Coeur Mining Inc (CDE) 2011 Q2 法說會逐字稿

Good afternoon, my name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coeur d'Alene Mines second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

(Operator Instructions).

I will now turn the conference over to Wendy Yang to begin.

Thank you, Kelly. Welcome everyone, I am Wendy Yang, and I joined Coeur last month as Vice President of Investor Relations. Thank you for joining us today to discuss the Company's second-quarter and six-months results.

You'll find Coeur listed at CDE on the New York Stock Exchange and CDM on the Toronto Stock exchange. This call is also being broadcast live on the internet through our website through www.Coeur.com. We have also posted slides to accompany our remarks that you will find on the website. A telephonic replay of the call will be available from our website for one week following today's call.

We will be discussing forward-looking information today, so we caution our audience that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from projections. Please review our cautionary statement shown here, and review the risk factors, including some that are specific to our industry described in our latest annual and quarterly financial reports, filed with the US SEC and Canadian regulators.

On the call today are Mitchell Krebs, our new President and CEO, Leon Hardy, Senior Vice President of Operations, and Don Birak, Senior Vice President of Exploration. With that, I'll turn it over to Mitch.

Thanks, Wendy. Hello, and thank you for joining us today. I have been with you on this call many times in the past as the Company's CFO and this will be my first as Coeur's new President and CEO. I look forward to saying a few words about the Company's priorities and direction going forward, near the end of the call, but first, we want to tell you about the really solid second quarter Coeur just had.

Our outstanding financial performance, with large jumps in quarterly sales, in our earnings and operating cash flow, our operating costs per ounce were down 58% to $3.39 per silver ounce. Palmarejo had a record second quarter, all time best with 2.4 million ounces of silver and over 33,300 ounces of gold, with operating costs at Palmarejo negative $3.68 per silver ounce. With consistent performance out of San Bartolome with 1.7 million ounces of silver produced, almost identical to the first quarter of the year, and operating costs there were about $8.73 an ounce in the second quarter.

The expansion now underway at Rochester, our longest running mine, is now back in production, and stacking ore on the newly constructed leach pad. Like someone from Rochester said this morning, it is good to hear the threshers are running again. And a 67% increase in our second-half exploration program, which is intended to increase resources and reserves near our existing operation, and Don Birak will talk more about that in a few minutes. We expect to produce 19.5 million to 20.5 million ounces of silver, and 240,000 to 250,000 ounces of gold, and we anticipate continued, strong silver and gold prices during the second half of the year, particularly with the unfolding EU issues and our own events and challenges here in the US. We have many initiatives underway at several of our operations, which we expect to lead to higher second-half production, lower costs and even stronger financial performance, which Leon will describe in greater detail in a couple of minutes.

On slide five, these improved second-quarter results were due to the contributions from having all three of our core mines online, most significantly, a very strong performance from our Palmarejo silver and gold mine in Mexico. Before I go into further detail, there are two specific items I want to mention regarding our second-quarter financials. The first is, on the income statement, there is about an $11 million expense for pre-development costs. This relates to Rochester pre-stripping activities. Normally, you would see that capitalized in the CapEx line on the cash flow statement, but because Rochester is an existing operation, we're required to expense that. So there is an $11 million expense on the P&L that is worth pointing out, and that is something that will be there in the third quarter, as we progress into active mining and operations there.

The second is the difference between the ounces we produced in the second quarter, and the ounces we actually sold. We produced 4.8 million ounces of silver and sold 4.1 million. We produced about 60,000 ounces of gold and sold about 50,000, this is merely timing-related, just a function of when we shipped metal from our operations. And, now all of that metal is now sold here in the third quarter, but that had a significant impact in terms of sales and earnings of about $45 million of sales that didn't take place in the second quarter that will show up in the third. So, that is worth mentioning as well.

Getting back to the slide there, on slide five, starting with the top left chart, we continue to see quarterly increases in our realized silver and gold prices. Our average realized prices were $39.11 per silver ounce, and $1,504 per gold ounce. This is an increase of 111% for silver and 28% for gold, compared to last year's second quarter, and as you probably seen this morning, we are above $1,700 on gold, and silver is again close to the $40 an ounce mark.

Moving to the chart on the right, metal sales reached a record $231 million in the second quarter, which is up 16% over the first quarter, and 129% higher than the second quarter last year. Silver contributed about 69% of the Company's total metal sales, while the remainder was derived from the sale of gold. For the first six months, metal sales were a record $431 million, up 128% compared to the first six months of last year.

For the full year of 2011, we expect to generate approximately $1 billion in net metal sales and over $0.5 billion in operating cash flow. Based on our expected full-year production guidance, and assuming that we have the same precious metals prices in the second half of the year that we averaged during the first half of the year, which are about $35 an ounce for silver, and about $1,450 an ounce for gold.

Looking at the chart on the lower left, we generated operating cash flow of $116 million in the second quarter, that's a 29% jump over the first quarter and about a fivefold increase over last year's second quarter. Also, adjusted earnings totaled $58 million during the second quarter, which is up to 55% over the prior quarter and a significant improvement over last year's second quarter, when the Company had an $8.9 million adjusted loss. With expected higher production and lower unit costs in the second half of the year, especially at Palmarejo, Rochester, Martha and Kensington, we expect our second-half metal sales, operating cash flow and adjusted earnings to exceed first-half levels.

On slide six, it shows improving financial metrics being driven by our higher production in metal sales and cash flow. Starting again at the top left had chart, cash and equivalents stood at $107 million as of June 30, which is about a 66% increase over the end of the prior quarter, and more than 1.5 times higher than 12 months ago. This obviously does not take into account the ounces produced but not sold during the quarter that I mentioned earlier.

Turning to our CapEx on the top right, we expect to show a year-over-year decline in CapEx once again. We have slightly raised our 2011 full-year CapEx guidance from $120 million to between $130 million and $140 million. This additional capital will fund several capital projects at Kensington that are designed to increase productivity and reduce costs.

Kensington is slowly but steadily settling into life as an operating mine, but we still have work to do there. Production for 2011 is going to end up being a little bit over 100,000 ounces. This reduced production level for 2011 is mostly due to lower-than-expected grades, which in turn is keeping costs per ounce at much too high levels. The additional CapEx being invested at Kensington in the second half of the year and into 2012 is designed to increase production and reduce costs by accelerating underground development activities in higher grade areas, getting the underground base plant operational, so the mine can have more flexibility in where it mines, and completing several surface facilities in order to better support the operation.

As throughput increases, and the average grade rises, costs per ounce should trend downward through the remainder of the year, as we head in to 2012. Our total shares outstanding remained constant as we seek to increase our per-share value for shareholders. And, the bottom right chart reflects the Company's growing balance sheet strength, as cash rises due to free cash flow from our operations.

Thanks, Mitch, this is Leon Hardy. Let's take a closer look at our second-quarter production in the charts at the top of the slide.

Our second-quarter production of 4.8 million ounces of silver was up about 16%, over the second quarter of 2010. Palmarejo accounted for approximately 50% of the silver production in the second quarter. Gold production was a record 60,700 ounces, 40%, or almost 26,000 gold ounces came from Kensington, which began operations a year ago, and over 33,000 ounces were produced at Palmarejo. Gold production was up 14% over the prior quarter, and 162% compared to last year's second quarter.

Our consolidated cash operating costs were $3.39 per ounce of silver in the second quarter, which was a 58% reduction from the year-ago quarter. Our full-year Company-wide forecast for cash operating costs are $5.75 per silver ounce and $8.50 per gold ounce at Kensington.

As Mitch said, Palmarejo had a record second quarter and is hitting its stride. Palmarejo produced 2.4 million ounces of silver, and 33,400 ounces of gold, at cash operating costs of negative $3.68 per ounce after the gold byproduct credit. Metal sales at Palmarejo were $124 million during the quarter, operating cash flow was $79 million, capital expenditures were $10 million.

The excellent results are attributable to higher silver and gold grades, and an increase of nearly 6% in silver recovery rates to a 78% average in the quarter. This is due to less oxide material as the open pit gets deeper, and continued blending improvements. During the second half, increased throughput and sustained silver recovery rates are expected to drive increased production, and continue to lower costs.

San Bartolome continued to perform consistently. The mine produced 1.7 million ounces of silver at a cash operating cost of $8.73 per ounce. Metal sales were $56 million, with operating cash flow of $41 million, capital expenditures during the second quarter were $3 million.

Kensington has now completed one year of operation. For the second quarter, 25,800 ounces of gold was produced at a cash operating cost of $9.24 per ounce. quarterly metal sales were $26 million, operating cash flow totaled $11 million, capital expenditures were $7 million. As Mitch mentioned, we will increase the number of tons milled throughout the remainder of the year, in order to maximize full-year production, which we expect will be approximately 100,000 ounces. As we increase throughput and see improvements in the average grade, costs per ounce are expected to trend towards during the remainder of the year.

The Rochester expansion is on schedule. We began hauling and stacking ore on the new leach pad in late July, which will lead to higher silver and gold production at Rochester in the fourth quarter. During the second quarter, residual leaching activities at Rochester produced [33,400] silver ounces and 1,400 gold ounces. Cash operating costs were $4.34 per ounce of silver, net of gold byproduct credit. Metal sales in the quarter were $14.4 million, operating cash flow was negative $2.3 million, which is a reflection of the fact that all pre-stripping costs related to the expansion at Rochester are expensed, rather than capitalized. And capital expenditures totaled $4.2 million during the quarter.

Considerable upside potential remains at Rochester, as we begin to see the impact of this initial $50 million ton leach pad, we will begin to focus our efforts on recovering additional economic material from further exploration and development of large mineral resource base at the mine. Don will highlight the exploration potential at our Rochester property, including the adjacent Nevada Packard pit.

This is Don Birak. The face of our drilling ramped up considerably in the second quarter, and will continue into the second half of the year, with over 66,000 meters of drilling planned as compared to 43,000 meters in the first half of the year, a 50% increase our exploration drilling for the second half of the year. To support the accelerated drilling, we've increased our second-half exploration budget by 67%, to $14 million, for a total 2011 budget of over $23 million, a 29% increase over 2010 levels.

This investment, expected to continue into 2012, reflects the prospective nature of our property and will help extend mine life by adding to metal resources and reserves. Adding new ounces near our existing infrastructure represents an excellent way to deploy the Company 's cash flow and generate value for the shareholders.

Starting with Palmarejo, we drilled nearly 27,000 meters during the first half of the year, largely around the immediate Palmarejo mine area, followed by Guadalupe and La Patria. Together, these three silver and gold deposits represent just 10% of the Palmarejo landholdings. Palmarejo mine itself spans an area over 2,000 meters by 1,500 meters in size, with five known ore zones, and includes both surface and underground mine operations. Mineralization at all five of the zones remains open to definite strike, and in the next months and into 2012, we will continue drilling at these areas and on new zone of veins and stockwork discovered in the hanging wall at the 76 ore zone.

In more detail, this image shows the location, the image on 16, shows the location of the drilling completed this year at Palmarejo and some key results. The results from drilling at Tucson and Chapotillo, two of the five zones that make up the Palmarejo mine area, bode well for expansion of surface mining activities.

In the second quarter, we recommenced drilling at Guadalupe in the east central part of the district, and started drilling on La Patria, which is located about three kilometers to the west of Guadalupe. This La Patria drilling is the first such program conducted by Coeur since acquiring Palmarejo in 2007. Thus far, our drilling there encountered multiple near-surface gold and silver mineralized veins. We are pleased with this initial core drilling, and results suggest potential for both surface and underground mining operations at La Patria.

Now let's shift to Rochester, a world-class silver and gold mine in Nevada, where we produced over 128 million silver ounces and over 1.4 million gold ounces since production commenced in 1986. This image shows the Rochester and Nevada deposits, some key production infrastructure and several promising exploration targets. And the second quarter, we commenced drilling on the LM and NRW targets at Northwest end of Rochester, and also at the Nevada Packard. These areas have good potential to grow our resources and reserves, and will be prime areas for drilling in the coming months.

Current metal reserves at 48 million short tons are all slated for processing in the new stage 3 leach pad. However, Rochester's additional measured and indicated mineral resources stand at nearly 215 million short tons, and over 21 million tons of inferred, modeled using $1,300 per ounce for gold and $20 per ounce of silver. This large, robust mineral resource and our new expiration targets are strong opportunities to expand reserves and the mine life further, and we are currently conducting engineering and environmental studies towards that end.

Moving south, I am pleased to report that Coeur completed the first mineral source estimate for the Joaquin silver and gold property in Argentina and filed a technical report on SEDAR this past quarter on the results. The report finds indicated and inferred mineral resources on two deposits, La Negra, La Morocha at Joaquin. Subsequently, we commenced definition drilling and initial studies, which are expected to lead to a feasibility study. Both deposits be made open for expansion.

The Joaquin property is twice the size of our Palmarejo property. We only really explored a small part of this large, 24,000 acre property and we look forward to new efforts on both feasibility and the exploration front.

I'll close now with some new results from the Raven zone at Kensington. The results for four new core holes were recently received, shown on this long section image in slide 20, and reinforce our view that this vein and related foot wall and hanging wall splice have strong potential to add meaningful, high-grade tonnage to the Kensington mine life. In addition to more drilling at Raven in the coming months, we will be testing some new targets, which have potential for mineralization similar in style to the main Kensington deposit.

Thanks, Don.

Slide 21 shows a map of our operations as well as a handful of silver exploration companies in North and South America in which Coeur has made strategic investments. Year-to-date, Coeur has made $17.9 million of these investments in five exploration companies. These junior silver exploration companies have primary silver projects in Canada, Mexico, Chile, Peru and Bolivia. We will continue to evaluate other opportunities like these and make similar investments from time to time as we seek to build out a balanced pipeline of growth opportunities for the future.

We remain bullish on the precious metals markets, both silver and gold remain among the best performing asset classes, and the expectation by most experts is that this trend will continue. We share that view. Investment demand through EPS remains very strong for both metals. Total ETF demand for silver is about 450 million ounces worldwide. Industrial demand remains strong as economies continue to recover and emerging market demand is robust. There continues to be strong investor demand for silver coming from both China and India. And new uses for silver, the most widely-used industrial metal in applications from solar energy to wider electrical components within automobiles continues to grow.

The drivers behind gold record run are similar to silver. Obviously, the S&P downgrade of the US credit rating will be a key driver for gold, as concerns continue about the US dollar, sovereign credit issues both here in the US and in Europe, and inflation. This is driving investors to the safe haven of gold and silver. In July, investors added a net $13.2 billion to the gold ETFs, but we expect August ETF close to be even stronger.

In addition, central banks continue to add to their holdings. Year-to-date, net purchases by the world's central banks totaled 203.5 metric tons, which is already 168% increase from 76 metric tons for all of 2010. The biggest buyers have been Mexico, Russia, Thailand and South Korea. So, we believe that the fundamentals underlying these strong metal prices will continue to support the market.

With these underlying strong metals markets, and with our core mines all operating together in their first full year together, we are looking forward to a record year for Coeur in terms of silver and gold production, metal sales and adjusted earnings and cash flow. We expect full-year net metal sales of approximately $1 billion and operating cash flow in excess of $500 million.

Our 2011 full-year production forecast is unchanged at 19.5 million to 20.5 million ounces of silver, and 240,000 to 250,000 ounces of gold. And as Leon mentioned, we forecast full-year average operating costs of about $5.75 per ounce of silver and Kensington's cash cost per ounce of gold should average about $850 an ounce for the full year. Our confidence in these full-year targets are based on five main drivers. Palmarejo is operating at full stride with the mine plant calling for increased mill throughput and the silver recovery rate remaining high during the second half of the year.

Like Palmarejo, San Bartolome looks to be operating at full stride and on track for a solid, consistent year. And Rochester is expected to produce additional silver and gold ounces from the new leach pad, starting in the fourth quarter. Although we have work to do in Kensington, we expect higher production levels in the second half of the year. And as cash operating costs continue to decline through the remainder of 2011, as we increase production, and aggressively pursue opportunities to reduce costs at all of our mines.

As many of you are aware, in July the company announced my appointment as President and CEO and the appointment of our recent lead director, Rob Miller, as the new non-executive Chairman of the Board. On behalf of our company, we extend our gratitude and well wishes to Dennis Wheeler, who has retired after 25 years of service as our CEO, and 33 years as the Director of Coeur. In my new role, I see the Company continuing on its trajectory we have put in place over the past few years. With that said, there things that we'll change, enhance and build upon with the objective of creating a true, value-creating, primary silver company.

I've been dedicated professionally to Coeur for 16 years and I've seen evolves from a small company to a $2.5 billion market cap company, with the level of cash flow we are now generating, I see tremendous upside potential for our shareholders. We have a great set of assets and will continue to build the balanced pipeline of new growth opportunities. We have great people who are dedicated to the Company's success, and we're constantly working to bolster our team and bring in the best talent possible. We have a great metal-strike environment, and we're working hard to exploit that in every way possible. With that said, we will always be mindful that we operate in a cyclical commodity business, and we will strive to be well-positioned, flexible and opportunistic.

We are on a bit of a roll here at Coeur, and the Company's performance is improving with each quarter, but that's no reason to sit still. I believe we can make Coeur into the premier company in the sector. We need to sharpen our focus on delivering consistent performance at our existing mines, while reducing costs everywhere we can. We have talented general managers at our properties who lead large teams of dedicated employees. It is these people and these assets that are the engines that make this Company run and our outlook so promising. We're going to work hand-in-hand with these teams to extract as much value as possible from these operations, where we have invested such significant resources over the past few years.

At the same time, environmental stewardship, safety and community relations are priorities for us. We need to be a leader in these important aspects of our business if we want to truly be the premier Company in our sector. Although these aspects of the business don't get a lot of attention from quarter-to-quarter, this Company will not succeed in creating value for its shareholders if it doesn't get it right in these critical areas.

As our current operations begin to perform as consistently as we are beginning to see, and as we expect they will, and we are already seen this kind of performance at Palmarejo and San Bartolome, we must start to look forward and outward to grow. We will grow in a disciplined, accretive fashion that will always place value creation and return on capital as the main criteria when evaluating opportunities. We will pursue organic opportunities like Rochester and the accelerated exploration program Don mentioned, and we will pursue external opportunities that make sense and that we feel will create long-term value for our shareholders. As our cash flow accumulates over time, and our cash position becomes more than sufficient to support these objectives, the Company and its Board will evaluate and implement a rational policy on how best to return capital to the Company's shareholders.

I'm very excited about the opportunity and our Company's bright future. So is our management, employees and Board of Directors. We hope you, our shoulders and stakeholders around the world share that excitement as we work hard to build a truly great Company here.

Thank you for your time and operator, we are ready for questions.

(Operator Instructions). We will pause for a brief moment to compile the Q&A roster. Your first question comes from Jeffrey Thorp, with Sonoma Capital.

Hi, Mitch, congratulations on another excellent quarter.

Hey, Jeff. Thanks a lot.

Just a couple of quick questions. First is, you're producing a lot of cash, probably even more significant if you include the inventory build. And so, my questions with respect to that are, can you give me a little bit of information with respect to win the inventory will be converted to cash? If it has not already been done? And, what you are going to do with the cash that you've been producing? Are you considering paying down debt or paying a dividend?

Yes. First question that you asked, all of that metal that built up in the second quarter and spills over into third quarter has now been sold, so that will show up in our third-quarter results. Which will then, as you point out, lead to a significant bump in our cash. We highlighted a few priorities here on our call and for us, is all about deploying that cash to the highest return opportunity available to us. Exploration is probably at the top of that list, that is why we are increasing exploration as aggressively as we are in the second half of the year. Right behind that, I think a close second is organic opportunities, like we have at Rochester, not only with existing expansion with this new leach pad that's now underway, but future opportunities there that really represent high return, relative low risk growth opportunities for the Company. Those opportunities, though, Jeff, I think this is where your question is pointing, we can do all of those things and we're still going to be generating cash well in excess of those priorities.

We will seek to reduce debt, opportunistically, but I think overall, what you'll see from us is a balanced approach of some of the growth opportunities that we mentioned. Reductions in our debt, and we want to maintain a sufficient cash flow so we can withstand any potential hiccup in metals prices are a potential operational unanticipated pickup. Above and beyond that, the dividend question, return of capital question, I think is squarely next in line and that's something that the board will be evaluating here as the cash does accumulate in the second half of the year and as we enter 2012 and I think returning capital to shareholders is a 2012 event, not a 2011 event, but it is something that we are all very cognizant of here and will be on the front burner as we end the year and start 2012 with what should be a pretty significant cash balance. Does that help?

Great. And just one more question if it's okay. Could you talk a little bit more about your guidance and the breakdown by mine? And, if you could -- and you may not want to or can't be that specific with respect to Kensington, I'm just curious -- cash flow guidance for that would be if you can make it?

Yes, directionally, Jeff we can walk through the production if you look to the first six months of the year results and just eyeball those, and compare those with the second half expectations. At Palmarejo, we did have a slow start to the year if you recall so production through the first six months of the year was 4.1 million ounces, we will be well in excess of that in the second half of the year. Both -- mostly on the silver and that is mainly because silver recoveries in the first quarter were pretty low. We think we have kind of cracked that nut now and with that continuing to be consistent in the second half, that silver production will be quite a bit higher in the second half. Gold will be about the same in the second half as it was in the first top Palmarejo.

San Bartolome will increase throughput a little bit and we'll see a slightly higher second half. The first half was 3.5 million ounces. We will see that, plus probably another couple hundred thousand ounces of San Bartolome in the second half. The big ramp-ups for us are at Martha and Rochester in the second half. The second half at Martha is really based on two -- three things really. One is, it's now gotten into the Betty and Betty Sur zones, which will begin to contribute ore to Martha. They've also expanded the mill capacity there from 240 tons a day to 480 tons a day. That will allow them to process not only the Betty ore, but also, they are going to start reprocessing tailings there at the site. And so, if you see Martha through the first six months of the year, 280,000 ounces of silver production, there's going to be a material increase there in the second half.

And, then at Rochester, for obvious reasons with respect to the new leach pad, the ongoing residual leaching generated 670,000 ounces of silver in the first half of the year. You'll see the second half, especially fourth quarter there, materially higher and that's where we kind of breakdown our 19.5 million, 20.5 million silver and on the gold side is a much more straightforward story. You got about a little over 100,000 ounces at Kensington, like we mentioned, if you take the first half of Palmarejo, of 61,000 ounces and double it, that gets you up to a little over 120,000 ounces there. So, that's 220,000 and then you got Rochester making up the bulk of the difference on the gold side. So, that's sort of how our guidance breaks out.

Thanks very much, and continued success.

Thanks, Jeff.

Your next question is from Jorge Beristain with Deutsche Bank.

Good afternoon or good morning over there, gentlemen. Mitch, just following up a little bit on your opportunities at Rochester, could you talk to the point as to the cycle time for between the stacking and when you're going to see first silver out of that leach pad? And then, you mentioned in your Press Release that there could be about 200 million tons of additional mineral resources whereas you're indicating about 48 million of mineral resources in your presentation, so if you just kind of scope out how big do you think of Rochester could be and what the timing would be to put in more leach pads into service?

Yes, sure. Hi, Jorge, I'll take the second question, and then Leon, you can handle the first question. Like you said, Jorge, like we said in our comments this initial leach pad which has been completed has the capacity for about 50 million tons of ore to be stacked on there. And, that's the material that is currently listed as reserves at Rochester of about 28 million ounces of silver and about 250,000 ounces of gold, and that's what will be mined over the next seven years or so off this new pad. Where things, I think, get really interesting at Rochester, is that in the resource categories, measured and indicated and inferred, if you add those all together, you've got over 225 million tons of additional mineralization there at Rochester, primarily in the walls of the existing pit that has been created their since 1986.

And, so, if you compare the 50 million tons of capacity at this initial pad to that total size of material, we've got another four of these things that we could conceivably get into under leaching into production. There is a lag time there, as we seek the permitting required for an additional leach pad, and there's probably about a greater lag associated with that, but you can kind of see how this can stair step Rochester back into becoming a real significant asset for us. And, that's where we -- not only are we enthusiastic about what we've got going on there now, and the impact that's going to have in the fourth quarter and over the next few years, but really, the bigger potential there is what still remains. Leon, do you want to handle the other question about when that ore goes on to the pad and when metal comes out?

Yes, that's a bit of a complicated question, but you get an initial, from the minute you stack it and you put it under leach, you get an initial spike of grade, usually your gold comes out first and then your silver. But, your initial spike can run up to 50% over the first three months. And, then, over time, which may require one to two years, you'll get the rest of your recovery up to 65% to 70%, both metals, gold and silver.

And, Jorge, just to add to that, the leach cycle at Rochester to get all the gold and silver out of the ore, historically, is a 5 to 10 year process to ultimately recover all that metal. So it's a relatively long leach curve, likely of that there is the short-term dynamics that make up the bulk of that recovery.

30% to 50% short-term.

And for the permitting? You mentioned there was a three-year lag or lead time? Would that be per leach pad or would you be able to essentially apply simultaneously for all four with one permit within three years?

Yes, it kind of depends on the approach we take. We don't necessarily have to go down the same path as far as each pad being the same size as this initial one, so, to the extent that we could get a larger -- one larger pad permitted, at once, that would be probably the most advantageous way to go about it. But, we are still looking at what makes the most sense there. But, I wouldn't think about in terms of each new pad being the same size.

Great, thanks very much.

Sure.

Our next question is from John Bridges with JPMorgan.

Morning, everybody. Congratulations on the new appointment.

Thanks, John.

Just wondered, at Kensington, the capital that you're spending now, where is that going and how much more capital does need to be spent? What is the sort of maintaining capital level for the mine?

Yes, just to take the second part of your question, the sustaining for non-growth, non-start up related CapEx, they are on a year-in, year-out basis, would be in the $10 million to $12 million range, and that includes obviously underground development and everything else that goes into sustaining an underground operation in a location like that. The funds that we mentioned in our comments are related, really the first and foremost, Leon you can chime in if you feel differently or have anything else to add, but it's underground development, and we really need to get ahead of the game on underground development so especially in the higher grade areas, this mine has a bit more flexibility, and more sources of higher grade material to contribute to the mill. There is, along with that, underground development, and the need for some additional equipment. And then, there is a series of surface facilities, for example, an expanded man camp and expanded warehouse, things of that nature that will better support the operation there, even where it's and logistics associated with operating there at Kensington. We are, do you have anything to add to that?

No, that pretty well covers it. We have had a much higher mining rate then our name plate, which was 1,250 tons per day, we've seen an average of 1,430, all that requires more manpower, more equipment and that's the mode we are into the second half of this year.

Are you afraid that accelerated development is going to interfere with production in the second half?

No, we try to keep our development two years ahead of the mining and we want to keep it there.

Okay. And then, another bigger picture question, with this cash that was referred to earlier you've got a tremendous opportunity, or Don has a tremendous opportunity to go off and find things, but also, a very big responsibility. And, I was just wondering how you were sort of thinking about longer-term and how you're going to direct these funds in exploration development, M&A, how are you thinking about taking the Company forward?

I'll start, and then Don can chime in. I think, we are blessed to have three mines with long mine lives. So, we're not in a situation where we are living hand to mouth in terms of reserves, just to support the next year or two or three, in terms of mine life. But, the focus of the Company, from an exploration standpoint going forward, I see it in two tracks. One is helping connect the dots in the eyes of the investment community on the extent to which Palmarejo become a true, long life operation. Ever since we made the acquisition, we have been talking about Palmarejo, the large land position and the potential there to be mining for a very long time. And, obviously, new reserves and resources don't pop up overnight. It takes time. We're getting now to the point where Don can take some increased exploration money and, in addition to supporting sort of the in-mine drilling, to support active operations, and step out and really start to provide us and shareholders with some visibility on the long-term potential of the larger district. And, I note one area that is a perfect example of that is La Patria, the Don mentioned, where we haven't -- Coeur hasn't done a lot of drilling there, we've been busy drilling in other areas since we acquired Palmarejo in 2007.

Guadalupe was the first, initial example of a new deposit that will begin to contribute to ounces to Palmarejo, probably the end of next year. Now, with La Patria, with its near surface potential, an additional source of open pit mining and those are the kinds of things that represent one avenue of opportunity, and then the second is we -- and I'm looking at this, I guess with a financial perspective, is on a depreciation, depletion, and amortization per ounce basis, with all of our minds now up and running, that's a high number. And, in order to really drive earnings, we need to spread that DD&A out over as many ounces as possible and that's something that's important for us to do with these dollars as well. Which is to add to reserves and make our income statement in our earnings all the more attractive and hopefully derive that generates an additional value for shareholders., Do you have anything to add to that?

Thanks, John, for the comments. You're right. Over the years we've tended to be fairly careful about the way they manage our exploration money. We've watched our dollars closely, we've put programs forth, and kept our spending in line with budget. This year, we're seeing a lot of opportunity to really expand what we've been doing at the operating mines, not just Palmarejo, which is going to receive the biggest increase of the money that we talked about here, earlier today. Were going to ramp up our drilling at Rochester, to more drilling in South America, and hopefully get some drills turning again on some new targets that I mentioned at Kensington. These will all -- I'd like to see these just roll into next year at the same pace. And you're actually right, we have to make sure we continue to manage the money properly. The part of that, part of the increase is going to be working with our exploration senior people to lay out good targets and follow up on them diligently.

John, just one follow-up there on Rochester I know you've always been a frequent follower of our activity and Don's activity at Rochester, you know there's two distinct growth opportunities there at Rochester. One is just what we talked about, the expansion through and getting additional tons under leach, and then there's the second, which is really the renewed drilling programs that Don has now got underway there, which we have a large land package there, and it's so sensitive to these metal prices that in this environment, Don's drilling in the second half especially is going to be really geared towards bringing as many of those new ounces into resource, and ultimately reserve, that makes sense in a $40 silver price environment. And, there's a lot of material that makes the cut at those prices.

It really does, Mitch, I think that our responsibility is, is to use the money that we've been given by you and the Board to go after the best target so we can get the highest grade ounces to come forth into the mine plan. Rather than looking strictly at just conversion of resources and reserves with metal prices, John, but lots of opportunities to go after the really high-grade things and increase the grade and the tons accordingly.

Okay, great, guys. Good luck.

Thanks, John.

Thanks.

(Operator Instructions). Your next question is from Andrew Kaip with BMO Capital Markets.

Hi, guys, congratulations.

Hey, Andrew, thanks.

I've got a couple of questions the first one is just with respect to Rochester, can you give us an indication of how much capital is remaining to be spent on the project?

Yes, full year CapEx at Rochester this year is targeted at about $30 million and through the first six months of the year, it's been about $16 million or $17 million,

Okay.

And that includes, Andrew, just to be clear that to the expense versus capitalized, I count that pre-stripping cost that we are expecting to be part of that $30 million.

And just to confirm, we are unlikely to see any of that additional expense related to Rochester show up on -- to be capitalized and nothing to show up in the P&L?

There will be a little bit in July, in this third quarter, but then that will go away and those costs then will be assigned to inventory and so we won't, in the third quarter, see nearly as large of a line item there on the income statement.

Okay. And then, just, regarding that, what do you expect your ongoing reclamation expenses to be? Can you give us some guidance there?

At Rochester?

Just company-wide. Those that you're expensing?

Let me get back to that, Andrew, I don't have that off the top of my head.

Okay, all right. And then, you've spent approximately $17.9 million investing in five exploration companies. Do you have an internal budget that you are working towards on an annual basis on making these kinds of investments? Or, are these just as you go and you identify opportunity?

Much more the latter. We don't have a specific target in mind in dollars or number of opportunities is just, as we identify companies that have projects of interest and locations of interest to us, that we will dig deeper and pursue the strategy a bit more.

Okay. And then, finally, just on the lag between production and sales. What kind of lag should we expect? Or, was this really an isolated incident, that with respect to the production and sales being so different this quarter?

It's kind of the feel of two products. There's the Dore that we ship and then there's the concentrate that we should they Kensington. The Dore at Palmarejo and San Bart was really a function of just when it ships and then when it got through the refinery and we were able to recognize it as sales. And so, that's about a 28 to 30 day lag and it just happened this quarter to be a fair number of ounces that straddled the date of June 30. That is sort of a one-time -- the Kensington concentrate, especially the half that gets shipped to Aruba silver in Germany, that's more of a typical concentrate, smelting and refining contract. That's where you'll see the typical delay of 60 days or so on 90% of the value of the shipment. And, I think first quarter, if the other way around, more sales and producer now this quarter, about 6,000 ounces, 7,000 ounces or so at Kensington the other direction.

Okay. All right, thanks very much.

Okay, thanks, Andrew.

Our next question is from Chris Lichtenheldt with UBS Securities.

Hey, everyone. Just a couple questions, wanted to elaborate on. Kensington, the grade you expect was a little bit lower than expected what's causing that?

Leon, do you want to take that?

Principally, our mining areas, we started the property pretty much in the center of the deposit, and the extremities are where we had a higher grade. That's why were going to escalate the development plan.

Okay. So, it should it got throughout the later half of this year, though? You see some improvement, and then into next year. Is that what we would expect at this point?

That's correct.

Okay. The recoveries that were at Palmarejo that were significantly improved over past quarters, what has changed there? What gives you comfort that should stabilize now? I know there's been some various experimentation over past quarters and it's dipped and then spiked a bit, but should we expect this to level off of and if so, if you could just talk a little bit about that?

Well, primarily it's because the open pit is getting deeper, where getting out of the oxide zones and that leads to much higher recovery. We're getting very good recovery on the underground ores, and we have a pretty intense blending program that everybody is getting confidence in and implementing very well at site, and then with all those factors together, have put us in this high 70s range.

Okay, that's great. And, this may be a question we follow up after, but I just wanted to -- going through this disclosure, the cost disclosure at Palmarejo, obviously very good cash cost. But, when I try to back out the gold revenue to get sort of a proxy for what the costs are to run that site, it almost looks like the cost in millions of dollars has come down versus last quarter to rump on rate? Is that accurate? Do you know off the top of your head and if so maybe you could talk about why that might be?

Yes, I will circle back to you, and make sure I have my facts straight, but my knee-jerk reaction is that could be the case. I know in the first quarter we had a lot of maintenance expense, equipment maintenance rebuilds that we hit hard in the first quarter that aren't there, weren't there in the second quarter. That would be -- I know that's actually fairly large dollar amount in the first quarter so with that gone in the second quarter, I think you're right, there, Chris.

Okay. Okay, that's great. And then just finally on Kensington, the maintenance CapEx you talked about, that won't expensed going forward, right? You've got the development expense this quarter, but that should be sort of a one off?

Yes, Kensington, sustained CapEx going forward of call it $10-ish million, that's capitalized. Not on the P&L.

Do you expect any significant cost development work to be expensed over the rest of this year?

Say that again, Chris? You said the second half of this year?

Yes, you had a large development expense related to Kensington in this quarter? Do you expect any more of that in this year?

Well, the development will increase in the fourth quarter, as part of this increased CapEx plan that we have. To help increase production and reduce costs. And, so, I think the beginning of the year we were targeting just under $30 million in total CapEx at Kensington and now that number is closer to 45. And, through the first six months of the year, the CapEx at Kensington was, hold on, Chris, let me follow up with you I don't have my hands on it right now.

No, not a problem. That helps. Thanks a lot.

Thanks.

Our final question comes from Benjamin Asuncion with Haywood Securities.

Afternoon, guys, congratulations on the quarter. I just wanted to follow up on some previous comments that you made about exploration, so, I guess the 2011, full year expiration budget has been expanded to $23 million. Could you give me a break down for how much of that is going to be spent adding sort of mind-site exploration versus let's call it green field exploration?

Hi, thanks, it's Don Birak. Most of our exploration is really organic growth, so it's at existing operations we do have some early stage properties in our portfolio that we are going to be testing, principally in South America. Right now, we are in sort of the winter season down there, and it's a little difficult to get out to some of these places. But, by and large, we put over 80%, 85% historically at our operating properties are for organic growth. That will continue, this year and probably into next year. One thing that might change that is some success on some of the properties, great build properties that we have, we see success there, we will ramp it up accordingly.

Okay, and I guess maybe within that -- what's going to account for the largest I guess organic growth project here? And, essentially if you can comment on which sort of green field project is going to be the largest within the budget?

Palmarejo is by far the biggest. And that's things that we are doing around the current mine area as well as these other targets that we mentioned, Guadalupe, La Patria, plus testing new targets in that district. We're putting the biggest proportion of the increase towards Palmarejo. Following that, it becomes Rochester and also Argentina. So, the other ones really pale in comparison. I'm hoping that's going -- we will continue to see good, strong exploration at Palmarejo in the future and then we're going to ramp up on the Greenfield side, as we see good results.

Okay, perfect. Thanks, guys.

Thank you. Okay there being for the no further questions, I just wanted to thank you again are taking the time and we're looking forward to reporting future results that are consistent with the things and the priorities that we laid out you today and appreciate your time and we'll talk to you at the end of the third quarter. Thanks.

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