done on the Crusher Building alongside the Mill Building. Again, this shot is from a few weeks ago. Slide 17 is a shot taken last week where you see the structural steel in place on the Crusher Building and right behind that you'll see the siding going up on the Mill Building. Slide 18 shows another view of the buildings.

We will soon begin assembling the process equipment. And while all of this work is going on, we have also begun the work on the tailings impoundment dam. Slide 19 is a view of Lower Slate Lake which is the location of the approved tailings disposal facility. Slide 20 is a closer view of the lake. You see the treeline around the lake? That represents what basically will be the shoreline of the lake when it's reclaimed after mining is completed. The reclaimed lake will obviously be much larger and will support wild stocked fish. As I say, we're very excited by the rapid progress on this project. Capital investment at Kensington totalled about 21 million during this quarter. That brings our 2006 cumulative capital expenditure to about 45 million on this project.

Exploration drilling at Kensington continues to look very positive. As we previously reported, a high percentage of our drill intercepts are above our cutoff grade. We'll update you later, more fully, later this year when this process is completed. As many of you know, we are aiming to complete the project near the end of 2007. That's it for Kensington. Dennis.

Thanks, Harry. Now we'd like to talk to you for a few minutes about San Bartolome, the Company's most important silver development project in Bolivia. During the second quarter, construction activities there continued to focus on rough cut grading of the plant site and construction of roads. We've been pleased by the recent current cooperative and productive actions of the Government of Bolivia. In particular, I can tell you about three recent developments.

First, the Company recently completed renegotiation of a contract with the State Bolivian Mining Company called COMIBOL concerning the timing of certain lease payments. Secondly, we entered into an agreement with COMIBOL that calls for joint exploration of certain COMIBOL silver properties in Potosi. And we're very excited about this new relationship and the exploration opportunities it brings to Coeur. Third, we received a letter of assurance from the Minister of Mines regarding the government's support for the San Bartolome project. In addition, we recently hosted a very productive official visit to our corporate headquarters in Coeur d'Alene by the two top senior executives of one of the most important mining cooperative groups in Bolivia.

Based on all of these developments, Coeur is proceeding with engineering and procurement activities now. As most of you know, San Bartolome is the key element in our growth story and we'll add 8 million ounces of silver annually to our production profile. I'm going to ask Don Birak, our Senior Vice President of Exploration, to tell you a few things about our new Argentinian property acquisition and give you a further update on our exploration. Don.

Thanks, Dennis. During the second quarter, the Company increased its greenfield exploration activities. As a result, we acquired two new properties near the Company's Martha Mine, through option to purchase agreements with private Argentinian interests. Largest of the two is the Costa at 98,500 acres which lies about 90 miles north, northwest of the Martha Mine. The second property, called El Aguila, is located in the eastern part of the province, approximately 90 miles north of the port city of San Julian. Slide 22 is the location map of all of our properties in the Santa Cruz Province of Argentina. Both Costa and El Aguila are located in the same volcanic rocks that host our existing Martha mineral reserves and resources. You can also see the proximity of the new properties to our mine. The Company has commenced exploration activities on El Aguila and we expect to start Costa in the coming spring and summer months in the Southern Hemisphere. Slide 23 is a satellite image of El Aquila highlighting five high potential target zones.

We have secured additional exploration concessions to cover these and new targets. Slide 24 shows a cross section of El Aquila. The target environments consisting of silver and gold bearing beams and stockworks are shown in this schematic section. On Slide 25, in addition to our new property work, we continued exploration drilling during the quarter at the Company's Cerro Bayo, Martha and Kensington properties. All three of these properties, Coeur has already sizeable mineral resources and mineral reserves within large prospective land packages. And at Cerro Bayo and Martha, mineral reserves and resources have increased for three consecutive years. We are reviewing the new drill data for Kensington, Cerro Bayo and Martha. The data is very encouraging and I expect that we will be able to offer more formal updates later this year. You can see the drilling totals listed here on the slide, so I won't repeat that information.

And, of course, as Dennis mentioned earlier, we are excited to tell you that Broken Hill reported a 20% increase in reserves as of June 2006, compared to 2005 year end. They didn't put it on the slide here, but in addition to the increase in proven and probable reserves, Broken Hill also reported that its inferred resource increased by more than four-fold. This is an encouraging sign as we are always seeking to convert resources to reserves. Dennis.

Thanks, Don. Gold and silver prices have remained at the kind of robust levels that enabled Coeur to generate healthy income and cash flow. Our bullish view of this market remains unchanged. Growth in silver demand appears to be particularly robust in the industrial sector and we expect current healthy price levels to continue. Looking forward to the balance of the year, we see strong operating performance from our mines in the second half of the year. In particular, we expect to see silver production at noticeably higher levels in the second half, with the Cerro Bayo and Rochester Mines, in particular, setting the pace. If you look back at last year's performance, you'd also see that the second half was a stronger half in terms of silver production at Coeur. Not unusual given the weather that we face at Rochester and in South America.

Beyond that, we'll continue to execute our growth strategy, to expand production, reserves, earnings and cash flow while further working on reducing our cash operating costs. Scott?

Okay,operator. We're ready to go to Q & A

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to John Bridges at JPMorgan.

Hi, Dennis, everybody. I was just wondering -- I was intrigued. The rains came through in Q1 but only appeared in Q2. How long does it take for that water to get through into the Rochester production stream?

Well, this is Harry Cougher.

Hi Harry.

This was an extremely wet winter. Our pads literally filled up with water to the extent that we had to recirculate our solutions. We were doing more managing the levels of the dike than we were concentrating on processing the solutions. Now we're in the process with the hot weather, as we're experiencing today, we are also in the process of sprinkling on the pads to increase the evaporation. Once we get our dike levels down to manageable levels we can concentrate more on the selective solution process.

So will this be over in Q2 or will the bulk of the improvement come through in Q4?

It's beginning in the third quarter. With the dikes down, we can also -- we have withheld leaching in the areas of the pad on stage 4, particularly. The idea is to get the solutions down so that we can concentrate more selectively. As we see it today, our silver production is increasing and we would expect it to increase through this quarter and into the fourth quarter.

Okay. And then an accounting question for Jim. The interest and other income line, the 4.8 million, what's driving that?

Well, two things, John. Increasing interest rates and, of course, cash portfolio is at higher levels than it was a year ago period. So both the drivers are up against year ago period.

Okay. Got it. Thank you.

We'll go next to Dave Martin at Deutsche Bank.

Thanks, and congratulations on the success. Just a couple of things. First of all on your production outlook for the back half. You said it's going to be noticeably better. Is that noticeably better than the 6.8 million ounces that includes Silver Valley or is that excluding that number?

Well let me just say that we have maintained our production forecasts for the year. We're seeing increased production levels, as Harry Cougher mentioned. We don't give forecasts on a mine by mine basis. That just becomes too intricate a process. But based on what we're seeing we're pushing hard to maintain our forecast.

In the original mine forecast for the year was somewhere between what 15.5 and 16 million ounces of silver; is that right?

In the last forecast, as I recall, was 15.6 million ounces given in June.

Okay. And then on the Endeavor Mine, I know you don't give specific mine plans for the year, but should we expect the third quarter to be pretty flat and then a big uptick in the fourth quarter?

Well what I can tell you is that our team has just returned from Australia and based upon their review of the mine plans and reserves, we believe that the operator of the mine's plan is on track to return to normalized levels in the fourth quarter.

Okay. And then secondly, on the acquisition front. You acquired these two projects in the quarter. Can you give us a sense of what the cost was? And secondly, when you'll have some reserve or resource numbers for us from these projects you bought?

Could you tell me what you mean by cost? Are you talking about the original purchase price?

Correct, correct.

Dave, you're not referring to Endeavor and Broken Hill, are you?

No, no, no.

The exploration properties.

Correct. Exactly.

Yes, the costs associated with those has really been nominal. That's our people doing spade work on the ground to pick them up. I'd defer to Don, but I think it's probably premature to be talking about resource numbers right at this point.

Let me just echo that. These are early stage exploration properties without anything on them. They're really very green. And we recognize some opportunities on there that were not developed by the prior owners or private companies, then we're going to move on them.

Okay. And then lastly, also on the acquisition front. You've talked about continuing to explore other opportunities. Is most of what you're looking at similar to these types of exploration projects? Or are you looking at other opportunities as well?

We are looking at other opportunities as well. As long as they meet our strategic profile of lower operating costs, long life and they're accretive to net asset value, earnings and cash flow. We don't have anything to announce particularly at this time, but I can assure you we're working diligently to grow the Company externally. But having said that, we will not overpay. Others might, but Coeur won't.

Okay. Thank you much.

We'll go now to John [Plaza] at Prudential.

Congratulations on the profits. I apologize for being a little bit out of date. Could you explain the background of the Silver Valley divestiture? Why you sold the assets and who the buyer is? And total proceeds and consideration?

Sure, John. We're going to get back to you to see to it that you're up to date maybe the next time we come East. But let me tell you just a few things here. You might recall that a few years ago, we embarked on a development plan that was designed to set the mine on a path to produce 5 million ounces of silver a year. We were going to spend about $14 million on that program. And it was premised on certain exploration and development successes including a lowering of the cash operating costs at the mine.

While we did have some very encouraging results early on, the stuff that we were finding in the later phase of our exploration efforts and development of the mine, were really silver deposits that contained high amounts of lead. And we're not lead miners in the Silver Valley.

And consequently, when we looked at the fact that we were experiencing higher and higher levels of cash costs, significantly higher, nearly $10, we decided that consistent with our strategy, that we look for lower cash operating cost mines that Silver Valley no longer fit the strategic profile of the Company. And so we thought this was a very good time to market the property given these silver prices and the gang here at Coeur, I think, did a splendid job of accomplishing that mission.

Dennis, I've known you 26 or 27 years. And I don't recall you ever not being optimistic about silver. You're not getting cold feet, are you?

Not at all. As a matter of fact, I think I mentioned in my comments that we think these robust price levels are going to continue, John. But, having said all of that, we're also continuing to position the Company to have greater profitability, stronger levels of cash flow, by becoming lean and efficient at our operations, and that's why we want lower costs of production.

Which is to be applauded. Who is the buyer?

US Silver Corporation is the name of the recently formed company. And that's about all, I think, I can say about it.

Thank you.

Okay. Thanks, John. And we'll go next to Anthony Young at Bear, Stearn.

Dennis, it's Mike Dudas, good morning. The first question is what are some of the milestones that we should look forward to on the progress of Kensington for the end of the year 2007 start up?

Harry, do you want to talk about the construction milestones? We're basically on time for the project.

Yes. With the completion of the surface facilities, the tailings pond and the mill site is timed at about the same time we will complete our tunnel access from the [Juellen] side or where the mill site is to the Kensington operations. In fact we're driving a 7,000 foot access drift, if you will, to the Kensington Mine. And that's all expected to be winding down in the mid, well late third quarter and by the fourth quarter we should have the operations completed.

The mill and the tailings facility will be completed prior to the final underground development which will work out about right, because we'll be doing some preliminary start up, kind of the shake down, if you will, of the surface facilities to where they'll start processing or by --now, I think we're looking at, like I said, fourth quarter 2007.

Terrific. And relative to the labor force there. Certainly, it's been a point of topic from mining companies globally about the tightness of the labor pool, tightness of equipment and infrastructure. How is Coeur set up for the underground mining and processing folks that are going to be required at this mine? Have they have been finding issues attracting and retaining those folks to be on board?

Good question, Michael. We have done a few things. First of all, we have established a partnership with the native groups, the consortium that we work with, as well as the University of Alaska and the State Department of Labor there for a miner training program. We've had the first graduates of that program a couple of months ago now and that program will continue to provide us with workers. The other thing is that southeast Alaska has experienced quite an economic downturn. So the young people there are keenly interested in finding high-paying jobs that have long lifes attached to them. We have not felt the pressure yet in Alaska and we believe that we'll continue to attract good workers.

Dennis, given your 10, 11 years you've been working through this project, do you find that Alaska could be an interesting opportunity for Coeur expanding away from the Kensington deposit in the future? Do you think the government infrastructure and the opportunities from a metallurgical and geology standpoint point towards maybe some more activity for Coeur up there?

I don't want to put too much on Don Birak's back here today, but I will tell you that our land holdings around Kensington basically comprise what is called the Juneau Goldbelt where nearly all of the early day production came from in southeast Alaska. So we do have confidence in long term exploration in and around the Kensington and Juellen areas in terms of future projects. That's one of the reasons why we are quite optimistic about Kensington today.

Thank you, Dennis.

We'll go next to John Doody at Gold Stock Analysts.

Dennis. Congratulations on a great quarter.

Thank you.

It doesn't seem like you're saying too much about San Bartolome despite how much Bolivia has been in the news. I wonder if you could give us a little more color and detail and I'd particularly like to know when do you start spending the serious money there? And when do you now see commercial production starting?

Okay, you've asked a series of questions there. Let me say that we are having ongoing meetings with the leaders of the government in Bolivia. And I don't think it would be in the best interest of our shareholders to go into the details of those meetings, other than to tell you that I think you see that we enjoy very strong support from the miner's groups in Potosi and that the government has certainly done some things, some signs to us, that we're very important in terms of confirming their strong support for San Bartolome. And my expectation is that when you see the third quarter results at Coeur you will have seen a significant increase in the spending profile at San Bartolome consistent with what we have suggested today is the increase in the level of activity, because of the signs that we've seen.

Okay. Could you comment on what you've ordered for the mill already?

I don't have the engineering details about that. but we're going through a lot of procurement activity right now. The next major phase of the project would be the construction of the tailings facility which, as I recall, involves about a $30 million expenditure.

Okay, but at this stage the major components of the mill are not ordered?

No, they are ordered.

Okay thank you.

Yes.

We'll go next to Mack Young at [W R Havrack]

Hi there. My question is also with respect to Bolivia. Do you have any intention to put the letter of assurance you received up on your website so that we might be able to take a look at it?

You mean in terms of the OPIC insurance that we carry?

No, no. The letter of assurance you received from the Minister of Mines in Bolivia?

No. I don't expect that we will do that.

Okay

We've been quite candid with you as to what it says. And I would just suggest you follow the project this quarter and I think any questions you have will be answered.

All right I'll do that. Thank you.

We'll go back to John Bridges at JPMorgan.

Hi, Dennis. There's been a few problems in Argentina and -- well parts of Argentina. You're buying in, you've obviously done well with Martha so far. What is the political temperature down there that you're seeing?

We have a very constructive relationship with both the federal and provincial governments in Argentina. The province where the anti-mining activity is taking place is not where we are located and doing business. We are located in a region that is noted for natural resource development. And I'm very proud of the way our local people there conduct our affairs and build the support that's necessary to carry on constructive relationships, John. I think you see by the recent exploration package that Don and his group have acquired, that we have a confidence level that those relationships are going to continue.

Are you in San Juan?

No, we're not.

Which province is it?

This is Don Birak, it's Santa Cruz where we're operating at right now, both the mine and our exploration focus is there.

Thank you. Good luck.

Thanks, John. and just a reminder if you would to ask a question, please press star one.

[OPERATOR INSTRUCTIONS]

Operator?

Yes. We have no further questions.

Okay. We would like to just remind the listeners, if you have any further questions please feel free to contact Scott Lamb following today's conference call and to remind you that the text of the meeting today will be available until August 7th. We would like to just thank you again for joining us here today. As I've said in my opening remarks to you, because of solid hard work by the team here at Coeur, I believe we are continuing to fulfill our promise to you to position the Company to benefit fully from the market conditions that we're enjoying today. We are pleased with our financial and operating results that we discussed with you today, but I can assure you we're not going to rest on our laurels here at Coeur. We will continue to set the bar pretty high for ourselves. Our strategy is driving us to pursue continual increases in silver production and new reserves at the Company while reducing our cash operating costs, all of which translates into strong operating performance. And we will continue to deliver, we believe, significant long-term value for our shareholders. So thanks very much and have a good day.

And that does conclude today's conference. Again, thank you for your participation.