Coeur Mining Inc (CDE) 2008 Q4 法說會逐字稿

Good afternoon, my name is Crystal and I'll be your conference operator today. At this time I would like to welcome everyone to the fourth quarter earnings 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) Ms. Anderson, you may begin your conference.

Thank you, operator. Thank you for joining us today to discuss the Company's results for the fourth quarter 2008. This call is being broadcast live on the Internet through our website at www.Coeur.com where we have also posted the slides that accompany our prepared remarks. Telephonic replay of the call will be available for one week afterward on our website.

On the call today here in Coeur d'Alen are Dennis Wheeler, Chairman, President, and Chief Executive Officer; Mitchell Krebs, Senior Vice President and Chief Financial Officer; and Don Birak, Senior Vice President of Exploration; we also have several of our executives on the line who have called in from our mine sites; this includes Richard Weston, Senior Vice President of Operations, who is dialed in from our Palmarejo line in Mexico; Don Gray, Vice President and General Manager calling in from San Bartolome in Bolivia; and Humberto Rada, President of Coeur South America and current President of Bolivia's National Mining Association, who is on the line from La Paz.

Any forward-looking statements made today by management come under Securities legislation of the United States, Canada and Australia and involve a number of risks that could cause actual results to differ from our projections. Please see our full cautionary statement on slides two and three. With that, I would like to turn the call over to Dennis.

Welcome, and thank you for joining us on the call. In the fourth quarter and January of this year, we successfully navigated frozen capital markets to continue investing in and completing our new long life mines. We have entered 2009 a much stronger and vibrant Company. With two new silver mines, a rock solid balance sheet, and the industry's leading production and reserve profile, Coeur has strengthened its position as the leader in silver.

Today's results are the Nexus of the strategic plan we laid out three years ago. We've not wavered from that plan, which included the development of two of the world's largest silver mines, both of which have been successfully constructed. A focused exploration program directed towards our mine sites, which has yielded industry-leading reserves. Thirdly, cost discipline, where we are well on our way towards meeting the expected 40% reduction in G&A expenses. Fourthly, investments in human capital, including the establishment of a top notch technical services team at the corporate headquarters and expanding executive leadership in both our North and South American operations. And finally, a capital structure to support our growth. Our cash stood at a comfortable $100 million as of January 31.

The culmination of these efforts could not have come at a better time. Precious metals, our silver and gold, are on an upward trajectory. We think Coeur shareholders are in the right place at the right time. Our industry is the place to be and as investment demand in silver and gold soars, Coeur will meet that demand with rising production and lower cash operating costs. We're unique among primary silver producers in that we are exclusively focused on precious metals production and have no exposure to base metals. San Bartolome in Bolivia is operating at engineering capacity and made a full contribution to fourth quarter results, while Palmarejo will pour its first silver and gold next month.

These state of the art new operations will contribute to an expected 66% increase in our total silver output this year to 20 million ounces in 2009 and accompanied by an 85% increase in Company gold production. We expect our two new silver mines long in life to generate robust cash flow growth over the coming years. In addition to new production online, we continue to divest -- invest strategically in exploration and development. Today, we're pleased to report that Coeur's reserve base leads the industry in primary silver reserves. Coeur reported a Company record 248 million ounces of proven and probable silver reserves at year end, an increase of 15% over a year ago. And we also grew our gold reserves by 54% to 2.3 million ounces. Just as impressively, the Coeur team ended the year with an additional 236 million ounces of measured and indicated silver resources. One of our near-term objectives will be the conversion of resources into economic reserves.

Finally, Coeur strengthened its balance sheet. Despite turbulent market conditions, we reduced our debt load by nearly $50 million thus far in 2009. And as of January 31, Coeur had a substantial cash position of approximately $100 million. Meanwhile, gold and silver prices continue to attract investors as a safe haven investment. Silver has clearly reaffirmed its position as a monetary metal in our judgment and we expect these strong silver prices to favorably impact our cash flow.

In the fourth quarter, Coeur continued to ramp up production while lowering costs. We produced four million ounces of silver in the fourth quarter, an increase of 28% year-over-year. Our San Bartolome mine is operating at engineer production levels today and contributed substantially to fourth quarter production. We had cash operating costs for the quarter of $5.60 per ounce of silver. This is notable when you consider that our quarterly gold production was lower from a year ago due to the temporary cessation of mining at Cerro Bayo.

The cost reduction efforts we outlined in our last earnings call have already impacted our income statement. Yielding a 22% reduction in G&A costs quarter over quarter. For the full year, Coeur produced 12 million ounces of silver at very competitive cash costs of just $4.75 per ounce and we reported $11.6 million of operating cash flow. This year, our shareholders will begin realizing the full benefits of our investments at San Bartolome and Palmarejo. Silver production will increase by 66% this year to 20 million ounces. And our gold production will increase 85% over last year's levels to 83,000 ounces.

So the building blocks we have put in place and the strategic plan this team has executed over the last three years have resulted in two of the newest and largest silver mines in the world. We'll complete our capital spending program with just $65 million remaining for the year. The team will be delivering dramatic production growth with a strong balance sheet and excellent exploration potential. Now I would like to ask my colleague Richard Weston to discuss our operations in more detail. Richard.

Thank you, Dennis. The most important operational development is that our Palmarejo silver and gold mine in Mexico. Today we can report that operating and construction activities at Palmarejo remains on schedule with our first dore pour expected expected in March. Underground mining activities are producing very well with over 6,100 acres of underground development (inaudible). Stockpiling of oil from both underground and (inaudible) mining has commenced in preparation for processing. Construction activities are also well advanced. The on-site power station has been completed and generating power for commissioning activities and the water supply has been established. Commissioning of the plant has commenced and our goal to pull gold and silver in March remains on schedule.

On the next three slides, we've provided some recent photos of Palmarejo as it meets commercial production. You'll see the Palmarejo processing (inaudible), power station, grinding area, flotation area, leach area and tailing facility. These are all state of the art facilities and we are very proud of the high quality construction. I'll now turn the call back to Dennis to discuss operational leadership structure for (inaudible).

Thanks, Richard. As we mentioned at the outset of our call, to support our investments in mine development and production, we've also invested in human capital. We've established a technical services team at our Idaho corporate headquarters, which provides immediate support and good expertise to each one of our operating sites. This team is led by Leon Hardy, President of North American Operations which reports to Richard Weston. We further strengthened leadership in Bolivia with the employment of Humberto Rada as President of Coeur South America and Bolivia, and Don Gray, as our permanent Vice President and General Manager on the ground at San Bartolome. Humberto is also President of the Bolivian Mining Association. Don and Leon Hardy helped direct operations in the fourth quarter of 2008 at San Barts, which was the turning point for San Bartolome when the mine achieved design capacity. Production and costs have remained on target since. To talk more about San Barts, I'll turn the call over to Don Gray, who is currently in Bolivia. Don?

Thanks, Dennis. At San Bartolome, the world's largest pure silver mine we're now in full operation with a targeted average monthly production of approximately 750,000 ounces of silver and a total annual targeted production of nine million ounces for 2009.

I do want to take a moment here to acknowledge the very fine effort put forth by our entire work force at San Bartolome. They have done an outstanding job of getting operations up and running and we want them to know that Coeur recognizes and appreciates their contribution. Looking forward, cost reduction and containment is and will continue to be a major priority at San Bartolome. In fact, we've already reduced our operating cost per ounce nearly 50% since commencing operations in late last summer. While San Bartolome is close to meeting our expectations for both production and costs, we will continue working to further enhance its economic efficiency as the year progresses. I'll now turn the call over to Mitch Krebs to discuss our financial performance.

Thanks, Don. As Dennis mentioned at the beginning of the call, we've started 2009 with a substantial asset base and sturdy balance sheet. Total assets were $2.9 billion and shareholders equity stood at $1.8 billion at year end. We have also turned the corner in terms of the Company's liquidity and cash flow profile. We have a comfortable cash position of approximately $100 million as of January 31. With projected 2009 operating cash flow of an additional $100 million and remaining capital expenditures during the year of about $65 million, the Company feels confident about its financial position going forward. The Company's balance sheet is also improving due to debt reductions.

The amount of floating rate convertible notes will be issued in October of 2008 has been reduced by nearly $50 million as the holder continues to convert the notes into common shares. We expect the remaining $25 million of these notes to be converted this quarter. Coeur's intensive capital spending plan of the last few years is substantially complete. In the first half of 2009, we're making the transition from being a user of cash to a generator of cash. With the bulk of our spending behind us, we now expect to generate positive net cash flow in the second half of the year as San Bartolome and Palmarejo contribute to our financial results.

Cost reduction and controls remain a key priority at both the corporate level, as well as at our mine sites. While we're pleased to have reduced G&A expenses by 22% quarter over quarter, our efforts continue to rationalize our operations and to reduce costs wherever possible towards our goal of a 40% reduction. This ongoing cost reduction strategy is focused in three areas. Operating costs at producing mines, nonoperating costs throughout the organization, and capital cost reductions and deferrals. The Company has been successful in all three areas since implementing this strategy in October and management will remain vigilant in containing and controlling costs going forward.

As Palmarejo moves into production and begins contributing to our financial results, we will begin to amortize our investment there over the current mineral reserve base. These noncash items will impact our income statement. In addition, due to several noncash adjustments flowing through the Company's income statement in the fourth quarter of 2008 and going forward, management will focus its reporting of financial results on operating cash flow as the main metric. Operating cash flow for Coeur is defined as net income plus depreciation, depletion and amortization and other noncash adjustments before changes in working capital.

On the next slide, we've charted the sensitivity of the Company's operating cash flow to the silver price. While we currently expect to generate $100 million of operating cash flow in 2009, based on $900 gold and $13 silver price, you can see the trajectory as metal prices continue to strengthen in line with recent trends. The Company's shares provide investors the significant leverage to changes in metals prices. For every 10% increase in prices, Coeur's operating cash flow increases by approximately 30%, or approximately $35 million. With that, I would like to turn the call over to Don Birak to discuss our exploration results.

Thanks, Mitch. Today we released excellent 2008 year end exploration results. We increased our mineral reserves and resources in every category year-over-year for both gold and silver. The strong inventory is the largest reserve base of any primary silver producer and more significant considering it is net of last year's production.

In 2008 our exploration program focused primarily on our large land packages adjoining our operating properties in Mexico, Chile and Argentina. Due to these efforts the Guadalupe deposit in the Palmarejo district nearly doubled in size. We discovered a new vein at Cerro Bayo and and we have positive results from drilling at Joaquin, a new property northwest of our Marta Mine. We also integrated three new properties, La Currita near Palmarejo, Nico near Martha and Huantajaya in Northern Chile into our exploration program.

In 2009, we will build on last year's success with a $17.6 million exploration initiative primarily devoted our operating properties. Some key objectives for 2009 are to define new reserves for Cerro Bayo to support its restart in 2010, to establish new resources and reserves to Martha, to expand proven and probable reserves at Palmarejo and to test new targets there as well. Within Palmarejo, we're reporting sizable increases in all resource and reserve categories. Just the measured and indicated resources grew 52% for silver and 37% for gold since our feasibility was released in June of 2008. In late 2008, we made an exciting new discovery at Cerro Bayo, which we have named Delia, shown on slide 27. At Delia, we've encountered wide silver and gold bearing vein intercepts, just 500 meters from our ore processing facility. Our 2008 drilling at Delia defined a main zone and a new extension about 600 meters to the south. The main zone occurs near the north end of the structure which now extends over one kilometer in strike and up to 100 meters vertically. Drilling continues today to further define the main zone and to test the full potential of this long new structure. With that, I'll turn the call back over to Dennis.

Thanks, Don. I would like to just build briefly on my initial comments regarding the attractive macro environment for precious metals. The price of our silver has risen three times faster than the price of gold since the beginning of the year. And silver, it appears, has tremendous appeal as a monetary investment and storer of value, particularly during these times of economic stress. Several market commentators are starting to catch on to the fact that the technical indicators are looking extremely favorable to silver. We've seen unprecedented investment demand in both silver and gold ETF holdings and they stand at record levels. The iShares ETF, the largest of silver ETFs now hold over 245 million ounces of silver representing roughly 30% of the total silver fabrication demand in a year. Any changes in fundamental demand for silver are readily addressed by the increased investment demand.

During the recent rally on silver, there remains some dislocation in the historical ratio of silver to gold prices. Over the past decade, we've seen this ratio below 60 to 1 silver to gold price, and after a brief period last year, it was even above 80 to 1. We're now seeing a return to historic levels, as silver tracks gold as a safe haven and flight to quality. This would indicate that $1000 gold price could well translate into silver prices above $16.

This next chart shows the relative performance of silver and gold along with the base metals going back to 2005. We find this very interesting, as the prices of gold and silver, as you can see, began to diverge from pricing of copper, lead, and zinc starting in November. Over 70% of world silver supply comes as a by-product of base metal mines. The decline in base metal prices has resulted in the closure or suspension of mining at many base metal mines around the world and we would expect to see a drop-off in silver supply from these operations because of this feature. We think this supply dynamic will be very supportive of silver market prices and a benefit where Coeur's production is 100% precious metals, unlike most of our peers who have significant base metal exposure.

To wrap things up again, I would like to highlight that Coeur has the largest silver reserves among our peers in the primary silver industry, the highest percentage production growth for 2009, and I believe the strongest team. We're positioned for major production growth this year with our two new mines that have been completed in the last nine months and even as commodity and input prices rose last year, the Coeur team pro actively managed its expenses. We invested in human capital by establishing an inhouse technical services team to provide all of our projects with immediate support and expertise. We have a deep bench at Coeur and it will get stronger. With the heavy investment now behind us, Coeur is transitioning into a long-term phase of positive and significant cash flow generation for our shareholders.

In the next few months, we look forward to providing periodic updates on production and rampup at Palmarejo. News on the US Supreme Court decision on on Kensington and more evidence of our efforts to lower cost and boost cash flow. While the financial markets still remain under stress, our silver market is strong and Coeur is well positioned for success. With that, we would like to open up the call for questions.

(Operator Instructions) Your first question comes from the line of John Bridges with JPMorgan.

Good morning, or afternoon, Dennis. Still morning for you. Sorry about that.

Yes. Thanks, John.

Just wondered, you seem to be liquid enough based on CapEx. How much money do you think is going to get consumed in the pipeline work in progress as you ramp up production at Palmarejo?

Yes, John, hi, it's Mitch here. How are you?

Hi, fine. Yourself?

Good, thanks. As we've said, we have a full year CapEx budget at Palmarejo of approximately $100 million with about $60 million of that having spent in the first two months. From here then, that will decline gradually as the mine begins to ramp up in March, April, May and June.

Right. So the CapEx numbers that you speak of, do they include the money that will be going into, into the pipeline, or is that a separate number?

Say that again, John. I couldn't quite catch the word you used there.

The -- the pipeline of concentrates that you're going to be producing or the pipeline material, how much money's going to get taken up in that?

Oh, I see. The working capital lag, as we build up.

Right.

Yes, that's, that's in the $100 million, John, and it's reflected in that, in the $100 million as it's broken out month by month. Clearly that will be the bulk of the CapEx in April and May as we see that working capital swing as we go from startup to full scale production.

Okay, fine. And then perhaps a follow-up for Don maybe. I see there's been a pickup in the resources at Endeavor. How, how do you see that being translated into reserves?

Hi, John. Well, I think we feel pretty good about the investment both at Endeavor and Broken Hill, they're a strong resource and reserve base and we look pretty closely with the operators on their program going forward. Endeavor people spend a good amount of money on exploration and we're comfortable with their program.

Any thoughts on how and what's needed to take it into reserves?

I don't think so at this stage, John, I think we just want to see them continue to focus on exploration.

Thanks, guys. Best of luck.

Thanks, John.

Your next question comes from the line of Andrea Cheung with Cormark Securities.

Good afternoon. I just had a couple of quick questions. The first one was relating to the tax benefit that we saw in the quarter. Can you just explain what the nature of that was?

We have Tom Angelos with us here, our Chief Accountant. Tom?

Yes, the tax benefit we booked during the quarter was primarily related to a loss in Mexico due to foreign currency exchange.

Okay. All right. And then in terms of production from Palmarejo, you've given a number of 5.3 million ounces for '09. Can you give us a sense of when you expect to achieve commercial production?

Well, I think we've indicated that we expect production to start there in March and normally you would expect I think a cycle, what, Leon, 90 to 120 days before we consider full commercial production to be achieved at a normal operation?

That's correct.

Okay, and so your 20 million ounces for the year includes the 5.3 from Palmarejo then? The 20 million--?

That's correct, that's correct.

Okay, and then my last question just relates to grades at San Bartolome and Martha. Can you give us a sense of what the grade profiles are going look like over the next couple of years at those operations?

Don?

I think -- Andrea, this is Don Birak. The numbers we put out there so far show the total reserves and resources for all of our operations, typically we don't forecast grades beyond that.

Okay. All right. Thank you very much.

Thank you, Andrea.

Your next question comes from the line of Mike Curran with Royal Bank.

Good afternoon, guys. I'm just wondering if you, on San Bartolome, the difference between cash operating costs and total cash costs is $2.30. I believe the two kind of line items for that difference are royalties and production taxes, if I'm correct. Can you give us kind of guidance what the split is between those two things?

Mitch?

Yes, sure. Hi, Mike. Production taxes, you're right, and royalties make up the difference between operating costs and total cash costs. The split between royalties and production taxes in 2008 is actually all, all royalties and no production taxes that went into that number. You'll see in 2009, which is about the highest year we'll see as far as royalties in the mine plant at San Bartolome where that will be about $2 total addition on top of the operating cost number. To take both of those into account. And as far as the split between them in 2009, we don't have that in our forecast at this time. But if you use $2 an ounce on top of the [6.50] that gets you to a total cash cost for '09.

Okay, great. Thanks a lot.

(Operator Instructions) Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

Good morning, John?

How are you?

Well, thank you.

Congratulations on the metals prices. In terms of the Palmarejo startup, could you give us a timetable for the first several milestones and when you expect it to be producing full design throughput?

Yes, Richard Weston?

Yes, Dennis, I'll answer that for you, John. We (inaudible) water available for commissioning. The challenge for each area is really to accept the (inaudible) and electrical commission (inaudible) has commenced. (Inaudible) the introduction of the ore into the mills and we expect to do that next day. And the introduction of reagents into the system to achieve final commissioning of the plant. The final milestone will be the production of (inaudible) which we expect in March.

When do you expect to meet the forecasted throughput at 2010 annual production rates?

I can take that, John. It's Mitch here. The current plans for 2009 shows that we'll be at those run rate levels in the month of July.

Thank you.

Yes.

How much money are you spending this year to drill out more reserve and resource at Palmarejo?

John, this is Don Birak, our budget for Palmarejo this year is a little over $8 million.

Thank you.

At this time, I would like to turn the call back over to Dennis. Sir, please go ahead.

Thank you, operator. We would like to thank all of you for joining us here on today's call. We can assure you that our focus will remain resolute, our management of cash disciplined. We'll be steady and we'll continue to stay on course through some very interesting times with strong silver and gold markets and look forward to reporting to you the progress at our new mines and other activities of the Company. So thanks for joining us and look forward to keeping in touch.

This concludes today's conference call. You may now disconnect.