Coeur Mining Inc (CDE) 2010 Q3 法說會逐字稿

Good afternoon. My name is Arona and I'll be your conference operator today. At this time, I would like to welcome everyone to the Coeur d'Alene Mines third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator instructions)

Thank you. I will now turn the call over to Ms. Debby Schubert. Ma'am, you may begin your conference.

Thanks for joining us today to discuss the Company's third quarter and nine-months resultS. This call is being broadcast live through our website at www.coeur.com where we posted slides to accompany our prepared remarks. Telephonic replay will be available for one week following today's call. On the call are Mitchell Krebs, Senior Vice President and Chief Financial Officer, Leon Hardy, Senior Vice President of Operations, and Don Birak, Senior Vice President of Exploration.

Any forward-looking statements made today by management come under Securities legislation of 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 Mitch.

Thanks Debra. Welcome everyone and thank you for joining us. With the Company's third quarter results released today, we are very pleased to report very strong quarterly and nine-month financial and operational results driven by our three new long-life precious metals line as well as the very strong metals markets. As you've probably seen, silver reached a new 30-year high today, trading north of $25 an ounce and gold at nearing $1,400 an ounce. The third quarter marked the first full quarter, with all three of the Company's new mines in production, leading to accelerated metal sales and cash flow, while operating costs and capital expenditures declined significantly.

Over the past three years, Coeur has been executing its strategic plan to transition the Company to three new long-life silver and gold mines. The results from the third quarter demonstrate the momentum being created by these new operations. The most recent quarter delivered a doubling in quarterly gold production from the prior quarter and a 4% increase in silver production from the prior quarter. A 40% decline in cash operating costs of $4.87 per silver ounce, record metal sales of $118 million, up 17% from the previous quarter, and nearly $30 million higher than last year's third quarter. A 58% increase in our operating cash flow to $34.7 million, compared to last quarter. Operating income jumped to $10.5 million, from $1.9 million last quarter.

Our cash position is strong, with nearly $52 million in cash equivalent and short-term investments at the end of October, and rising up from the $33 million at the end of September due to a rising cash flow. Kensington, which began commercial production at the beginning of the third quarter, produced 15,155 ounces of gold during its initial quarter of operations. Palmarejo silver production increased 41% from the second quarter and gold production increased 49%. With the higher production at Palmarejo, cash operating costs dropped to just $0.15 per silver ounce versus $10.78 per ounce during the second quarter. At San Bartolome, silver production at 1.8 million ounces was consistent with the prior quarter while cash operating costs dropped 9% to $7.05 per silver ounce.

In addition we are enthusiastic about the progress made to expand production in our Rochester silver and gold mine in Nevada. Just last week this expansion plan received a positive decision record by the Nevada Bureau of Land Management, representing a major milestone. This clears the way for additional mining to commence, with additional production from a new leach pad beginning in the fourth quarter of 2011. This new production will lift average annual production at Rochester to approximately 2.4 million ounces of silver and 35,000 ounces of gold, and make Rochester a fourth important component to the Company's portfolio of operations. Rochester remains one of the great silver mines of the world, already having produced 127 million ounces of silver and 1.5 million ounces of gold over its 25 years of operations. With exploration efforts underway, we are hoping to extend its mine life even further.

We expect our growing cash balance to be sufficient to fund the related capital investment at Rochester next year. So the third quarter was a very good quarter for us, both operationally and with strong financial metrics. We expect this year to expand gold production by 135% over last year's levels, to approximately 170,000 ounces, thanks to the additional production of Kensington and Palmarejo. And we expect to exceed 17 million ounces of silver production at an average full year cash cost of approximately $5.50 per ounce of silver. I'll now turn the call over to Leon to go over progress at our individual operations in the quarter.

Thanks, Mitch. In the third quarter, the Company produced 4.3 million ounces of silver, compared to 4.2 million ounces in the second quarter, and 3.4 million ounces in the first quarter of the year. On slide six, you can see the substantial increase in quarterly gold production to 47,000 ounces versus 23,000 ounces in the second quarter. The 105% increase in gold production was primarily a result of 15,000 gold ounces produced at Kensington Mine during its initial quarter of operations and also a 50% increase in gold production at Palmarejo to a little over 29,000 ounces.

At Kensington, commercial production commenced on July 3 and the ramp up has gone very smoothly and as planned. The mine produced 15,155 gold ounces and we sold a little over 7,000 ounces during the quarter as the mine ramps up to its shipments of concentrates. We have reached nameplates throughput capacity of 12,050 tons per day. Kensington is the newest pure gold mine in the world and as we approach the year-end, we expect to produce at the level of 125,000 ounces annually, which is the run rate for the current life in mine plan based on current reserves of 1.5 million ounces. Shortly, Don will talk about the exploration initiatives at Kensington including some new positive growing results in the quarter.

The next few slides give an overview of the progress we've been achieving at Palmarejo. This recent third quarter was Palmarejo's strongest quarter ever. We saw our highest production levels for both silver and gold since the April 2009 start-up. Silver production increased 41% to 1.5 million ounces compared to the previous quarter. Gold production increased 49%, compared to the second quarter to a total of 29,823 ounces. Year-to-date, we've produced 3.9 million ounces of silver and 72,350 ounces of gold at the mine.

Quarterly metal sales were up 37% compared to the previous quarter. And cash operating costs have declined 99% compared to the second quarter to just over $0.15 per silver ounce. This dramatic decline in cash cost from $10.78 per ounce in the second quarter was a result of significantly higher grade material from both surface and underground operation, and from a larger gold by-product credit due to increase in gold production and higher gold prices.

As planned, we began mining higher grade ore during the third quarter. On slide 12 you can see that open pit silver and gold grades were up 156% and 133%, respectively, in the third quarter and we expect these higher grades to be mined throughout the remainder of 2010 and into next year. During the third quarter, underground silver and gold grades increased by 10% and 11%, respectively, the third consecutive quarter of increasing grades. We expect these levels to be sustained throughout the remainder of 2010 and into next year. A processing plant achieves stability during the quarter, with gold recovery averaging 94% and silver recoveries remaining at about 70%. Implementation of a series of enhancements in the third quarter including installation of a new pumping capacity system, enhanced focus on grind size, optimization of chemical level and improved blending of the ores are now beginning to make an impact.

Several other capital improvements focused on additional oxygen plant and enhanced carbon stripping and regeneration which are now underway and expected to lead to further gains this quarter. We expect to produce approximately 6.1 million ounces of silver and 109,000 ounces of gold this year at Palmarejo at an average operating cost of approximately $250 per silver ounce. San Bartolome is coming off with a good quarter. Production at San Bartolome was up 73% from the first quarter of this year and basically flat with the prior quarter. In addition we had a 14% increase in average grade and a 5% increase in recovery rate, offsetting a decline in tons milled during the third quarter.

Slide 16 further shows the favorable trends we're seeing at San Bartolome with an average up trend in quarterly silver production with declining cash cost which dropped 9% to $7.05 per ounce. We are also seeing an increase in average silver grades mine, which is mostly the result of mining activities in the [Pocache] area which has been a major reason why gross margins continue to decline each quarter. For the full year at San Bartolome, we expect to produce in excess of 6.5 million ounces of silver, an average cash operating cost of $8 per ounce.

As Mitch mentioned, we reached a major milestone in opening up a new production at Rochester. Just last week, Bureau of Land Management issued a positive decision of record allowing for an extended mining operation and additional silver and gold production beginning in the fourth quarter. This expansion will lift annual average production rates to approximately 2.4 million silver ounces and 35,000 gold ounces. Our current reserves there are 27.6 million ounces of silver and 247,000 ounces of gold. We also have a substantial amount of major indicative resources which provides early production potential along with ongoing exploration activities which again Don will talk about shortly.

Already this year we are expected to produce 2 million ounces of silver and 10,000 ounces of gold in 2010, at an average cash operating cost of $3 per ounce, as Mitch previously mentioned. In this 25 years of operation, this the mine has produced 127 million ounces of silver and 1.5 million ounces of gold. So this recent decision at Rochester will extend production at on the world's great silver mines. We're also pleased to report that our Martha Mine will continue producing silver through 2011.

We began 2010 with 1.2 million ounces of silver reserves and 1.8 million ounces of mineral resources. We expect there will be a new larger year-end reserve that can support our 2011 operation while we continue to mine extensions of existing bank system, run the ore blocks and other available ore. This year, mine Martha has already produced 1.4 million ounces of silver and almost 1,700 ounces of gold. I'll now turn the call back over to Mitch.

Thanks Leon. We had a very strong quarter financially, the combination of the operating performance of our three new mines and strong metals markets. The third quarter metal sales jumped nearly $30 million to a quarterly record of $118.6 million. This was a 31% increase over last year's third quarter and a 17% increase over the prior quarter. The Company's average realized silver and gold prices during the third quarter were $18.87 per ounce and $1,229 per ounce respectively, representing increases of 30% and 29% over the prior year's quarter. Sales of silver contributed 62% of the Company's total metal sales, compared to 75% during last year's third quarter as the Company's gold production from Kensington continues to rise.

Slide 24 shows the improvement in gross mine margins over the last five quarters as we have seen production in metal sales increase and production costs remained essentially flat. For the quarter, cash operating costs declined 40%, to $4.87 per silver ounce, compared to the prior quarter, mostly due to Palmarejo's cash operating cost of $0.15 per silver ounce. Our quarterly operating income has really turned the corner. Operating income in the third quarter increased to $10.5 million, versus a $4.1 million operating loss during last year's third quarter. Compared to the second quarter, operating income increased 453% from $1.9 million.

We continue to point investors to operating cash flow as one the most important financial metrics for the Company. Operating cash flow increased 58% in the third quarter over a strong second quarter. In last year's third quarter, the Company posted negative operating cash flow of $1 million. Consistent with our strategic plan, this cash flow growth from operations is accelerating as the Company's CapEx continues to decline now that our three new mines are in production. The recent quarter saw 19% decline in CapEx from the previous quarter to $36.8 million, which represents a 32% drop from the same period last year. This represents the Company's lowest level of quarterly CapEx in over four years, which is when we began construction at San Bartolome, the first, of course, of three new mines.

Our balance sheet remains strong, with $32.8 million in cash equivalent and short-term investments at the end of the third quarter, which has grown to nearly $52 million at the end of October. EBITDA in the recent quarter was $48.3 million, and is 106% increase from last year's third quarter and a 52% increase from the second quarter, and mirrors our growth trend in operating cash flow. Our shares outstanding remains unchanged from the second quarter as we expect this trend to continue. Total debt stands at just $186 million, and the current debt-to-equity ratio is a low 9%.

Also, the Company received and monetized $10 million of Franco-Nevada Corporation common shares in the third quarter in connection with an operational completion test tied to the January 2009 gold royalty financing at Palmarejo. The Company's silver and gold production is rising rapidly, with San Bartolome beginning production in mid-2008, Palmarejo in 2009 and now Kensington in mid-2010. 2011 will represent the first full year of production from all three of these mines.

Along with this production growth and higher metal prices, is dramatically higher cash flow. Looking back at 2008 for the full year, Coeur's EBITDA was negative $2 million versus the $48.3 million in just the third quarter of this year alone. I'll turn the call over to Don Birak now for an overview of recent exploration activities.

Thank you Mitch. Coeur's aggressive drilling program continued on pace from the second quarter with nearly 30,500 meters completed in the third. Majority of our recent drilling was again at Palmarejo where we continue to expect strong gold and silver mineralization from several zones.

In Argentina, we commenced a program to find the main part of La Negra at Joaquin to a 50 meter grid to support mineral resources modeling and technical studies planned for the coming months. We also commenced a new program of new mine drilling at Martha. At Kensington and Rochester the first phase of drilling on the Horrible and Nevada Packard were completed. Excellent results were obtained from both.

Moving to slide 32, at Palmarejo, we continue to expect strong gold and silver mineralization from several zones, notably 108, 76, Tucson, Chapotillo at the Palmarejo open pit, an underground mine and at Guadalupe. The Guadalupe is situated about 6 kilometers to the southeast of the current Palmarejo operation. As you can see on slide 33 where our drilling was focused this past quarter in the long section image on the upper left. Two areas, Guadalupe Norte and Las Animas received the most drilling this past quarter.

Drilling at Guadalupe Norte extended the strike length of the mineralized zone to the northwest and we are especially pleased with the results here where many of the drill holes continue to cut high gold grades in addition to silver. The mineralization being defined here is very close to the plant underground access and should contribute to the mineral resources and reserves as part of the continued growth potential of the Palmarejo district. At Las Animas, drilling was conducted to define the southern limb to about 40 meters centers and thus helped to expand mineral resources and reserves at this near [core holes].

All of the [core holes] at Guadalupe remain open at depth. Our next program was conducted in the Santa Cruz province of Argentina on Joaquin and around our Martha Mine is shown on slide 34. Late in the quarter, and near the end of the winter season, focus for Joaquin shifted to definition drilling for La Negra zone, shown here with the goal to define the main, mineralized zone to a nominal 50-meter grid and thus permit estimation of the first mineral resource and technical evaluation. Over 3,200 meters of core holes were drilled in this definition program.

In addition drilling at La Morocha to the west intersected 30 meters of 408 grams per ton of silver at about 125 meters below the surface. This is one of the highest grades and one of widest zones at La Morocha today. It's also one of the deepest intersect -- it is the deepest intersects so far at La Morocha. This still remains open at depth, trending to the northeast, and it and La Negra infield drilling will continue to be focus for fourth quarter drilling.

Shifting to Kensington on slide 35, we are pleased to present results from our completed Phase one drilling on the Horrible vein system. Total 35 holes were completed on this large system this year which is well positioned along the 850-foot access drift and about 2,000 feet west of Kensington. It's the first drilling conducted at Horrible by Coeur and most of the new drilling cut multiple [core holes]. The program for the remainder of 2010 will focus in on the higher grades used defined to date followed by additional exploration in 2011 on this and other targets in the district. We are expecting this and follow-up work to continue -- to contribute to new mineral resources and reserves.

The next slide 36 shows two of the higher grade core intersections from Phase one drilling. You can see core from two drill holes, 31 and 16, both drills in the new hanging wall drifts this year. Both holes -- both core holes cut zones of high grade gold mineralization containing quartz-pyrite and carbonate [chalcopyrite], [diorite] which is the Main ore holes at the Kensington Mine to the east. Finally we are encouraged by the results from our latest drilling at Rochester. Main focus of this drilling was in the northeast trending structural belt linking the main Rochester Mine with the Nevada Packard to the South. The last exploration in this quarter was in the late 1990s and our 2010 program was designed to test extensors of the mineralized structure from Packard.

2011 we plan to test the same area again and another untested zones on the large Rochester property. We expect that work will lead to further increases in resources and reserves. Mineral reserves in the Rochester district now stand at over 27 million and nearly 250,000 contain gold, ounces of gold and silver -- excuse me, silver and gold respectively as defined in the recently updated feasibility study to support a new phase of mining and precious metal recoveries. Overall we continue to be encouraged by our exploration and results from these and other targets and we will continue -- this will continue to be focus for drilling in the coming months. I'll turn the back call back now to Mitch.

Thanks Don. This past quarter, we affirmed the vibrant dynamics at work with the precious metals market and the positive impact they're having on our Company. Gold prices are up over 30% over the past year. And now with this morning's increase, silver prices are up 50% over that same time period. Precious metals remain a preferred safe haven around the world. In particular as we are witnessing a declining dollar and increasing and growing uncertainty relative to international currencies.

The current record low interest rate environment and the elusive monetary policy in decades should continue to benefit precious metals. Meanwhile, in China and India, with their large and growing economies, they are loosening controls over the purchase of precious metals and buying remains vibrant. India is also experiencing a dramatic growth of funds into gold ETFs. Higher assets in gold and silver ETFs were at record levels. This has been the major driver of gold prices towards the $1,400 an ounce level for gold.

Similarly on slide 41, the silver price that has now risen beyond $25 per ounce is being fueled by ETFs safe haven investments. The iShares Silver Trust, the largest of the silver ETFs, now has 329 million ounces of physical silver underlying this silver investment vehicle. Silver has outperformed gold two-to-one this year. Investment demand is the main driver behind the 50% rise in price over the past year to its current level of over $25 an ounce. Worldwide ETF holdings in silver are now near 450 million ounces and investment in silver coins also remains strong. Silver is being driven by the same dynamics as gold and is also benefiting from its role as the most widely used and essential industrial metal. The Coeur's three new mines set firmly in place. We're well positioned to take advantage of this very strong pricing environment.

This past quarter, we demonstrated the beginning results of our strategic plan, investing in three new precious metal mines which are now gaining momentum, delivering higher production in metal sales and cash flow and lower operating costs. This momentum will continue building through the remainder of 2010, with an expected 135% increase in full year of gold production over last year, along with 17 million ounces of silver production with an average cash cost of about $5.50 per ounce of silver.

All three of our new mines are now in production, and 2011 will represent the first year all three mines will contribute production and cash flow for a full year at the same time. The rebirth of the Rochester mine will add a fourth major contributor to the Company's three new mines. Our production, sales and cash flow are climbing rapidly while our operating costs and CapEx are declining, leading to a growing cash balance. With continued strength in metals prices, this should continue to generate very strong cash flow growth for our shareholders. Operator, we are now ready for any questions.

(Operator Instructions) Mr. Bridges, your line is open.

Hi, thank you. Just a question on Palmarejo. You seem to be making that thing work now. Can you remind us what reserves and resources there are at the moment and to what extent and which deposits do you think are going to deliver more resources and reserves in the year-end accounting?

John, I should always be prepared for your questions and I think you caught me a little bit. My numbers in my head are a little old. The reserves and resources are really largely at the Palmarejo open pit and underground mine, and Guadalupe contributed to that this past year. So I'm just drawing a blank on the numbers right now. But where I think we see potential for expansion is still at Guadalupe where there's a lot of drilling yet to be done and we'll be doing much of that from underground positions which are more cost effective in the future.

And also around Palmarejo, this drilling that we talk about in 108, and 76, Guadalupe, which are still open. Drilling from Tucson-Chapotillo, which we're going to be wrapping that up this year into next and on strike to the north. Those are the areas primarily, and then as we go forward in the future shifting more of the exploration focused in new targets. Tony just brought me some numbers. Thanks, Tony, I appreciate that. If you look at total P&P for Palmarejo, John we're looking at about 90.5 million continued silvers ounces and 1.1 million continued gold ounces. That was at the end of the year 2009.

Yes I seem to remember the exploration company you bought this from were waving their arms around and talking about 200 million ounces and it's probably a ways off, but which deposits do you think you'll be able to get up to reserves status by year-end?

Well I think we'll see gains at Palmarejo and at Guadalupe, that's where we focused our efforts to date.

Okay. On this project in Argentina -- any, can you compare and contrast that with the Andean property that's just been sold?

Well, it's -- our property is near Martha, it's more of a silver/gold system. Probably more similar to Martha in that regard. We won't comment much about what the other company has but that's main big difference there. We're seeing at Joaquin instead of just veins we're seeing wide zones of veins, branches, veinless, more of a bulk mineralization potential. There's at least three zones that we focused in La Negra, La Morocha and La Morena. La Negra zone at this stage at this stage has seen some most encouraging results. The main zone at La Negra is about 800 -- a little over 800 meters long and it places up to 300 meters wide with multiple zones of mineralization, silver dominant with the gold subordinates.

If you're talking about a dissemination deposit, is that really amenable to the mill that you've got at Martha now?

Well I don't know that I call it disseminated, I think I would call it much (inaudible). What we want to do this year is finish the infield if drilling we've got going on right now at La Negra, model deposits and produce -- evaluate the best opportunity for it. Clearly there's plenty high grades at La Negra that would very easily be able to blend in with Martha, but we have to look at all these options. If it's a stand alone, is this a Martha operation, all those things at this stage are still on the table.

Okay. Great. And then finally Rochester, you, you doing some more exploration? Is that more bulk tonnage for the heap leach or is that going to be something that is going to a high grade vein deposit?

John there's actually potential for both of those. I think we shifted our focus now to what we can do to find more mineralization that's similar to Rochester and Packard historical production. This belt between the two deposits really has seen very little exploration since the 1990s and when we've taken a look at opportunities for expanding production, that's one area where we really -- because it wouldn't require anything new in terms of processing technology, so that's an area of I'm quite excited about. And depth below Packard on strike up towards Rochester is a very large area that's really not received much exploration. This is our first foray, again since, probably the mid-to-late 1990s.

Would there be a higher strike ratio?

It just depends on the depth. We're seeing some of the results be fairly shallow and each hole is coming up with from to two to three different zones of mineralization and that will definitely need to be followed up on next year. I just envision this being the same, more of the same style of mining and processing that we've seen so far.

Would it be within your existing permit there or would you have to get re-permitted?

Sorry can you are repeat that.

Would that require a new permit?

I don't know if I can comment on that. I don't know if I can comment on that, I mean that's -- we just received another permit for the continuing operation, and we'll cross those bridges as we have exploration success.

Many thanks. Good luck.

Thank you.

Your next question will come from John Tumazos of John Tumazos Very Independent Research.

Excuse me for the question, it might be a little bit complex, but roughly what level of gold and silver prices would be necessary next year, 2011, for to earn about $1 a share?

It's Mitch, John. Hi. Boy, that's a question that I really can't answer off the top of my head. We don't have any 2011 guidance out there yet. Net income is such a complicated accounting number by the time we factor in GAAP requirements on derivatives and things that factor into that, if you didn't have a fair value adjustment line on our P&L, that question is really impacted to a large degree by that. But in this current pricing environment as we enter 2011, it would be -- depending on what gold price you want to use, but if you assume no change in gold price in 2011, the Company said publicly it expects operating cash flow to be north of $250 million versus where we are so far this year in 2010. But that's probably as good as I can do, John, for you.

And I'm sure there's a number of adjustments that I haven't taken enough time to figure out, but just to circle on one or two, the equity account year-to-date went up by $53 million, but the net income is minus $81 million and you didn't issue equity, but there appears to be $134 million increase in equity . Could you explain

Yes. I'm pretty sure, John, that, that relates in first quarter, and especially in April, we extinguished, I don't know what the dollar amount was, but that dollar amount sounds right of convertible debt using shares, so we did debt for equity changes in the first quarter and in April, so the issuance of those new shares --

You just don't show it on the cash flow as a debt repayment and stock offering. It's a summary format.

Right. So if that offsets of the net loss, on the P&L with the issuance of new equity to retire those --

Now, as we look at the cash flow, it looks like the payment on the gold production royalty, which I presume is the Franco-Nevada on the Palmarejo, assuming the fourth quarter is at least as much as the third will be about $41 million versus the $75 million of cash, I guess, they advanced last year. Is the mine performing well ahead of your budget this year?

First, you're right, John, on the treatment of that Palmarejo gold royalty protection on the Franco. That's picked up in the financing section of the cash flow statement. That sounds about right for the full year. I think it was $11 million in the third quarter. And you're right that was a $75 million royalty financing in January of 2009, plus the warrants that we exercised and monetized during the third quarter were about $10 million with additional proceeds. I'd say the mine is performing in the second half of the year according to plan.

The first half of the year, we discussed this on the second quarter call, first half performance was impacted primarily by the silver recovery being lower than what we originally expected. They've been a little slower to come up. But in the second half of the year, it's performing really now driven by the higher grades that have shown in the third quarter. That royalty was done when gold was about $800 an ounce. So that does have an impact -- big impact with where gold is today in terms of the total dollar amount being paid out on that royalty.

Thank you.

Thanks John, see you next week.

Of course. Thank you.

Thanks.

Your next question will come from Mike Curran of RBC.

Good afternoon guys. I just had a question on Rochester. You provided guidance on what the expansion or the continuation, I guess, the extension of the mine life would do in terms of production, 2.4 million ounces of silver. I was wondering if you could give us a little guidance, I don't think I've seen it anywhere as to what actual throughput rate, how many million tons will you be mining each year?

Yes. Hi, Mike. It's Mitch. We haven't given, or put out anything in terms of tons, grades, recoveries. We've just given those ounce numbers. We're finalizing our feasibility study now, and as that's completed, and as the technical reports that press release triggered, within 45 days, we need to have technical report on file, and there we'll have much greater detail in terms of ton, grades and recoveries.

Okay. No, that's great. I just wondered if I had missed it.

No. Thanks, Mike.

(Operator Instructions)

Okay. With no other questions, we'd like to thank you again for joining the call today, and we look forward to reporting to you our fourth quarter and full year results early in 2011. Thanks.

And this concludes the conference call. You may disconnect.