Coeur Mining Inc (CDE) 2007 Q3 法說會逐字稿

Good afternoon. My name is Christian, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Coeur d'Alene Mines Corporation Q3 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn today's call over to Mr. Ebersole, Director of Investor Relations. Please go ahead.

Thank you, Christian. Good day, everyone. This is Tony Ebersole, Director of Investor Relations for Coeur. Thank you for joining us on today's call to discuss the Company's results for the third quarter of 2007.

In accordance with our standard practice, this call is also being broadcast live on the Internet through our website, www.coeur.com, where we've also posted the slides for the Company our prepared remarks. A telephonic replay of the call will be available for one week afterward on our website.

Today's presenters include Dennis Wheeler, Chairman, President, and Chief Executive Officer; Jim Sabala, Executive Vice President and Chief Financial Officer; Richard Weston, Senior Vice President, Operations; and Don Birak, Senior Vice President, Exploration.

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, Tony, and good day to everyone. Before I turn to the details of the third quarter for Coeur, I would like to mention to you that our management team is in New York today meeting with shareholders in connection with Coeur's proposed acquisition of Bolnisi Gold and Palmarejo Silver & Gold Corporation. I'm pleased to report we're currently scheduled to complete these acquisitions in mid-December, and as you are all aware, adding the Palmarejo project to our platform of mines is a key component of our growth strategy and together with San Bartolome will transform Coeur into the world's undisputed leader in silver.

Once both San Bartolome and Palmarejo are in production in 2009, Coeur expects to produce an industry-leading 29 million silver ounces, an increase of 142% over current levels. We'll also increase our gold production 65% to 200,000 ounces, and importantly, this is expected to reduce our overall cash cost to an industry low $1.75 per ounce by 2009, a reduction of 55% from current levels.

We already have key Coeur personnel on the ground at Palmarejo, coordinating construction activities to ensure this world class asset is developed in a safe and environmentally responsible manner. Stuart Mathews is serving as the Interim General Manager at Palmarejo, as our on site lead of the project development and we have a joint Company steering committee that formulates overall policy and objectives for the project.

Slide 4 demonstrates the dramatic impact of the Palmarejo project in San Bartolome on our future production profile. This profile represents the Company's continued transition towards long life assets. As I mentioned, Palmarejo will help drive our cash costs to an industry-leading $1.75 per ounce of silver, which we believe will be the lowest in the sector.

Moreover, there's significant potential to increase Palmarejo's resources and reserves, given that only 30% of the land package has been explored to date. Aggressive drilling is continuing to expand and define the existing 150 million ounces of silver resources and 1.7 million ounces of gold resources. Initial proven and probable reserves and a final feasibility study are expected to be completed by year end.

We'll touch a bit more on this later, but with that backdrop, let's now turn to our third quarter results. During the recent quarter highlighted on Slides 6 and 7, your Company made substantial progress on all of the Company's strategic initiatives that we believe will result in Coeur becoming the world's undisputed leader in silver. The San Bartolome silver mine in Bolivia, the world's largest pure silver mine under construction, remains on schedule for a February 2008 production start-up.

In Australia, both Broken Hill and Endeavor continued to improve results this year. Cash costs remain consistently low and we are nearing complete payback of our investments made just two years ago. We expect to continue receiving silver production from Endeavor for at least the next 15 years and from Broken Hill for the next seven years. As I mentioned, Bolnisi and Palmarejo transactions are expected to close in mid-December following our core shareholder vote on December 3. And construction is progressing well at the Palmarejo project with Coeur's management and the direction of the steering committee of all three companies.

Net income for this quarter was $3.6 million on revenues of $52.9 million. Cash and short-term investments at the end of the third quarter were a very healthy $209 million, more than enough to fund all our internal growth projects. I'll now ask Richard Weston for some additional comments on operations and projects. Richard?

Thank you, Dennis. We were disappointed with the operating performance at Cerro Bayo. We have instituted several recent personnel changes that are expected to improve operating performance. Most importantly, we have hired Don Gray as the new general manager for Cerro Bayo. Mr. Gray was most recently Vice President and General Manager for Hecla at its La Camorra operation in Venezuela.

Mr. Gray is a mining engineering graduate of the University of Idaho and with a master's degree in civil engineering from MIT. He has 27 years of mining industry experience, including 16 years with Hecla. He has also worked for Newmont, Exxon and Climax.

In addition, we are conducting a full review of the mine planning and scheduling processes at Cerro Bayo. We are also expanding the exploration program to increase the number of higher grade, wider veins that will be mined going forward. As previously reported, these exploration efforts have already resulted in a 51% increase in Cerro Bayo's mineral reserves. These reserve additions represent higher grade ounces that are located near existing processing facilities, open in most directions and are already being incorporated in the operations, development and mining plans.

With the new vein discoveries at Cerro Bayo and Martha, we are expecting to add reserve additions by year end. This is a continuation of what we have said before and is a meaningful evolution of what has taken place within the entire core Chilean and Argentinean exploration programs.

Meanwhile, our new San Bartolome silver (inaudible) project is on track for a February 2008 start-up and expected to produce an initial annualized rate of 9 million ounces of silver per year, representing a 75% increase to current Companywide silver production levels. At the Martha Mine in Argentina, construction is on schedule for the new stand alone flotation mill and will be operational in the fourth quarter 2007.

The mill will improve costs in 2008, as well as extend the project's mine life. I'll now return the call to Mr. Wheeler.

As we enter the new operations phase at these exciting new projects, as you can see, we have brought in a new team of very experienced managers, which we expect to guide and manage this new growth. At San Bartolome, Rick Irvine has been appointed General Manager, bringing over 17 years of operations management experience throughout South America with him to his new position. And at Kensington, Tom Henderson has been promoted to General Manager. Tom brings nearly 30 years of large scale underground mining operations experience to his new post. He was previously a technical superintendent at the Barrick Goldstrike Mine in Nevada and has worked as mine manager at the Grasberg Mine, one of the world's largest mines located in Indonesia.

And with these additions, Coeur believes it has significantly strengthened our operations management team to secure the Company's position as we move forward with our next level of strategic growth. Jim Sabala, our Chief Financial Officer is with us today, and I'm going to ask Jim now to step in and make some comments about our third quarter financial results.

Thank you, Dennis. Slides 8 and 9 illustrate both the improved metals sales and stronger metals price environment that we experienced in the third quarter. Metals markets remain robust. Most analysts expect this price environment to continue into 2008, with many having recently raised their price expectations.

I'll now turn to a brief overview of the financials. Don Birak will then expand on some of Coeur's recent exploration initiatives. Through the first nine months of this year, the Company maintained its solid financial position, ending the third quarter with more than $208 million in cash, cash equivalents and short-term investments. A total of $57.3 million was spent in the third quarter on capital expenditures, principally on construction activities at San Bartolome, Kensington and the new mill at the Martha Mine.

We expect additional capital investments in the first -- fourth quarter of this year to total approximately $87 million, primarily related to San Bartolome, completion of the new mill at Martha, and sustaining capital expenditures. As previously mentioned, we expect the commissioning of the $14 million mill at Martha to improve costs in 2008, as well as to extend mine life, as the exploration program continues its successful drilling to expand mineral reviews and resources.

Production ounces in the quarter totaled 2.7 million ounces of silver and 20,500 ounces of gold. The Company reported quarterly revenue of $52.9 million compared to $50.6 million during last year's third quarter. Quarterly net income totaled $3.6 million, or $0.01 per diluted share compared to net income of $18.4 million, or $0.06 per diluted share in the third quarter of 2006.

Also included in third quarter results for 2007 were expenses of $2.5 million associated with the cessation of mining activities at the Rochester mine during the third quarter. As far as our growth projects are concerned, the Company has a very strong capital base to supply the liquidity needed to complete all of the existing projects, as well as the Palmarejo project.

Now I would like to turn the call over to Don Birak for a look at exploration during the quarter. Don?

Thanks a lot, Jim. As Dennis mentioned, the Coeur exploration program, which is at one of its highest levels in history, has already returned very positive results through the first three quarters, resulting in an increase to our mineral reserves at both Cerro Bayo and Martha at midyear. In the third quarter, exploration in the Cerro Bayo district focused on five new veins discovered in June, and we completed nearly 10,000 meters of drilling, primarily on Dagny and Fabiola, two of the veins.

We are very encouraged by the exploration and drilling results to date, which should translate into future gains in our new mineral resources and mineral reserves. Due to the high grade nature of the new vein intercepts and their proximity to the ore processing facilities, permitting for underground access and future mine development has already started. Drilling also began in the recent quarter on a new target at Martha, the Isabel Oeste vein. This target is about 1 kilometer north of Martha and southwest of the nearby Betty West vein that we discovered last year.

So far on Isabel, the first three drill holes intersected high grade silver and gold mineralization [hosting a rock type] similar to those at our Martha mines. These two attributes, high grades and favorable host rocks, give us encouragement for additional discoveries and expansion of Isabel. Our mine staff at Martha is currently planning underground access to the Betty zone which will pass closely by Isabel.

On other fronts, we commenced an exploration drilling program at the Rochester mine. This program is designed to identify all opportunities for new ore that may be conducive for processing in the current crushing and leaching facilities and to test new targets for potential to host high grade silver and gold deposits. On this latter front, new high grade structures were identified in the last quarter, with -- around the Rochester mine. These structures extend below and between the Rochester and Nevada packer deposits, and I'm pleased to announce that we commenced drilling on one of the new targets this past month.

Rochester has produced over 119 million silver ounces and 1.4 million gold ounces for Coeur's since inception in 1986. We remain excited about opportunities to find new ore at Rochester and continue its legacy as a world class silver producing district.

Finally, at Kensington in Alaska, we commenced drilling just recently on new targets in the Jualin area adjacent to the Kensington mine on the south. The next slide shows a map of the five new exploration targets at Cerro Bayo where we drilled nearly 10,000 meters of Coeur, just completed on the Dagny deposit, the parallel Fabiola vein which lies about 250 meters to the east and on the Dalila and Yasna veins in the same area.

Currently, the drill defined mineralized body at Dagny is now over 600 meters long and nearly 150 meters in vertical height. Mineralization is still open for expansion to the southeast. At the nearby parallel Fabiola vein, the drill defined body is currently 350 meters in strike length and about 120 in height.

Mineralization is open both to the southeast and northwest. In addition, drill results from initial work on Yasna and Dalila were discovered ore grade mineralization in both of those veins with significant results today being 2.4 drill meters averaging a gram of gold per ton and 391 grams of silver in Yasna, and 0.43 drill meters averaging 59 grams of gold per ton and 1,250 grams of silver in Dalila. These positive results are very encouraging and I think bode well for future gains of resources and reserves at both Cerro Bayo and Martha. And now I'll turn the call back over to Richard.

Thank you, Don. If you're on our website, the next slide, Slide 13, shows construction of the Martha mill. Completion of this 240-ton per day, $13.9 million stand alone mill at Martha is on schedule for completion in December. The mill will support the Company's ongoing success in expanding the mine's reserve and resource base and is expected to lower per ounce production costs.

Costs were higher at Martha in the third quarter because of a shortfall in ounces. Production ounces are lower on a quarter-to-quarter comparison basis. The overall reserve grade at Martha is up and we do expect that we'll meet our production and forecast for the year. With the start-up of the mill in December of this year, we are expecting operating costs to improve in 2008 and target for cash costs in the future is $4.50 to $5 per silver ounce.

The stand alone mill will also hope to extend mine life, since we can reduce the cutoff grade at Martha, as we continue the aggressive exploration program, which has already increased silver mineral reserves by 25% through the first half of this year.

Thanks, Richard. As you may recall, we acquired Martha for $2.5 million in 2002, with only nine months of resources. Since then we have mined 11 million ounces of silver and still have 14 million ounces of reserves and resources. As a result of this success, Martha is now evolving into its next phase, as a stand alone operation with the construction of the mill.

Turning now to Slide 14, at Kensington, construction of the process buildings and power plant is now 100% complete. In the third quarter, work is completed breakthrough of the main horizontal access tunnel which connects Kensington with the Jualin property where the facilities are located.

I would like to make a few comments about the Kensington litigation. We are currently continuing to maintain our options to resolve the litigation relating to the tailings disposal facility to enable the mine to move forward to production. We met with the plaintiffs in Juneau twice in October and we have planned further meetings next month. I'm pleased the City and Borough of Juneau has sponsored a third party facilitator who meets with the parties to work for a desirable outcome.

Turning now to Slide 16 and 17, at San Bartolome, we are nearing the finishing line with initial production expected in February of next year at an annualized rate of approximately 9 million ounces of silver per year. The workforce and contract crews totaling 1,600, mostly Bolivian, workers have maintained a stellar safety record, having surpassed more than 2 million man hours without a lost time accident, a significant achievement for any construction project anywhere in the world.

This is a testament to Coeur's worldwide approach to mine safety, which is not only bringing well paying jobs to the people of Bolivia, but it is also doing in a safe and productive work environment, a practice we have employed wherever we develop new mines.

Slide 15 illustrates some of the recent construction activities occurring at San Bartolome and gives a sense of the high quality construction at work.

On the legislative front in Bolivia, tax legislation has now been passed by the Bolivian House of Representatives and as it currently stands in the Senate would result in a 50% effective tax rate. We consider this proposed tax package to be acceptable, and is the one which we have incorporated into our economic assumptions for the project.

Precious metals markets remain very robust and this week we saw silver prices move to their highest level since last February, when prices reached new 25-year highs. Based on the strong underlying fundamentals and continued strong industrial demand from growing economies, most precious metal analysts have revised their forecast for silver prices upwards over the next year, and we at Coeur also remain very bullish on the long-term prospects for the silver market.

Investor demand for silver remains very strong. The same macro drivers that are at work on gold are also benefiting the silver market, the weakening dollar, inflation concerns, and strong world economic growth, particularly in China and India. As these economies grow, the diversity of silver and its many industrial uses further enhance the allure of the metal beyond its link to gold as a precious metal, with industrial demand expected to remain the key feature of the metal's performance.

It's important to note that within this silver market dynamic, there are very few new primary silver mines coming into production in the world to meet this demand and help offset a decline for mature mines. Coeur's San Bartolome mine and the Palmarejo silver project are two of the very few new primary silver mines being built in the world today, and these mines will truly distinguish new Coeur as the primary silver company in the world with industry-leading new mine production on the horizon.

So what are we seeing for the balance of the year? Looking forward through the remainder of 2007, we are certainly expecting stronger operating performance from our existing mines, as well as further progress on our Company transforming development. By mid-December, we expect to bring the Palmarejo project into Coeur's strong portfolio of assets, an addition which will clearly vault us to the undisputed leadership in the silver space with our partners, Bolnisi and Palmarejo.

By year end, construction will almost be complete at San Bartolome, with production beginning in the first quarter of 2008, adding silver ounces at a rate that will nearly double production from our current companywide levels. The mill at Martha will be up and running, allowing us to bring economies of scale to this still emerging and highest grade underground silver mine in the world, while we continue our program of resource development.

Ongoing exploration at both Martha and Cerro Bayo are expected to add new ounces to mineral reserves by year end, as we continue to pursue additional ounces in Nevada and Alaska. Certainly, I have the highest confidence level in our exploration team. And with prevailing market conditions, we expect to maintain positive returns for our shareholders. Now, we'll be pleased to take your questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Terence Ortslan. Mr. Terry, your line is open. Please go ahead.

It's Terence Ortslan, Terry Ortslan, how are you, I didn't recognize my name. How are you?

Hi, Terry, how are you.

Thank you. Dennis, maybe in a broader question, that's a great review, thank you very much for those details -- in a broader sense, how do you see Coeur deploying its cash flow coming from all of those expansions and increased production, and the, obviously, lucrative price of silver, in terms of dividend policy and also exploration policy?

Well, beginning in 2010, we certainly expect robust cash to be generated by the new Coeur, and at that time, clearly, the board of directors at Coeur will consider the appropriate dividend level for our shareholders, given the performance of the Company that we expect.

And your allocation on the exploration budgets for next year?

I'm expecting that exploration budgets will be up next year because of the very strong performance that we believe will continue at Palmarejo. We'll, obviously, be incorporating a significant budget there to expand the resource, as well as reserves. This year, you'll recall, it was $15 million.

Which is, which is a very high, nice number. You're going to see a higher number next year, then I assume, right?

Well, the board of directors has yet to approve the budget, but my expectation is knowing Don he'll have a request for more money.

Reading my mind, Dennis.

(laughter) Give it to him. And the last question, actually again, a long-term broad view is that how do you see the Company's capitalization happening now that (inaudible) maybe you want to talk about that too -- but capitalization, the capital structure of the firm with respect to the balance sheet, how do you see -- (inaudible).

Well, as Jim pointed out, we've got sufficient cash on hand to complete the growth profile that we have talked to you about today, so that I don't foresee us needing to access at all the equity markets to complete the program that we have outlined for you. I'm sure that Jim will turn his focus to bank facilities in the future based on our expected performance.

Great. Thank you very much.

Our next question comes from the line of John Bridges with JPMorgan. Please go ahead with your question.

Hi, Dennis, everybody.

Hi, John.

I thought for a moment there there was a new analyst following the Company. I've not heard Terence's name read that way before. (laughter) Don, could you give us a little bit of an idea as to the sort of in sections you're going underneath Rochester? I'm just trying to get a sense of as to what might happen down there, just a faint starting idea.

John, I know you're interested. We talked a little bit about this before. We just started the drilling program, so I really can't say anything about this. I'm not too bad at looking at rock and seeing if it's veined or anything, but I'm not very good at analyzing it with my eyes, so I think we'll wait to see how the assays go, but so far, I'm happy with what we're drilling.

Have you done channel samples in the bottom of the pit?

Yes, we have, and we have done samples around the district too, looking at these structures that go out from the, from the deposits, where they are currently exposed, but they are pretty thin there and we're seeing those same structures down at depth, I believe, hopefully, we'll have some results by year end on that first round of drilling.

Order of magnitude grades?

So far, the channel samples are coming back with multi-ounce silver and very significant gold values. That's really about what I can tell you today.

Okay. Well, that's more than I got out of you last quarter, so I'll keep on plugging away. At Cerro Bayo, could you give us a bit more detail as to what happened last year, last quarter and how that's going to get sorted out?

Yes, hi, John, it's Richard here.

Hi.

As I said, we're very disappointed with the performance at Cerro Bayo in the last quarter. Cash costs were significantly and unacceptably higher at the mine. We have implemented a number of initiatives to improve both production and costs going forward, and the issues experienced at Cerro Bayo include an increase in most of the operating costs, similar to what we're seeing in other mining companies' quarterly reports.

For example, contract and outside services, supplies, particularly fuel, explosives, we're looking into those, and also slower than anticipated transition into higher grade water zones at Cerro Bayo and this was particularly, had a particular impact in second quarter. So the grades mined in the third quarter were about half of the reserve grades and we introduced long haul staffing at the beginning of the year. That hasn't gone as smoothly as planned. We've had more dilution than we expected and that's also resulted in lower silver grades.

And at the same time, especially in relation to costs we've brought in additional expertise and manpower to assist with the transition to the new mining method. That's resulted in higher personnel costs. So put together the higher costs and lower ounces, disappointing cash costs overall, and on top of that, we've developed a recovery plan and that recovery plan has been commenced. One of the first things in that, we've just replaced the VP and General Manager on site.

The new General Manager is Don Gray. As I mentioned, he brings 25 years of mining experience. He's very, very capable and has a fine intellect, and we think he'll be an important driver at the site. And we've also doing a detailed technical review.

Okay, okay. Just remind me, what's the mill throughput at Cerro Bayo and how much of it did you fill last quarter?

It's about 400,000 tons a year. It's got 600,000-ton capacity, I think.

John, we run about 75% of the total capacity at Cerro Bayo. Cerro Bayo has excess mill capacity.

Okay, okay. Are you planning to run 75%, or are you hoping to fill that once you've got the bulk tonnage going?

On our current plans, we would probably remain at about that same level, John.

About 75% of the 600,000?

Yes, around that.

Okay, got it. Thank you very much. Good luck.

Our next question comes from the line of Jorge Beristain with Deutsche Bank. Please go ahead with your question.

Hi, good afternoon, gentlemen. I'm just trying to square the circle here a little bit on what happened quarter-over-quarter specifically with your EBITDA generation.

It would seem that you're down about $10 million sequentially and I can only trace roughly $3.5 million of that to the large increase in the Cerro Bayo cash costs quarter-on-quarter. So I was wondering if you could speak to the other sort of 65% of what would be that increase in costs or miss on perhaps byproducts?

Sure. There's a couple of things that would add up to that. One, is in the press release, we noted about $2.5 million related to cessation of mining activities at the Rochester mine.

That was the cash expense?

That was a cash, a P&L expense. What happened on that was the rules for termination of employees in connection with a layoff allow us to accrue that over the useful life of the layoff, or of the employee before they are laid off. In our case, our managers were very good, they determined they could cut head count faster and so the useful life of that employee came down, so we had about $1 million charged as a result of that.

Then we had about $1 million in the month of August, as we got down to the end of the mine life in the very last month, which is normal, we had less ore than planned, so we had a lower cost to market adjustment on that material. The remainder would be the drawdown of some historical inventory costs, non-cash costs are on the balance sheet.

That's simply the result of the amount of gold and silver that came out of the heap was much larger than what was put on the heap in the last month of -- or last quarter of production. Ore production, I would clarify.

Sure, but maybe I'm not understanding this, but if we're looking at EBITDA, that would include the add-back of non-cash charges and I don't have your cash flow in front of me, so I'm just trying to determine it, but roughly speaking, I would guess you're down $10 million in operating cash flow quarter-on-quarter, as well?

Yes, and if you take a look at that, you'll see the combination of the inventory changes on the operating cash flow, plus we shipped a lot of metal at the end of the quarter. You'll see our total receivables went up about $14 million, which was a drag on the OCF that will even out over time.

Okay. I also noticed that you had slightly lower, at least than my colleague, David Martin's, estimates for gold. Was there some slightly lower grades in gold during the quarter?

We had a little bit -- I'm just looking at the key factors page, which is included in the press release, and we had a, quite a bit less gold came out of the Rochester, the residual leach, we had 12,000 ounces in the quarter versus 21,000 in the previous year's quarter. That would be one of the big factors there. That's in the press release on Page 9.

Sure. Sorry, I'm looking at an Internet version of it so I don't have the pagination on it, but my other question was just on a go-forward basis, do you expect to see in the fourth quarter a kind of a normalization back to your historic EBITDA run rates, or do you see a continuation of problems at Cerro Bayo continuing to weigh on your near-term EBITDA generation?

Well, I -- Richard has outlined in the program that we're going to have. We hope to bear fruit from that program very quickly and so we would expect to show improvements over that. So we certainly hope that it occurs in the fourth quarter and that's our goal.

Okay, thank you.

There are no further questions at this time. Mr. Ebersole, please continue with any closing remarks.

Dennis?

Thank you very much, all of you, for joining today's conference call and your continued interest in your Company. We can assure you that we are committed to remain the leading primary silver producer in the world and we will remain focused on our continued execution of our long-term strategic plan for growth designed to maximize the value for all of our shareholders. And we're looking forward to seeing you at the shareholders meeting in December to approve the Palmarejo, Bolnisi acquisition. Thanks, again.

Ladies and gentlemen, this concludes the Coeur d'Alene Mines Corporation Q3 earnings release conference call. You may now disconnect.