Coeur Mining Inc (CDE) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the third-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.

Thank you. Thank you for joining us today to discuss the Company's results for the third-quarter 2009. This call is also being broadcast live on the internet for our website at www.coeur.com, where w We have also posted the slides that accompany our prepared remarks. Telephonic replay of the call will be available for one week afterwards on our website. On the call today here in Coeur d'Alene are Dennis Wheeler, Chairman, President and Chief Executive Officer; Mitchell Krebs, Vice President and Chief Financial Officer, Richard Weston, Senior Vice President for operations. On the phone are Leon Hardy, Senior Vice President of North American operations; Don Birak, Senior Vice President of explorations; Humberto Rada, President of Coeur South America and Manquiri; and Don Gray, Senior Vice President of South American operations

Any forward-looking statements made today by management come under the 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 slide two. With that I'd like to turn the call over to Dennis.

We welcome you today and thank you for joining us on our call. It was a record-setting quarter for Coeur. We produced 5.2 million silver ounces, an all time record, and we posted our highest ever quarterly revenue of $89.8 million. So today, while we are mostly satisfied with our progress, we are intensely focused on optimizing our mines and on future growth. We will actively support these efforts to complete the ramp-up at Palmarejo. With our Kensington mine now in the final stage of construction, on schedule and budget, and to begin production in 2010 and with our San Bartolome team committed to achieving excellence and with the rebirth of Rochester we are well poised to complete 2009 successfully. It's been a year of progress to date, but we still have work to do, so look for more record-setting activity and improvement from us as we build the world's premier precious metals company.

Slide four shows clearly Coeur's strategy to transition to long-life, low-cost mines is delivering results. Third-quarter results were nicely complimented by Palmarejo's increasing production. Here in the fourth quarter Palmarejo is approaching full-scale mine production while silver recoveries have markedly increased. In the exercise of conservatism we have made a slight downward adjusted of 500,000to our full-year forecast at San Bartolome after the government announced a resolution to temporarily suspend mining activities above the elevation of 4,400 meters there while stability studies of Cerro Rico Mountain are undertaken, which are unrelated to our mining operations confined to the surface of the property. Mining does continue actively on the remainder of the property and we have had some favorable results there in the last 24 hours. Although the news media sends mixed messages, I want you to know that the president of Bolivia has affirmed his support for private investment and San Bartolome continues to enjoy the full support of the mining cooperatives, the business community at large and our outstanding employees. In fact, just yesterday [Fedacomin], the largest cooperative in Potosi, voiced its uncompromising support for our operations and highlighted Coeur's compliance with all the rules. We do expect that following the national Bolivian elections in December that the situation temporarily confining mining operations to the 4,400-foot elevation and below will be resolved.

Clearly 2009 has been a year of exhilarating growth at Coeur and our precious metals mining sector is back in the spotlight with gold reaching record levels. We think it's vital to take a step back and reiterate Coeur's strategy. First, we will continue to be a growing primary silver producer with a significant gold production, also. We will leverage substantial investments now in place to generate superior rates of return for shareholders. This includes also focused, but significant exploration at our existing operations such as Palmarejo, and it includes a new chapter in the life at Rochester. We will maintain a conservative flexible balance sheet, and clearly our improved financial position now allows Coeur to access conventional mine financing without diluting shareholders. We believe this approach maximizes shareholder value and uniquely positions the Company to lead the industry in cash flow growth for years ahead.

Finally Coeur today is truly a new company. Two of our three new long-life mines are in production and Kensington is in the final stage of 10% of its construction, with production scheduled for the third quarter of 2010. Our focus continues on reserve growth and continued operational efficiencies at our mining assets and we believe that this strategy will allow us to focus our efforts and further reduce nonoperating costs.

Now I'd like to call on our colleague, Richard Weston, for comments on our operations. Richard?

Thank you, Dennis. Our Palmarejo silver and gold mining operation in Mexico continued to build momentum in its second quarter of operations, by its underground and open pit mining performed according to plan with extraction of ore from our first major [strike] coming on stream in the third quarter. Silver production increased 178% to 1.3 million ounces in the third quarter compared to second quarter, while gold production was up 150% at 24,299 ounces versus the second quarter at 9,730 ounces. he processing plant performed well. Average gold recoveries increased from 77% to 94.3% during the third quarter, and average silver recoveries increased from 53.6% in the second quarter to 73.4% during the third quarter. We are pursuing a number of optimization opportunities expected to further enhance silver recoveries. A major milestone was completed in late October when the connection to the Mexican power grid was completed. This connection offers a good opportunity to reduce our operating costs as we move forward. Later in this call we will discuss our just-published reserve increases at Palmarejo based on drilling at the adjunct Guadalupe deposit.

Now Don Gray will update you on San Bartolome. Don?

Our San Bartolome mines, the world's largest pure silver mine, chalked up its third quarter of consistent production and operating costs. We produced 2.1 million ounces with a cash oper -- with cash operating costs of $7.63 per ounce. Through our training and development effort San Bartolome has evolved into a high-performing organization and the contributions of our mine operations group and the support staff deserves mention. As Dennis mentioned earlier, we have temporarily adjusted our mining plan while the temporary suspension of mining above the 4,400-meter elevation is in effect. Mining continues on the remainder of the property.

Leon?

Thanks, Don. I'm delighted to report that we've begun the final stages of construction activity on our Kensington gold mine in Alaska. The tailings dam has been fully excavated. We are now bringing the compacted lifts and fill back in, which is our primary emphasis between now and year end. The weather is cooperating with us. The pipeline work is fully engaged, with excavation scheduled for completion by year end. We have begun commissioning in the plant, beginning with the primary, secondary crusher. Commissioning activity will proceed through plant and transition into operator training in the first quarter of next year. We recently closed on a $45 million term loan facility that will ensure Coeur has sufficient financial flexibility to complete the remaining construction work. We are firmly on schedule for a third-quarter 2010 startup at Kensington.

In light of the discovery of the new ore reserves Coeur plans to restart activity mining at Rochester. Coeur began mining at Rochester back in 1986. You will recall we ceased active mining in 2007 and went into a heap leach operation, a process that continues to deliver ounces well in excess of budgeted forecasts. In order to restart mining, a new leach pad will be constructed. We expect the Rochester expansion to deliver 2.9 million silver ounces and 30,000 gold ounces of incremental annual production with a six year mine life. Meanwhile leaching continues and is expected to continue until 2014.

Mitch?

Thanks, Leon. During the third quarter we saw metals prices move swiftly upward, impacting our revenues, as well as some of our non-cash items. For example, there was an 18% increase in silver prices during the third quarter compared to a 6.3% increase in the second quarter, and a 6.6% increase in gold prices during the third quarter compared to a 1.9% increase in the second quarter. This third-quarter metals price increase did lead to non-cash adjustments we were required to mark-to-market as embedded derivative, including the Mitsubishi gold lease facility and the Franco-Nevada gold royalty, which were completed back in late 2008 and early 2009 respectively. These adjustments were triggered by the significant upward rate of change in the gold price over the last quarter, as well as a modification to Coeur's discount rate due to an upgrade received from Standard & Poor's during the third quarter. These two inputs are key drivers to estimating the value of these future liabilities.

Aided by a combination of increased production and strong metals demand, Coeur set an all-time Company record of nearly $90 million in revenue for the quarter. This is our third straight quarter of revenue growth and we are on track to generate $115 million in revenue in the current quarter. Our operating cash flow is escalating, up to $23 million in the third quarter, which is a 35% increase over the prior quarter, and we expect operating cash flow to approach $40 million in the current quarter, which would be a 40% jump over the third-quarter operating cash flow, as production ramps up and we vigilantly review costs. For the full-year 2009 we expect operating cash flow of approximately $80 million to$85 million as Palmarejo begins to contribute at full rate during the fourth quarter.

On slide 16 we've shared some additional capital spending projections that illustrate how far we've come. In the third quarter $42 million of the $55 million of CapEx was spent at Ken -- at Palmarejo, while $10 million was spent at Kensington. In the fourth quarter we expect total Company CapEx to be approximately $48 million. $20 million ,to $25 million of that will be spent at Kensington with the balance split between Palmarejo and San Bartolome. The significant capital investment in these new assets is behind us. 2009 CapEx will end up being 39% lower than last year and will decline sharply next year and again in 2011.

In the third quarter we continued to strengthen the balance sheet. We ended the third quarter with $46 million in cash and $170 million in net debt. Through the end of the third quarter our debt reduction program yielded a 64% reduction in net debt obligations this year. Debt reduction will be a continued focus for us. As Leon mentioned, we have recently entered into a term loan facility to support completion of the Kensington tailings facility. This $45 million facility allows Coeur to fund construction at a low cost of capital without diluting existing shareholders. The loan may be prepaid at any time after 12 months without penalty. At this time Coeur has not yet drawn down any funds.

We've also taken important steps to enhance our working capital position and maximize our financial flexibility. We are now in the final stages of implementation of two credit lines for Coeur Mexicana totaling $30 million. In addition, we are expecting to receive our Franco-Nevada shares related to the Palmarejo completion test in the fourth quarter. The value of those shares is currently approximately $9 million. Finally, Standard & Poor's increased our credit rating in the third quarter, citing our debt reduction program and improved financial performance.

In summary, revenue is increasing, capital spending is on the decline and net cash flow is growing. Don?

Thank you, Mitch, and hello, everybody. This is Don Birak. Today I'd like to share details of the 40% increase in silver and gold reserves reported yesterday at the expanding Guadalupe deposit in Palmarejo. Said Guadalupe is located at a Palmarejo mine area in Mexico where we control the mine district that contains several silver and gold deposits and many exploration targets. For 2009 the focus of our exploration effort has been on the Guadalupe deposit in the Chapotillo zone in the eastern portion of the Palmarejo surface mine. We completed over 18,000 meters of core drilling on these two through September and drilling continues today. Giving you more detail at Guadalupe, the current slide will show you a three-dimensional image of the Guadalupe area and some of the gold and silver structures we have discovered nearby. Two of those, Langeta and Lantana, are new this year and will be tested with drilling in the coming months. Most of our exploration work in 2009 was at Guadalupe and we are drilling there today between Las Animas and Guadalupe Sur, where there is excellent potential to discover new gold and silver metalization. A key attribute of Guadalupe mineralization is its continuity.

I'd like to turn this over to Leon Hardy now to tell you about the new mine design.

Our technical services team at Coeur has completed the first design, mine plan and financial evaluation for an underground mine there. This shows the potential for developing more reserves from this mineral resource. On this slide you can see the mine design drill hole pierce points and outline of the mineral resource model. In addition to the just reported silver and gold mineral reserves on this slide, you see the outline of the mine resource. This mineral resource is based on a total of 313 drill holes and the design was based on gold and silver prices of $800 for gold and $14 for silver respectively and the results of the -- and results from six new metallurgical tests.

Don?

Thanks. The new mineral reserves at Guadalupe now total 2. -- 25.8 million contained silver ounces and 315,000 gold ounces, a major addition to Palmarejo's current reserves. Future drilling will focus on expanding and converting additional mineral resources into new reserves. Shifting gears a little we now move to the Joaquin project in Argentina, located about 80 kilometers north of our Martha mine. Joaquin is a large property, over 71 square miles in size, in Deseado Massif in southern Patagonia. In addition to Martha and Joaquin, the Deseado is host to major -- several major precious metal ore deposits. We have hosted -- we have drilled -- excuse me --a total of 50 core holes on five different targets on this large, relatively-unexplored property and are conducting field work to identify more targets. To date the best results have come from drilling at La Negra and La Morocha, where we are currently conducting a third phase of core drilling.

On surface La Negra and La Morocha are black solidified structures with local high-grade values of silver and gold. The style of mineralization we have confirmed with drilling to date is wide zones of silver and gold metallization in (inaudible) and stock works hosted in [rialitic] volcanics, the same volcanics that hosts other deposits that I mentioned previously. In this slide you can see a plan map of the current drilling at La Negra and a cross-section through one of the Phase III drill holes for which we have recently received final assays. We are encouraged by wide lengths of mineralization discovered thus far, which contain narrower but substantial lengths of much higher grade metallization. We plan to continue drilling at Joaquin through the remainder of the year.

Finally we are pleased to have commenced a new program of core drilling at our Kensington gold mine in Alaska. Kensington, as you know, is a high-grade gold deposit with geologic features to other major [orejetic] gold systems around the world. Gold at Kensington is in hosted sheer and extensional vein sets and the best mineralization occurs where these two styles coalesce. Several zones of gold have been found at Kensington deposit today and there are numerous targets yet to be tested. One of those new targets we are testing today is the Kimberly vein. Kimberly is a share-hosted vein not exposed on the surface like many of the other veins in the district. This blind vein was cut by the main underground access link in the mill site with the mine. The slide this you see now shows you a cross-section of the first fan of four drill holes colored from the mine decline and a photo of the core from the first hole, which would be the middle hole going to the -- going downwards. This vein consists of quartz and sulfites over a length of about seven feet. Assays are pending, but so far we're very encouraged by the drilling results.

Switch that over to Dennis, please.

Thank you, Don. Gold prices continue to climb with the recent IMF gold sale underpinning the strength of our market. We at Coeur continue to be very bullish on our metals due to their unique characteristics, both as investment vehicles, as well as sources for technological products, medical devices and jewelry. Looking forward to 2010, most economists and analysts seem very much in accord with a strong gold and silver market and the direction of metals prices. We've provided several examples for you on slide 30. The average estimate for 2010 silver and gold prices are $16.63 and $1,010 respectively. This is far in excess of our intern -- of our conservative internal cash flow estimates, which are based on $13 silver prices and $900 gold prices.

While 2009 has been a good year for Coeur's cash flow growth, production growth and share performance, we want you to know we believe that this is just the beginning. Our ability to complete our growth strategy to date is attributed to the fine people at Coeur. We continue to strengthen the team, as evidenced by the establishment of our tech services group at the corporate headquarters. Looking forward to 2010, we will focus on our first full year of production at Palmarejo and continued to improvements there in silver recoveries and performance. Construction at Kensington will draw to a close and production will begin yielding 120,000 ounces of gold annually, with significant exploration upside highlighted by Don Birak. Our new Rochester mine life will continue towards a 2011 startup, adding an incremental 2.9 million ounces of silver and 30,000 ounces of gold through 2017, while ongoing leaching operations continue. And certainly we'll continue to aggressively explore at Palmarejo.

Our focus on exploration will intensify as we wind down construction-related capital spending at our mine sites, and we head into 2010 with this new ability to finance growth internally and through conventional instruments, I'm sure to the satisfaction of our shareholders. With no silver hedging Coeur will continue to have the best leverage to strong precious metals prices and all of Coeur's initiatives for the balance of this year and 2010 have been designed to create value and accelerate returns for you, our shareholders.

Thank you and now we'll entertain your questions.

Thank you. (Operator Instructions). Your first question comes from the line of John Bridges with JPMorgan. Mr. Bridges, your line is open. Your next question comes from Jorge Beristain of Deutsche Bank.

Hi, good afternoon, Dennis, Mitch, Karli. Quite a few questions, but could you comment a little bit on Cerro Bayo. I didn't notice any updated guidance. Is there the possibility that that mine could come back online in 2010 at this point?

Jorge, we have completed a positive internal review study with regard to Cerro Bayo. Our exploration there has identified several new targets. Having said that, we are currently exploring the question of the sale of Cerro Bayo, which is consistent with our objective of rationalizing our asset portfolio now that we have our large long-life new mines nearly completed.

Okay. So at this point would it be a safe assumption to not include it in 2010, either because you won't restart it or it may be sold?

I don't think that I would draw that conclusion necessarily. We'll keep you timely apprised. We think there's good value at Cerro Bayo, so we're not going to commit to a sale unless the consideration offered meets our expectations.

Okay. And then just this restart of the Rochester mine, do you have an update as to what the implied CapEx for that would be and/or the potential timing for when you would start to see primary ounces there?

Jorge, it's Mitch here. How you doing?

Hi. Good, thanks.

The way we're looking at that right now is that construction of a new pad would take place in the second half of next year. The two big CapEx items are essentially that pad and a new fleet of equipment, so we're looking at leasing options for the equipment, and building that tailings pad that would probably run about $20 million in total. $10 million or $15 million of that in the second half of next year and the remainder then in 2011 and that's the first year. Then, we would expect to see ounces coming off the pads, then, in 2011 from this restart.

Great. And in terms of your cash costs, I just ran some quick back of the num -- back of the envelope numbers for what you're implying for the fourth quarter based on your quarterly operating cash flows diagram on page 15. It would seem that you're intoning still some cost headwinds at San Bart's and Palmarejo and I can obviously understand San Bart's if you're taking your production down by half a million ounces, but could you also keep us up to date on what's happening at Palmarejo and why we would not be seeing a very strong sequential step down in the fourth quarter as you start to ramp up your production there?

Well, we're going to continue to aggressively seek and, I'm confident, bring about lower cash costs at both San Bart's and Palmarejo and we've identified, I think, some specific opportunities in that, Jorge. Obviously our continuing to improve the production profile of actual ounces at Palmarejo will have a favorable impact there, and our work group in Bolivia I think is solidly focused on continuing to bring down costs there with a target of perhaps at least $1 lower costs as we head into the end of the year. So I think you get the idea that this is the focus of effort for us as we continue through the balance of the year.

Okay. And sorry, last question, I promise. Just do you have an updated net cash cost guidance number for San Bart's for 2010 similar to what you provided for Palmarejo?

We haven't announced that yet.

Okay, thank you.

(Operator Instructions). Your next question comes from the line of John Bridges.

Morning, everybody. Sorry, I don't know what happened last time. Just wondered if you could give us a bit more detail on this issue with the stability at San Bartolome?

Yes, we have on the line today Humberto Rada, the President of Manquiri, and we've had a lot of activity the last couple days, so Humberto, could you give John a sense of where we are there?

Thanks, Dennis. Yes, John, temporarily the activities are (inaudible) 4,400 level above the sea level have been suspended and during the last days we have several meetings with senior representatives of the mining ministry, (inaudible), committee groups, our union and all the meetings has been very productive and very positive. Our main supporters, which (inaudible) here in Potosi who has more than 20,000 members and represents the main activity in the city and in the mining activity in Potosi are giving to us very strong support for operations because one simple reason. We are in the same business, we're partners with them. We're exploiting in joint venture agreement different parts of the mine and there's persons come to support there yesterday and we believe that this temporary suspension will be fixed soon.

Thank you, Humberto.

Yes. I was just wondering how much of the deposit is potentially likely to destabilize the slopes of Cerro Rico?

Is what, John?

Well, how much of the reserve is -- could affect the slope stability at Cerro Rico?

Well, many say that -- we are clearly of the view that our activities are not in any way destabilizing Cerro Rico mountain because we are completely a surface mining operation utilizing no explosives there. The government is clearly interested in studying the impact of somewhat unregulated and unorganized activities that occur with numerous underground mining groups within the mountain. In so far as our ore reserves without giving you a specific quantification now, let me say to you that we do have high-grade ore reserves above the 4,400 level. Clearly we have the rights to mine these and we will. At the same time, I will tell you that because we're in an election season for the presidency down there, we are accommodating the request of the government there, although the president has clearly confirmed support for our investment there, as have many of the leaders, as Humberto discussed.

So would it be fair to say that this is not targeted at you, it's just a general review, which you got caught up in?

Well, I think that's a fair statement and, of course, as you could tell from Humberto's comments, we really do include several groups within our mining operation there, but we are continuing to be gratified by this ongoing strong support.

Okay. Many thanks, Dennis. Good luck.

Thanks, John.

Your next question comes from Chris with UBS.

Good afternoon, thanks. Just wanted to get a little more clarity on how Guadalupe will be eventually incorporated into the mine plan. If you have any guidance on maybe the capital required to develop it in 2010 and then if it ultimately will change the previously-guided annual production run nine million ounces of silver?

Leon, Richard?

Well, at this point the mine plan we're predicting in 2010 that we will initiate development work. At this point we have not put any additional ounces into the 2010 schedule. We're still on the preliminary stages of evaluating the deposit and the timing of the deposit.

Okay. So are you saying it's probably too early to gauge how much capital will be spent on it next year?

Yes. It's probably too early for the timing in next year. I think we're still formulating our exact plan and how it will fall next year.

Okay. So we may be -- might get an update in the fourth quarter on the plans?

I think we'll be much closer at it then than we are right now.

Okay, great. Just another question on Palmarejo. The recoveries proved during the quarter and you mentioned in the release that they're proving again in the fourth quarter, can you give us some sense of where they are now, the silver recoveries?

This is Richard Weston. Silver recoveries currently in the mid to high 70s and we have -- we are continuing to work on increasing this during the fourth quarter.

Do you have some sense of where it'll level off and will that be in the fourth quarter potentially?

We're targeting the feasibility study and metallurgical test work results of around 90%.

Okay. Great, thanks. And would be it possible to -- you gave an 18 million-ounce silver production guidance for this year. Could you give us some sort of breakdown, at least for the large few mines? Is Palmarejo still expecting around five or a little over five?

Chris, how about -- it's Mitch here. How about Karli will get back to you after the call and walk you through that.

Sure, that'd be great. And then just last question, not to belabor this San Bartolome issue, but you said for the fourth quarter you expect now both 500,000 fewer ounces than otherwise. Can you give us some sense of how -- if the ban were to persist into next year, would that be the run rate for going forward a few quarters, or would it continue to ramp down if you weren't able to mine above the 4,400 level?

We're not going to respond to that here today, Chris, just because we don't foresee that as the outcome and at this point it'd be speculation.

Okay, fair enough. That's it for me. Thanks.

Thank you.

At this time there are no further questions. Do you have any closing remarks?

Thank you, operator. We'd like to just close today's call by expressing our appreciation for your continued interest in Coeur and watching with us the progress of the Company. Clearly we look forward to visiting with you as we enter 2010. We will continue our focus and we'll clearly report to you optimization of our three new mines. We're obviously excited about the good finish of the construction activities at Kensington to bring a world-class new gold mine into production. And with our improvements at San Bartolome and our expansions at Palmarejo, we think that with continued focus and good teamwork by our people here that 2010 will be a good year and we're also nearing the point to where we feel comfortable in looking at additional growth initiatives for Coeur as we enter 2010. So thank you for joining us here today.

This does conclude the conference. You may all disconnect.