Coeur Mining Inc (CDE) 2006 Q3 法說會逐字稿

Good day and welcome to today's Coeur D'Alene Mines Corporation third quarter earnings conference call. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the call over to Mr. Scott Lamb, please go ahead, sir.

Thanks. Good day, everyone. I'm Scott Lamb, Vice President of Investor Relations for Coeur and thank you for joining us on the call to discuss the Company's results for the third quarter of 2006. As per our standard practice, the call is also being broadcast live on the internet through our website at Coeur.com, where we also have posted the slides that accompany our prepared remarks. The telephonic replay of the call will be available for about one week afterward on our Web site.

Today's presenters include Dennis Wheeler, Chairman, President, and Chief Executive Officer; Jim Sabala, Executive Vice President and Chief Financial Officer; and Jim Duff, President of South American Operations. Also here with us to participate in Q&A are Don Birak, Senior VP of Exploration and Harry Cougher, Senior VP of North American Operations. As always, I need to tell you that 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'll turn the call over to Dennis.

Thanks, Scott, and welcome all to today's call. Coeur reported extremely robust financial results for this past quarter and highlights of the quarterly performance included a five-fold increase in incoming cash flow, higher revenues, meaningful reserve increases at both Broken Hill and Endeavor in Australia, and sequential quarterly increases in silver production at four of our five mines.

In particular, net income exceeded $18 million as compared to $3.5 million in a year-ago period, and cash provided by operations was also almost $21 million compared to approximately $4 million in the year-ago period. These results reflect lower administrative expenses, lower production costs, as well as, of course, higher realized prices and revenues. Our metal sales increased nearly 29% to almost $51 million in the quarter, largely as a result of higher realized prices for both silver and gold.

Specifically, our average realized price for silver was $11.55 per ounce or 58% above that realized in the year-ago quarter. Reflecting robust demand for silver, the world's most widely used metal and our average realized price for gold was $634, or a 40% increase from the average price of the year-ago quarter. Our production cost attributable to sales declined by 10% relative to the year-ago quarter. This lower production cost is due mainly to the routine inventory adjustment for the difference between units produced and units sold during the quarter. And we continued to work on our expenses and were pleased to report a 7% decline in the Company's administrative and general expenses relative to the year-ago quarter.

The people at Coeur remain focused on managing these overhead expenses very closely and we hope to see this trend continue. Another very positive piece of news during the quarter was the 38% increase in silver reserves at Endeavor in Australia. This increase, along with the reserve increase at Broken Hill certainly bodes well for the long-term production profiles at each of these mines. We do feel good about the production trend line we established in the third quarter. This is consistent with our expectation that we talked to you about that silver production in the second half of 2006 would be higher than our production in the first half of the year.

Specifically, we reported sequential quarter increases in silver production at four of our five mines. The percentage increases range from 11% at Broken Hill to 69% at Endeavor, and this increase at Endeavor is particularly significant because it signals the progress that's being made to return to a more normalized run rate at this mine. I'm going to now ask Jim Sabala to make some summary comments on each of our properties. Jim?

Thank you, Dennis.

If you're looking at the slides on our Web site, I'll go quickly through the key points starting with slide number 10. At the Rochester mine in Nevada, many of you will recall we had heavy precipitation in the first half of 2006. We told you during our second quarter conference call that we expected a trend of improving production as the year progressed and that's exactly what we saw in the third quarter when silver production was up 22% as compared to the second quarter of this year.

Gold production also rebounded strongly during the third quarter as compared to the second quarter of 2006. Silver cash costs per ounce was 56% below that for the second quarter of 2006 due mainly to increased gold and silver production. Silver cash costs per ounce declined by 69% relative to the year ago quarter. At the Cerro Bayo Mine in Chile, we have a good story to tell regarding the current mine plan and an expected rebound in the fourth quarter production. I'll let Jim Duff describe the details in just a few minutes.

In terms of results for the third quarter, silver and gold production were below year ago production due primarily to narrow grades. We have now commenced development in the recently discovered high grade Cascada vein, which is a wider body than we've recently had a Cerro Bayo, and we expect the new high grade Marcela Sur vein to be in development shortly as well. Jim Duff will provide additional detail in just a few minutes.

At the Martha mine in Argentina, silver production increased 42% relative to the year-ago period due to a 53% increase in silver grade. Production also increased in the third quarter of 2006 relative to the proceeding quarter due to an increase in tonnes metal. The higher production volumes reduced silver cash costs per ounce relative to both the year-ago period and the second quarter of 2006. At the Endeavor Mine in Australia, silver production was up 69% on a sequential quarter base as endeavor continues to approach the production rates outlined in its most recent mine plan. We expect Endeavor to see further production increases in the fourth quarter. Endeavor reported an impressive 38% increase in proven and probable reserves to 32.3 million ounces from 23.3 million ounces in the prior year.

At the Broken Hill mine in Australia, silver production was up 11% on a sequential quarter basis. During the year, Broken Hill has reported a 20% increase in proven and probable reserves to 18 million ounces from 15 million ounces in the prior year.

Turning to the balance sheet for just a minute on slide number 15, the Company had $365 million in cash and short-term investments as of September 30, 2006. This certainly gives us more than adequate funding to complete our two big development projects. Capital spending during the third quarter of 2006 totalled almost $49 million, most of which was spent on the Kensington gold mine in Alaska. Cumulative cap expenditures for the first nine months of 2006 amounted to $102 million. We think the fourth quarter will come in at about $83 million, which would put us at about $185 million for the full year 2006, which is right where we thought we'd be.

Again, Kensington has accounted for most of our CapEx spending this year, and for an update on that project, I'd like to turn it back to Dennis.

Thanks, Jim. We have more than 300 folks currently working in Alaska, including contractors at the mine site who are continuing to build Kensington. Our recent work has focused on completion of the mill and pressure building and we're also beginning to install the ball mill and the flotation circuit. At the same time, we continue to work underground on the main hall and access tunnel from the mill site to the underground mine workings.

As you're aware, in August the Federal District Court in Alaska upheld the 404 permit issued by the Army Corps of Engineers for Kensington. This has been appealed to the 9th Circuit Court with oral arguments scheduled for early December. The Appeals Court issued a temporary injunction pending the appeal which affects certain work activity around the tailings area. We continue to believe that this legal challenge has no merit and we're still planning to hit our targeted completion date on the project near the end of 2007.

Capital investment at Kensington totalled about $42 million during the third quarter and that brings our 2006 cumulative CapEx there to about $85 million on this project. We continue to do exploratory drilling at Kensington, designed to even further increase reserves, and our release has added detail regarding this program, but the most important thing to remember here in the takeaway is that we have a sizable reserve and resource base at Kensington. Our gold reserve is more than one million ounces and various categories of resources we have more than 800,000 ounces, much of which we expect will join the reserve base as a result of our year end update and ongoing exploration program. So again, we believe we have a very solid foundation there and we continue to build on our reserve numbers.

If you're following the presentation on the Web site, we've put in several recent photos to give you the idea of the substance and quality of the construction going on at Kensington. Slide 17 shows the portal near the mill site, slide 18, the nearly completed exterior of the mill building; and slide 19, the interior of the Mill Building.

And now, a few comments about our major new silver projects and Bartolome. We were very pleased to see the statements from the Bolivian government last week when it confirmed our earlier expectations that it had no intention of expropriating mining assets. We're pleased to have Jim Duff, our President of South American Operations, here today and I'd like to have Jim give you an update on the project and the political situation there as well as a brief update on recent exploration activities at our other South American properties. Welcome, Jim.

Thank you, Dennis. As many of you know, in October we signed a $29 million contract to begin construction of the tailing facilities at San Bartolome. We are using a contractor called ICE Engineering, S.A., which has extensive experience in the mining industry. The workforce is increasing now and will reach approximately 350 Bolivian workers during the first phase of construction. The tailings facility is the longest lead time item at San Bartolome.

We expect to complete construction of the mill by the end of 2007 with production commencing immediately thereafter. In particular, we think San Bartolome's first year of production will generate approximately 9 million ounces of silver. You can appreciate the significance of that 9 million ounce figure when you compare it to the 14 million ounces that the entire company will produce this year.

Additional engineering and procurement activities are ongoing at San Bartolome and our schedule calls for us to begin work on other key areas of project in coming months. We expect to see our spending level increase in the fourth quarter as construction activities proceed. On the political front, I'm sure most of you saw the important announcement from the Bolivian government on October 31, which is the anniversary of the founding of the government mining company, COMIBOL. In short, the government publicly stated what they have previously said to us in meetings, that they do not intend to expropriate mining assets. We think the timing of this announcement specifically on the anniversary date of COMIBOL's founding was especially significant. I should also mention that this project enjoys very strong support in the [Podoce] region because of the jobs and economic impact we are providing.

While on the topic of South America and now we're on slide number 21, exploration, I'd like to touch on some important developments at our Cerro Bayo and Martha Mine. The key message here is that Coeur is entering an exciting period in which we expect to begin realizing the benefits of previous exploration -- previous investment in exploration, particularly at these two properties. At Cerro Bayo, for example, we recently began development in the first two relatively new high grade vein systems.

You heard Jim Sabala comment previously on Cerro Bayo's performance in the third quarter of 2006. It's important to put this into the context of Cerro Bayo's full 2006 mine plan and in the context of its exploration results. Under this plan, Cerro Bayo has been making a transition from narrow, lower grade veins to newly developed wider and higher grade veins as the year progresses. Specifically, since the recent discovery of two new vein systems, the Marcela Sur and the Cascada systems, Cerro Bayo has made relatively quick progress to put the veins into production.

In October, Cerro Bayo began development of the Cascada system which is expected to make a meaningful contribution to production in the fourth quarter of 2006 and beyond. Marcela Sur production is expected to commence early in 2007. Drilling is ongoing at both vein systems to expand reserves. Cascada drilling has returned values much higher than we have seen in Cerro Bayo in recent years. These values, for example, are up to 124 grams of gold per ton and 1,926 grams of silver per ton. That's equivalent to 3.6 ounces of gold and 56 ounces of silver per short ton. And the drilling has shown widths of more than two meters, sometimes substantially more than two meters. So again, we look forward to seeing the high-grade contribution from Cascada in the fourth quarter and beyond.

Another interesting fact about Cascada is it's the first vein we have found at the 800 meter elevation. Most of our previous veins at Cerro Bayo has been at the 300 meter or lower elevation. This opens up a whole new horizon for exploration at Cerro Bayo. In Argentina, we have been begun exploration activities on two silver/gold properties in the Santa Cruz province that we acquired earlier this year through option to purchase agreements. The larger of the two is the Costa property at 98,500 acres which lies about 90 miles north-northwest of Martha. The second property, called El Aguila, is located in the eastern part of the province, approximately 90 miles north of the town of San Julian. Both properties are located in the same volcanic rocks that host our existing Martha minimal reserves and resources.

As a result of our work thus far in the area, we are planning a trenching and drilling program for El Aguila on the new targets thus far identified. Dennis?

Thanks, Jim. Before we leave the subject out of exploration, I will mention that we now can talk preliminarily about the work underway at our concessions in Tanzania, where we've identified numerous gold anomalies, the largest which is 1.6 kilometers long by 0.4 kilometers wide. We could be on top of something here with these early stage results, and we plan to spend about $1.5 million in Tanzania in 2007, advancing our program there.

As we step back and take a broad look at the gold and silver markets, our review remains bullish. Prices have remained at the kind of robust levels that will continue to enable the company to generate healthy income and cash flows. And our belief in the strong growth in silver demand appears to be particularly robust and supported by two recent news items. First, the statement at the fifth international China silver conference, where a forecast was made that there will be a 74% increase in China silver demand between 2005 and 2010.

And secondly, I'm sure most of you know that Barclay's has filed with the Securities and Exchange Commission to increase the size of the ETF by another 15 million shares to, or 150 million ounces. Considering that the recent level of the ETF has been about 104 million ounces, we're enthusiastic about this very clear sign of continued demand. Looking ahead for Coeur, I'm pleased with the performance of the people of the company, and we're expecting a strong performance in the fourth quarter of this year, with Cerro Bayo projected to show a strong rebound in production.

With that in mind, we believe as of this moment that our 2006 silver production will be about 14 million ounces and at the same time, we continue to pursue opportunities that will help us maintain our leadership position in silver. We expect a full-year consolidated silver cash cost of approximately $3.25 an ounce with our full-year goal production to be approximately 120,000 ounces. We're pleased we continue to move forward with San Bartolome and Kensington, both planned for the first full year of production and strong growth contributions to the company in 2008.

Scott?

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

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question from Michael Dudas with Bear Stearns.

Gentleman, good morning.

Good morning, Michael.

Dennis, could you -- a little bit more detail on the appeal process for Kensington. You say early oral arguments are for December. What's a typical range from a decision after those arguments and what's -- if we get very delayed in the tailings restart, is that going to jeopardize some of your targets you've put forth?

Michael, I don't think that it would be prudent for me to comment on the litigation beyond what I've said here today.

The hearing is scheduled in the early part of December and the timetable of the court, the court sets itself, we do feel that the district court prudently dismissed the relief sought by the plaintiffs and we continue to be optimistic about the outcome.

Jim, could you maybe give as an early indication as you're tightening up your capital budgets for '07 about the construction flows at Kensington, assuming everything is going well? And some of the ramp-up at San Bartolome. How much of a CapEx could we anticipate for 2007?

Our real preliminary plans, Mike, is that a a total for the two projects would be in the $145 million range.

And what about the rest of the company?

the rest of the sustaining capital is very nominal, Mike. It's usually 10 to $12 million a year.

Terrific. And we're very aware of your silver no hedging policy. Remind us, is gold still something you contemplate on that front?

We don't have any intent to hedge at this time, Mike.

Thank you, gentleman.

We'll take our next question from John Bridges with JPMorgan.

Hi, Dennis, Jim, and Scott. This is [Anhush] on behalf of John Bridges.

Good morning.

Could you please give us more details on what the litigation expense is related to?

The litigation expense relates to a settlement the company entered into in about 2002, which related to a natural resource damage settlement here in the state of Idaho with the EPA. The amount of that settlement was capped at that time. Going into 2006, this became the first year that the company had obligations to make payments. It's based on a royalty percentage of our silver and gold and I'm pleased to report with the robust results that the company is recording, we would expect that full $3 million to be paid out by the end of the first quarter of next year. There is full detail in our SEC filings, which can give you all the particulars. But the bottom line is it's capped and will be completely behind us by the end of first quarter next year.

Great. And the grade at Cerro Bayo was lower what we were expecting. Can you give us some sense as to what the transition from the higher grade ore is progressing and the if the grade would be higher from Q4 onwards?

Hi, this is Jim Duff speaking. During the second quarter, we -- second and third quarter, we experienced a decrease of the head grades at Cerro Bayo, which were related to veins that we were mining that were lower grade and had less continuity, and now with the development of the Cascada vein and Marcela Sur Sur vein, particularly the Cascada vein we anticipate seeing recovery from those lower head grades and lower production levels during the closing months of the fourth quarter of this year and on into the first quarter of next year.

Don Birak is with us here. Don, did you care to add any comment?

Yes, I'll say a couple things in addition to what Jim mentioned there. The development on Cascada is progresses quite well. We're driving drift, can't recall the exact elevation, but the grades and widths of the veins are better than what we expected from the definition one that we've done so far. I think this bodes quite well for Cascada being a very high grade and favorable width vein system in a new geologic environment.

Okay, thanks.

We'll take our next question from Terence Ortslan with TSO and Associates.

Thanks. Dennis, I've been fascinated with the statement you made at the Chinese precious metal conference, expecting consumption to go up around 75 million ounces. On what basis is that?

Well, it's premised on a 4% growth rate, Terence, and I think we have known for some time that Chinese internal demand for silver was growing at double digit rates based upon the really the infancy of its industrial modernization and the increased living standards for a greater share of the population there.

Mostly industrial, not necessarily jewelery?

Well, you are starting to see clearly increased demand for Chinese jewelery. There are a couple of dozen of firms now in China that are in the jewelery manufacturing markets and you're starting to see some of the models in the fashion magazines adorning silver jewelery. We think that's a robust future market, but for the most part, the substance of the demand has been industrial.

Okay. Just come back to the issues on Tanzania. Your budget and focus on spending the money 2007 would be on what?

I'll go ahead and answer that question, Dennis. This is Don Birak again. The Tanzania program, we're forecasting about a $1.5 million for next year based upon the strength of the results that Dennis talked about from the work on several of our projects, particularly one we call Gata 2 on the Gata greenstone belt.

I'm sorry. Remind me, are there any partners in those projects?

No, these are 100% Coeur properties.

Subject to government royalties, that's it, right?

Government take, but no other third parties.

Finally on the Bolivian situation, I think the Glen Coeur situation irritated some people. Can you talk about your comfort level, Dennis, except the fact that what we hear is anecdotal and I'm sure you're hands on what's happening there in terms of two interests and issues with respect to your property?

As you know, Terry, we took a very cautious approach when a change of government was occurring in Bolivia, and for several months wound down our spending levels at San Bartolome. The signal that we wanted to hear that was most important was that again confirmed in the October 31st statement by the government and that had previously been discussed with our folks in Bolivia by the government and that signal was the one that we wanted to hear, which is the reason why we have now fully resumed our activities with regard to San Bart's and do expect to have a full first-year production in 2008. Bolivia is the kind of place where you'll always continue to hear about this issue or that issue, but we feel comfortable that in terms of the government's stance on mining properties at San Bartolome is secure today, as Jim Duff reported.

Okay. Thank you very much for all the details. Thanks, Dennis.

We'll go next to Pierre Vaillancourt with Orion.

Just a question regarding San Bartolome. Does that mean that you're going to be -- you're planning on producing 9 million ounces in '08, that being your first full year, is that --

That's correct, Pierre.

Okay. What cost are you on a per ounce basis?

Approximately $3.50 an ounce.

Okay. So basically the cost profile hasn't really changed?

No, that's cash cost and we expect San Bartolome is going to be a major growth contributor to Coeur with very strong cost profiles.

Right, right. And what'd you say the CapEx -- the latest number on the CapEx is there?

The initial CapEx we budgeted is $135 million.

Okay. And that's still where you're at right now?

We haven't updated that, Pierre. As everyone knows, there's a little bit of inflation going on in the mining business, but I think that initial estimate is a good one for us to go with at this time.

Okay. Just briefly on the Kensington, is there -- given the timing on the hearing and all of this, is there any potential delay to the startup? You're talking about the end of '07, is that still accounting for the time it would take to -- assuming you're getting a positive decision here?

I mentioned to you that the question of timing was beyond our control. I can tell you that we are comfortable today with the time schedule that's been set to allow us to complete the project and have a full year of production in 2008.

Okay. So that time schedule is what again?

I didn't give you a specific time schedule and I won't do that today. What I have told you is that the hearing is in December. We have incorporated with our plans what we think is a schedule that allows us to have our first year of production in 2008, which means we've made certain adjustments to our order of construction, et cetera, on the site.

Okay, okay. One thing on the Cerro Bayo with these new vein systems, what kind of production profile could that support? Are you at the point where you can kind of see your way to what resource or what reserve that could result in and how you -- because it's been very, quite highly variable over quarter to quarter there. So if we're trying to anticipate what comes next, is there any -- as a result of this, is there any more predictability to that, or is it still?

Yeah, Pierre, I think I can tell you that there will be more predictability. As you can appreciate, we're right in our 2007 planning process right now. When we come out at year end, we'll provide you an update on all of the properties, all of the production profiles. Just the fact that we're going from mining narrower veins to wider veins inherently gives us more predictability and some improvement and we'll look forward to updating you on that at year end when we have our planning done on all of our projects.

Speaking of the predictability, with respect to Endeavor, you're talking about getting back to your quarterly production profile for Q4. So just as a rough guideline, is Q4 going to be comparable to quarters prior to the rock fall or what?

Well, they continue to make good recovery process under their plan and the important signal from our standpoint is that the strong reserve base at both mines now continues to confirm to us that the basis on which we did the transactions is firm.

Okay, so what does that mean for production, though? I can appreciate that, but are you telling me that you'll be back in full production in Q4, or is it going to take a little longer to ramp up?

Well, realizing that they are the operators, we expect to see a continued increase in the production profile. They won't hit their initial production estimate at the time of the transaction, Pierre, but we're very comfortable with the progress that has been made there and we expect that to continue.

So basically Q4 is still a recovery quarter, is what you're saying?

Yes, but with a strong upward profile.

Right, okay, okay. And one more thing, on the Rochester mine area, is it still the plan to stop mining sometime in the first half of '07?

We're going to continue mining there through mid-year 2007 with production scheduled through 2011.

Okay. But you actually -- but you're going to stop mining sometime in '07, though -- production will go on --

I just stated I think we expect production to continue there with mining -- the mining through mid-2007.

Okay, you mean from leaching on the piles with the longer term production, so you're looking at a declining profile, are you not?

That's correct.

Okay. All right, thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Ray Hann with Altrinsic.

Congratulations on a quick quarter. I wanted to ask you a couple quick questions with regards to Bolivia. For our internal modeling, what type of taxation and royalty rates should we be assuming?

We're not assuming any change in the mining tax scheme in Bolivia.

The current scheme is the 25% income tax. There's various royalty rates, but what I could say is the royalty rates is actually a complementary mining tax, so that in the event you're paying royalty taxes, it's offset against the income tax. So the higher tax of the two in times of robust prices like we have would be the income tax.

Can you say that's a relatively benign tax regime and you've had fairly hard Bolivian regulation on oil and gas, so should it be prudent to assume a little bit of an increase in taxes or royalties?

Well, I wouldn't say it's a benign tax scheme. It's still a healthy tax scheme for the government. The cooperativas in Bolivia have firmly came out with their position that the tax scheme there is adequate to continue to encourage investment and to reward them appropriately, there should be no change, but we can't speculate on what the government may pronounce in the future. There are no tax plans on the table right now and we believe the climate in Bolivia is going to remain favorable for foreign investment, as has been encouraged by recent statements of the administration.

Thank you. A nd with regard to corporate activity, there's been a lot of folks in the sector making acquisitions. It seems that assets are quite expensive and your balance sheet is such that you could make acquisition, what is your view towards corporate activity either acquiring assets, or has anyone tonight flip side approached you to be acquired?

Well, we continue to actively look at a handful of what we think are the most favorable opportunities to grow Coeur externally and we think that those transactions would be reasonable in value from Coeur's standpoint. We will not overpay for any transaction.

Just shareholder being somewhat concerned about that issue, what do you consider overpaying and what type of hurdle rates are you using to evaluate external opportunities?

You're familiar with what the NAB multiples are and what comparable deals have been done in the marketplace and the market is the market. We review it on an individual transaction basis.

Okay. Well, thank you very much. Thank you.

That does conclude today's question-and-answer session. At this time, I would like to turn the call back over to you, Mr. Lamb, for any additional or closing remarks.

Thank you. I think Dennis has some closing remarks and we're done.

Thanks, Scott. We'd like to just again express our appreciation for your interest in Coeur and visiting with us today. Our expected rebound in silver production in the just-completed quarter with growth in the fourth quarter combined with strong earnings and cash flow, ongoing successful exploration to continue to add to the reserve base of the Company, noted progress at San Bartolome, and continued progress at Kensington, gives us confidence that we'll continue to work hard and will allow us to finish the year on a very positive note. And with that, I thank you and have a good day.

That concludes today's conference. Thank you for your participation. You may disconnect at this time.