Coeur Mining Inc (CDE) 2010 Q2 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 second quarter earnings 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). Thank you. I would now like to turn the conference over to our host, Debbie Schubert. Ms. Schubert, you may begin your conference.

Thank you for joining us today to discuss the Company's second quarter and six month results. This call is also being broadcast live on the Internet through our website at www.Coeur.com, where we have posted slides to accompany our prepared remarks. Telephonic replay of the call will be available for one week following today's call. On the call today are Dennis Wheeler, Chairman, President and Chief Executive Officer, Mitchell Krebs, Senior Vice President and Chief Financial Officer, Leon Hardy, Senior Vice President of Operations, Don Birak, Senior Vice President of Exploration, and, Humberto Rada, President of Coeur South America and Manquiri.

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 materially from projections. Please see our full cautionary statement on slide two. With that, I'd like to turn the call over to Dennis.

Thank you, Deborah. Welcome, and thank you all for joining us today. The Company's second quarter results, we are beginning to see early stages of the impact of our significant investment in three new long-lived precious metals mines. Combined with continued strength in gold and silver markets during the past quarter, Coeur generated record metal sales of $101 million, 49% above last year's second quarter, and more than any other quarter in the Company's history. In total, Coeur produced 4.2 million-ounces of silver and more than 23,000-ounces of gold during the quarter, representing 7% and 68% increases respectively. The large new mines brought online in the past two years, San Bartolome in Bolivia and Palmarejo in Mexico, were the main contributors to our quarter operating cash flow of $32.5 million, another Company record.

Also in the second quarter, I'm pleased to say that the third leg of our strategy came to fruition with the start-up and successful commissioning of the Kensington gold mine in Alaska. We began processing ore at Kensington June 24th, and as Leon Hardy will tell you in a few minutes, start-up and operations have been very smooth. In fact, the first two barges of containers of gold concentrate have already left the mine site. We expect Kensington to produce approximately 50,000-ounces of gold this year, which will help boost Company-wide gold production to 170,000-ounces, a 135% increase over last year's levels and in line with prior guidance.

In addition to the positive launch of mining operations, Kensington marks another Company milestone. We've entered into a historic partnership with China National Gold Corporation, China's largest gold producer, for the sale of half of Kensington's gold concentrate. This agreement not only establishes an important new relationship between Coeur and China, but also represents the first of its kind between a state-owned China corporation and a United States precious metals mining Company.

The operation sites, Rochester, Martha and Endeavor, are all performing ahead of budget, and we continue to see consistent silver production and declining cost at San Bartolome. At Palmarejo, many important milestones were achieved as part of the Company's ongoing optimization program, which are expected to increase production and lower cost, balance of 2010. On the exploration side of the business, the Company's strategy is largely focused on drilling activities on large land positions near our existing mines. This strategy continues to generate very cost effective near term additions to the Company's substantial existing reserve and resource base and my colleague, Don Birak, will have more to say about these efforts in a bit.

This slide makes several key points about Coeur and your asset portfolio. First, our mines are 100% precious metal, silver and gold, with no base metal exposure. Silver production generates approximately 70% of our overall metal sales, while gold contributes the remaining 30%, which will continue to become a more significant part of our metals portfolio going forward, now that Kensington is in production. Gold, Coeur has a leading precious metals reserve and resource base underpinning our portfolio of new mines. At the beginning of this year, silver reserves alone totaled 269 million-ounces, and gold reserves totaled 2.9 million-ounces at the end of last year. We're maintaining our full year production guidance today of 17.3 million silver ounces, and 170,000-ounces of gold.

Now I'll turn the call over to Leon Hardy for more detail on our operations. Leon?

Thanks, Dennis. As mentioned, we are very pleased to report that production began ahead of schedule at Kensington. We have completed precommissioning of the plant and ramp-up is proceeding smoothly as scheduled. The mine is on track to produce approximately 50,000-ounces of gold this year. Production from the 1250-ton per day plant, is expected to average 125,000-ounces annually, in its initial 12.5 year mine life. Based on current reserves of 1.5 million-ounces of gold.

Recovery rates during the initial month of ramp-up were consistent with our design plan and are expected to climb as the processing of higher grade ore begins. On the metal sales side we are already completing shipment of two concentrate loads to China National Gold. We expect our average life of mine cash operating cost at Kensington to be approximately $490 per ounce. Needless to say, Kensington marks the achievement of a major milestone for Coeur. It is our third of three new long-lived mines, and we are very pleased with the smooth ramp-up over the past six weeks.

At Palmarejo, you'll see on the next slide we completed a substantial amount of test work during the first half of the year and are now implementing key steps to improve silver recovery rates and further bolster the mine's performance. We began seeing the impact of these initiatives in July with silver production up 50% compared to June and gold production up 58%, marking the mine's second highest month of gold production since inception. Cash operating costs during July declined to negative $0.97 per silver ounce, dramatically reduced from the second quarter average of $10.78 per ounce. These improvements are a direct result of recently commenced mining of higher grade underground ore and improved core blending procedures. A number of important planned steps were accomplished during the second quarter which we expect to result in higher production and lower cost at Palmarejo.

These include commissioning of the Merrill Crowe refining plant during June. Transition to the mining of higher grade ore from underground production scopes, versus lower grade development ore. Improved ore sorting and blending procedures for the various ore types at Palmarejo. July's improved results are the direct outcome of these initiatives, which we expect will boost second half performance at Palmarejo.

This past quarter, silver production nearly doubled to 1.1 million-ounces compared to 587,000-ounces last year, in last year's second quarter, the mine's initial quarter of operation. Gold production more than doubled to 19,950-ounces, compared to 9,730-ounces in the same quarter last year. During the first half of this year, silver production totaled 2.4 million-ounces, while gold production was 42,527-ounces. Cash operating costs averaged $10.78 per ounce during the quarter and $7.83 per silver ounce during the first half versus $19.44 per silver ounce during the last year's second quarter and first half.

First year 2010 production is expected to reach approximately 6.3 million-ounces of silver and 109,000-ounces of gold at an average operating cost of approximately $3 per silver ounce. At San Bartolome, we continue seeing solid operating results with significantly higher production and significant reduced costs. This is the result of process handling improvements and the mining of higher grade ores that began in mid-March. Production increased 79% to 1.9 million-ounces, compared to 1 million-ounces during the first quarter. For the first six months of the year, average monthly production was approximately 483,000-ounces. In July, San Bartolome produced just over 679,000 ounces, which demonstrates the significant progress our team has made since the beginning of the year.

Cash operating costs dropped 22% at San Bartolome to $7.78 per ounce in the second quarter, down from $9.98 in the first quarter, due to a 52% increase in tons mined and a 34% increase in average grade mined. In July cash operating costs declined further to $7.39 per ounce. We are lifting our full year 2010 silver production estimates to approximately 6.5 million-ounces at an average cash operating cost of $8 per ounce. Slide nine illustrates performance at San Bartolome so far this year with consistent increases in monthly silver production since January, shown on the left, and declining cash operating costs, shown on the right. I'd also like to discuss our Rochester mine in Nevada.

On slide 10, you will see that we plan to resume that mining next year, leading to at least six additional years of incremental production averaging 30,000-ounces of gold and 2.5 million-ounces of silver annually. This will be in addition to the silver and gold we continue to recover from ongoing leaching activities. Not only is this planned restart of acting mining an economically robust project, we also expect it to make a significant contribution to Nevada's economy, creating nearly 200 new jobs. We are increasing our 2010 production forecast at Rochester to 2 million-ounces of silver along with 10,000-ounces of gold at an average cash operating cost of approximately $3.50 per ounce. I'll now turn the call over to Mitch for a summary of second quarter financial results.

Thanks, Leon. Silver production increased 7% to 4.2 million-ounces and gold production increased 68% to over 23,000-ounces in the second quarter. Together with healthy increases in both silver and gold prices compared to last year's second quarter, we were able to post all-time Company records for metal sales and operating cash flow.

On slide 13, you can see the 49% increase in metal sales to $101 million, which was also 15% higher than the first quarter of this year. Our record operating cash flow of $32.5 million was 116% higher than last year's second quarter, and up from negative $9.2 million in the first quarter. Gross profit, which is metal sales less cash production costs shown in the middle of slide 13 also improved dramatically, 123% higher than last year's second quarter. This profit as a percent of metal sales grew by 50% from 28% in last year's second quarter to 42% during this year's second quarter. As production growth continues from our new mines, we expect to see continued margin expansion as cash production costs continue to decline. These record results represent the first of what we anticipate will be many quarters of strong operating cash flow as our three new large mines continue production, paired with continued strong metals markets.

We have stayed true to our strategy during the construction of these new mines and have reached the inflection point at which we begin to deliver the planned operating cash flow profile. If you'll continue to slide 14, you'll see a good illustration of the early stages of the impact of our new mines. This quarter, the Company reported $1.9 million in operating income, compared to an operating loss of $8.8 million during last year's second quarter. For the first six months of 2010, the Company reported operating income of $1 million versus an operating loss of $8.5 million during the first six months of 2009.

The next slide shows the percentages of gold and silver contribution to our metal sales over the past five quarters with coming online and expected production of 50,000-ounces this year, percentage of our sales from gold is expected to increase as prevailing metal prices this would mean a full year 2010, 40% for gold and 60% for silver. I'll turn the call now over to Don Birak for an overview of what's happening on the exploration front.

Thank you, Mitch and good morning everyone. The past quarter our exploration program accelerated as we drill 27,000 meters. All of our properties versus approximately 16,000 in the prior quarter. Majority of this drilling in the second quarter was again at Palmarejo, where we had up to seven drills running on surface and underground. Strong gold and silver results were obtained in several zones or clavos, at Palmarejo. Notably, 108, 76, and Lazaro Norte, and at Guadalupe Norte. We continue to be encouraged by our exploration results and these along with other targets will be the focus of drilling in the coming months.

We also drilled at the Joaquin property in Argentina and commenced drilling at both Kensington and Rochester. At Palmarejo, the largest component was around the main mine area shown on this slide, it comprised five zones or clavos. All of the clavos remained open for expansion on strike and at depth and our results from this past quarter demonstrate that. In particular, several new core holes cut wide sections of high grade gold and silver at the 108 clavo which is situated southeast extension of the La Blanca structure and less than 80 meters from the south tunnel access to the mill site. Some of these results are shown on this image.

As exciting as these results are, we also continue receiving good results from drilling at the other clavos around the mine. Our program for the coming months will focus on 108, 76, and the belt from Tucson to Chapotillo where there is good potential to increase surface minable reserves, and investigate those zones at depth which have not been tested in the past. Looking at the 108 clavo a little more closely, we show here two long section images of that zone.

Pierce points of drilling at the end of June 2010 with drill hole colored based on composite gold and silver grades are shown on the right. You can see a cluster of good results in yellow, orange and red, starting at about the 950-meter level and extending down to the 800-meter level. The entire zone is nearly 300 meters on strike. For comparison, drilling coverage prior to 2010 is shown on the upper left section. Drill results from 2010 drilling are shown in the appendix of this presentation.

Shifting to Guadalupe now, situated six kilometers to the southeast of the current Palmarejo surface and underground mine, you can see where our drilling was focused this past quarter, in the long section on the left, and in the 3 model on the upper right. This drilling is expanded the strike land at Guadalupe to over 2.4 kilometers from southeast to northwest, and the vein system is still open for further expansion. We are especially pleased with the results at Guadalupe Norte, where many of the drill holes are encountering better than expected gold grades, in addition to high grades of silver. Being defined here is very close to the planned underground access and should continue to reserves and resources as part of the continued growth potential of the Palmarejo district.

Moving north now to Kensington, we're pleased to have commenced core drilling on the Horrible quartz vein system which sits about 650 meters to the west of the main Kensington mine now in production. This slide shows a planned view at the 850-foot level with an outline of the Horrible vein, drill stations, drill traces at the 850 access level from the Comet Beach side of the property.

This past quarter's drilling is our first major campaign at Horrible. Many assays are still pending and drilling is still under way, but at this point we are encouraged with multiple quartz and sulfide veins in each drill hole. As we continue to receive assays, we will identify the best opportunities for further drilling at Horrible as well as other targets nearby like the Kimberly vein to the south. Lastly we move to Sascha, Argentina and the Joaquin project where we may earn up to a 71% managing joint venture interest. We completed nearly 4500 meters of core drilling in the quarter on several different targets. Our best results continue to come from La Negra. We show particularly encouraging intercepts here on slide 22. Drilling continues to identify wide zones of silver and gold containing sections of much higher grades.

La Negra is composed of a main northwest, southeast striking zone flanked by up to seven parallel zones. The main zone is about 1,000-meters long and has been fined to a vertical extent about 170 meters below the surface. Here you can see a planned view on the left side. And current configuration in a new three dimensional model on the drilling.

Our plan for the remainder of the year is to define the main zone with more tightly spaced drilling, with mining and metallurgical studies on the main zone, and continue to explore for new zones in this large property which sits at over 24,000 hectares in size now. I'll turn the call back over to Dennis.

Thanks, Don, to you and the exploration group for today's report. With regard to silver and gold trends and markets, we do expect to continue to see silver and gold markets to remain very bright, very vibrant. Gold prices are set to mark its 11th year of gain in 2011 as investors continue to seek refuge from continued uncertain global economic outlooks. There's no doubt at Coeur that we feel that gold and silver remain a flight to quality as a hedge against sovereign debt risk and the dollar. Unfortunately, our US economy continues to struggle.

On top of this, the US Budget Office recently has raised its deficit production projects to $1.4 trillion. The low interest rate environment continues as well to benefit our metal. Meanwhile, individual investors have continued to flock to gold and silver BTFs, levels of which remains strong, with the largest gold ETF despite some minor liquidation recently still above $50 billion in hard assets. China and India remain robust customers for our products and analysts have noted China's plan to develop its gold market, indicating a further expansion and sharp increase in Chinese demand.

So what to look for for Coeur for the plans balance of this year. In the second half we'll be looking for a number of catalysts to fall into place. First, continued positive momentum at Kensington as we expect 50,000 additional gold ounces this year.

Next, continued technical and operational improvements at Palmarejo, with sustained higher silver recovery rates, higher grades and reduced costs. In other words, growing production and cash flow. We expect continued silver production and lower operating cost at San Bartolome in Bolivia and positive results from our expanded 2010 exploration programs ongoing at Palmarejo and Kensington, as well as at the Joaquin property in Argentina, which continues to expand. At Rochester in Nevada, we expect to complete the permitting activities to restart active mining operations in 2011, and in summary, we expect to realize increasing operating cash flow for all of our mines. We're now ready for questions, operator.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of [James Puckle with Puckle Capital Management. ]

Yes, thank you. What is the breakdown of CapEx going forward for 2010?

Hi, this is Mitch. The first half of the year, CapEx totaled about $92 million, with the largest component of that being Kensington at $63 million, and Palmarejo at $27 million. As we look into the back half of the year, our guidance for the full year at the Company is about $165 million for full year 2010 CapEx, remains in place. The largest buckets of that will be, again, at Palmarejo and at Kensington, with about $40 million to be spent in the second half at Kensington and about the same at Palmarejo. The rest is small amounts at our other operations. But by far the largest two buckets are Palmarejo and Kensington. So we'll see a larger dropoff in the third quarter and then a more significant dropoff in the fourth quarter as construction activities wrap up at Kensington. Does that answer your question?

Yes. One other thing. Does CapEx include exploratory activity?

It includes one component of exploration activity and that's what we call category three exploration which is the exploration dollars spent at the mine to convert existing resources into reserves.

Another few questions. As your companies move from a heavily I guess development stage to now more of a final stage, when do you expect the Company to turn free cash flow positive?

Well, I mentioned the phrase inflection point in my comments and we really are there now, this quarter, with construction now having largely been completed at Kensington and now being in production, a quarter where we now switched to being a net cash flow positive quarter. So operating cash flow, less CapEx, is positive now going forward and we will be building cash from here forward throughout the rest of the year.

So you're telling me that the cash from operations are going to exceed all CapEx going forward?

That's right.

Okay. That's a very positive development. I appreciate that. Thank you.

You bet.

Your next question comes from the line of John Tumazos.

Could you describe the items that are the uses of the CapEx at Palmarejo? I understand the mine already was largely built and started up. Is this underground development? Is it changes to the recovery circuit to improve recoveries or something else? And second, clearly the returns on Kensington aren't ideal. I think the non-cash charge related to royalty's relevant. At what gold and silver price matrix would you put Palmarejo on care and maintenance? Or seek to renegotiate some of your agreements?

Hi, John. It's Mitch here. I'll take the first question there. As far as Palmarejo CapEx, you're right, one of the three large components of CapEx is the underground development. The largest component is the completion of a final tailings scan, and then between those two, I would put cement rock fill as being the third largest expenditure item.

I'm sorry. I didn't hear the third item.

Cement rock fill, underground cement rock fill.

Backfill. Cemented backfill.

That's right. And so those --

These are all planned outlays and not like repairs or changes to the circuit?

That's right. These are three things that we determined that could be put off until after production began last year and those are what we're in the process of completing here in 2010. As far as your second question, that's one I really, John, hesitate to step into. I think with where we are at Palmarejo and the cash flow profile there and the trend that we think we're on, I don't think that's a question that we really have on our radar screen as far as price decks or any sort of action like you had posed in your question. So I think I'll take a pass on that one.

Thank you.

(Operator Instructions). Your next question comes from the line of Daniel Greenspan.

Yes, thanks for taking my question. Can you give me a sense how much silver do you expect to produce at Palmarejo next year?

We really haven't given out any 2011 guidance but I think it's fair to say as we said in the past that Palmarejo is an 8 million-ounce run rate silver mine with 100 to 120,000-ounce gold production profile going forward. So that's what we're working towards. But we haven't put out any official guidance yet for 2011.

Okay. And is that consistent throughout the life of mine or does that start to tail off towards the end?

Hard to say, just given the dynamic profile there of the reserve and resource development and growth and things like Guadalupe which is coming along nicely and when the Company decides to bring that into production profile, so it's kind of hard to look out that far in the future and really give a strong indication as to what the production profile will look like there.

Okay. Fair enough. And then just my last question, can you sort of give me the same idea at San Bartolome or what steady state production is like there?

Yes. Leon pointed out in his slide deck that over the last four, five months we seem to have achieved a nice steady state run rate there, 600,000-ounce to 650,000-ounce per month rate. That will grow to 7.2, 7.8 million-ounces, that's what we would like to as sort of a run rate going forward there at San Bartolome.

Great. Thanks very much.

Your next question comes from the line of Chris Lichtenheldt.

Good afternoon, guys. Just a quick question at Kensington. When you -- you talk about life of mine cash cost I think around 490. When you ultimately hit sort of the quarterly production rate like the life of mine quarterly production rate, do you expect the cash cost to come in around there from that point, just based on grade profile and recoveries that you expect to see early on or will it be an upward slope in your downward sloping cash flows, can you talk about that just a little bit, maybe.

It's Mitch here, Chris, hi. As you look at the cash cost profile at Kensington going forward, we're obviously in a ramp-up period here through the end of the year. When you look at 2011 and beyond. That 490 doesn't seem very much, [technical issues] So for the foreseeable future, as we see it sitting here today, that 490 is kind of a pretty good run rate number.

Okay. Great. That's all I needed. Thanks a lot.

There are no further questions at this time.

Thank you, operator. Again, thank you all for joining us on the second quarter conference call for Coeur. We look forward to reporting to you further increases in production and cash flow as we go through the year with steady improvement as a result of our optimization program at Palmarejo and to reporting to you the further start-up and operation steady state at Kensington. So thanks again and talk to you soon.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.