Coeur Mining Inc (CDE) 2011 Q4 法說會逐字稿

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2011 year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn today's conference over to Wendy Yang, Vice President of Investor Relations. You may begin your conference.

Thank you very much. Welcome, everyone, to Coeur D'Alene Mines' fourth-quarter and year-end financial results conference call. I'm Wendy Yang, I'm Vice President of Investor Relations. You'll find Coeur is listed as CDE on the New York Stock Exchange, and as CDM on the Toronto Stock Exchange. This call is being webcast at www.Coeur.com, where we have posted slides to accompany our remarks. A telephonic replay of this call will be available from our website for one week following today's call.

We will be discussing some forward-looking information today, so we caution our audience that such statements involve risks and uncertainties that could cause actual results to differ materially from projections. Please review our cautionary statements shown here, and review the risk factors, including some that are specific to our industry and these are described more fully in our latest annual and quarterly financial reports, filed with the US SEC and Canadian regulators. With that, I'll turn the call over to Mitch Krebs, our President and CEO, Mitch?

Thanks, Wendy. Hello, everybody, and thank you for joining us here today. Before I begin I'd like to introduce Randy Buffington, our new Senior Vice President of Operations, who will oversee the Company's silver and gold operations worldwide. Randy, who has a demonstrated track record of success in both operating open pit and underground operations, will be an integral part of our efforts to achieve operational consistency, and implement internal and external growth initiatives that will create value for our shareholders. We welcome him to Coeur. Also with us here in Coeur d'Alene is Luke Russell, our Senior Vice President of Environmental Health, Safety and Corporate Social Responsibility, who is available for questions after our presentation, and also Bill Ohr, who heads up our Technical Services Group.

Let's get into the slides, turning to slide 5. 2011 was a year of transformation for Coeur. During the year, we achieved record financial and operating performance, realized the first full year of production at our three newer long-lived mines, Palmarejo, San Bartolome and Kensington, and we strengthened our management team at all levels of the Company. Our primary commitment is to produce shareholder value through operating consistency, cost containment, aggressive exploration and value-creating growth. At the same time, we are dedicated to protecting shareholder value by building a culture throughout the organization that has the highest regard for environmental stewardship, employee health and safety, and fostering mutually beneficial relationships in the communities where we operate. We continue our efforts to be the leading primary silver producer with a sustainable production profile of both silver and gold. After an aggressive build-out over the last four years with San Bartolome in 2008, Palmarejo in 2009, Kensington in 2010 and then Rochester in 2011, we now have a solid platform in place that is generating significant cash flow and that offers strong leverage to silver and gold prices.

Our financial and operating highlights are found on slide 6. Coeur reached new heights of success in 2011, driven primarily by record production at Palmarejo and San Bartolome, and higher silver and gold prices. The company realized all-time highs in full-year production, metal sales and operating cash flow. Metal sales nearly doubled in 2011 to over $1 billion, and our operating cash flow increased 147% compared to 2010 and adjusted earnings were $232.5 million, or $2.60 per share, which is a five-fold increase over 2010. Net income for the year was a record $93.5 million or $1.05 per share, compared to a net loss in 2010 and cash and equivalents increased 165% to end the year at $175 million.

These record financial results were the result of dramatically-improved operating performance. Silver production was up 14% to 19.1 million ounces, while gold production was up 40% to 220,382 ounces. Cash operating costs declined 3% to $6.31 per silver ounce. Total silver resources, inclusive of reserves, increased 8% to 525 million ounces, while total gold resources, including reserves, increased to 4.9 million ounces Company-wide.

Slide 7 highlights the priorities we have as a management team for making Coeur the most attractive precious metals equity possible. In this environment of rising prices, it's critical that we keep costs as flat as possible so that we can provide the kind of leverage to prices that our shareholders are seeking. To the right on this slide, you can see what kind of leverage we provided last year. On a percentage basis, our margins increased significantly more than metals prices did. On a dollar basis, our operating margin per ounce increased from just under $10 an ounce in 2010 to over $20 an ounce in 2011.

In addition to leverage, we are proactively managing the downside risks that are inherent in mining in the areas of environmental compliance and stewardship, worker health and safety, and establishing and maintaining constructive relationships with local communities around our operations. Finally, we are taking a disciplined approach to growing the business based on returns and creating long term value. We're aggressively focusing our exploration efforts on our land holdings near our operations and pursuing expansions at our existing mines in order to maximize returns on capital deployed. Any new external growth has to meet return criteria and be accretive on a per-share basis to our shareholders.

Turning to slide 8, we expect 2012 to be a year of important decisions and catalysts for the Company. We expect full-year company-wide production to be 18.5 to 20 million ounces of silver and between 210 and 230 ounces of gold, and we expect cash operating costs will be in the range of $6.50 to $7.50 per silver ounce, and between $1,150 to $1,250 per ounce of gold at Kensington. 2012 CapEx is expected to total $90 million to $120 million, including about $20 million that rolled over from 2011 into 2012. We expect our 2012 exploration program to be $40 million, which is a 53% increase over 2011 levels, and G&A costs are expected to come in at $26 million in 2012, which is down 15% from the $31 million level in 2011. I'll turn it over to Frank Hanagarne now for a financial overview.

Thank you, Mitch. I'll begin with slide 10, where as indicated, a dramatic rise in both annual net metal sales and annual adjusted earnings for the year, and over prior years. Beginning with the graph on the left, 2011 annual net metal sales nearly doubled 2010 levels to reach over $1 billion. This increase of $506 million or 98% is due to higher silver production from Palmarejo and San Bartolome, the first full year of gold production from the Kensington mine, and substantially higher silver and gold prices. Turning to the graph on the right, the full-year adjusted earnings reached a record of $232.5 million or $2.60 per share.

On slide 11, the chart on the left indicates 2011 operating cash flow at a record $454 million, a 147% increase over 2010. The operating cash flow per share result was $5.07 per share, outpacing Bloomberg analyst estimates of $4.56 per share. On the right, 2011 capital expenditures of $120 million represent a 23% reduction from 2010. The majority of the capital expenditures were at Palmarejo for its activities at the tailing facility, at Kensington for the construction of the underground pace-filled plant and for underground development, and at Rochester, for construction of the new leach pad.

On slide 12, our cash and cash equivalents totaled $175 million at year-end, an increase of approximately 165% from 2010. The chart on the right indicates that we reduced our debt balance by approximately $47 million in 2011, leaving total debt at $121.5 million at year-end. Debt repayment included the 1.25% convertible notes, senior term notes, bank loans, and the remaining outstanding balance of a gold lease facility. This rise in our cash balance was achieved after funding $120 million of capital investments, and supporting a $26 million exploration program. Working capital was $213 million at year-end, compared to negative working capital at the year-end 2010, and has resulted in a current ratio improvement to 1.8 at year-end 2011 from 1.0 at the end of 2010.

Turning to slide 13, 2011 marked the first year that all three of our newer mines were in production together. In 2012, a portion of projected cash flow will be reinvested to sell fund-sustaining capital needs and grow through exploration. We have earmarked expansion capital to develop the Guadalupe deposit at Palmarejo for targeted reserve conversion. Mining at Guadalupe is scheduled to commence in 2013. We also expect to invest approximately $28 million in tailing facilities in 2012 at Palmarejo, San Bartolome and Kensington. We're moving these tailings investments from sustaining capital expenditures, illustrates a $30 million to $50 million range for normalized capital expenditures for the company.

Moving on to slide 14, our shares outstanding total has remained largely unchanged for the last 12 months, to ensure shareholder value. We remain committed to maximizing shareholder value through prioritization of internal projects and growth opportunities, based on return and accretion of value. A valuation of shareholder capital return alternatives will be announced once operational consistency is achieved across all of our mine sites. In addition to using cash for capital expansion internally, we're also deploying cash flow to significantly increase exploration program funding. Later, you will hear Don Birak speak about the exploration potential at and around our young mining districts. I'll now turn over to Leon Hardy, who will provide a summary of our operating performance.

Thank you, Frank. Starting with slide 16, San Bartolome in Bolivia and Palmarejo in Mexico continue to perform consistently and at record levels. Together, these two mines represent 85% of our total silver production, and 57% of total gold production in 2011. Both mines are off to a strong start in 2012. Our decision to focus on long term stability at our Kensington gold mine in Alaska is on track. As planned, we will see significantly reduced production in the first half of 2012 at Kensington while several projects, designed to improve operational efficiency and consistency, are completed. Our Rochester mine in Nevada is back in operation for the first time since 2007, and we expect seven more years of production from Rochester's current reserves.

On slide 17, since 2008 the Company has grown its silver production at a 17% annual rate and its gold production at a 68% annual clip. This growth is a reflection of the new operations we have brought online during this time. Led by San Bartolome and Palmarejo, we now have reached a new platform of production that we expect to sustain in 2012. Let's turn to slide 18. The charts on the left provide our fourth quarter silver production of 5.3 million ounces, a quarterly record, while gold production dropped due to the reduction in mining activities at Kensington. Cash operating costs per silver ounce declined 20% compared to the third quarter, while cash costs per ounce of gold increased due to the reduction in production at Kensington.

Turning to slide 19, in the fourth quarter of 2011, our flagship Palmarejo mine produced 2.6 million ounces of silver and 34,000 ounces of gold at a cash operating cost of negative $2.13 per ounce. Total metal sales were $134 million, and operating cash flow was $77 million. For the full year, production at Palmarejo was 9 million-ounces of silver and 125,000 ounces of gold at a cash operating cost of negative $0.97 per silver ounce. Total metal sales were $513 million, and operating cash flow was $299 million for the year. Higher silver and gold grades and improved silver recovery rates were the key drivers for this strong performance.

Next is slide 20 on San Bartolome, where operations are steady, fourth-quarter 2011 production was 2 million ounces of silver and cash operating costs were $9.18 per silver ounce. Total metal sales for the quarter were $63 million and operating cash flow was $29 million. Production for the year was 7.5 million ounces of silver, with cash operating costs of $9.10 per ounce. Increased production was driven by a 4% higher mill through-put and 7% higher ore grade than 2010. Metal sales were $268 million, and operating cash flow was $128 million.

In December, 2011 we were granted an exemption to mine the Huacajchi Sur deposit located above the 4,400-meter mining restriction level mandated by the Federal Government. Continued mining over the next two years of the higher grade Huacajchi Sur ore should enable Coeur to realize higher margins to help offset the expected higher labor and consumable costs in 2012.

On slide 21, production for the fourth quarter at Rochester was 373,000 ounces of silver and 1,993 ounces of gold. Cash operating costs were $38 per silver ounce. Quarterly metal sales were $11 million and operating cash flow was $3 million. Production from the new leach pad began in November, 2011. We expect 2012 production at Rochester to accelerate with each quarter, with an expectation of achieving full-year production of 2.6 million-ounces to 2.9 million ounces of silver and 30,000 ounces to 35,000 ounces of gold.

Total 2011 production was 1.4 million ounces of silver and 6,300 ounces of gold. Cash operating costs were $22.97 per silver ounce, the significantly higher cash operating costs resulted from fact that pre-stripped and ore haulage costs associated with the development of the new leach pad and related mining activities were expensed in 2011, while ounces produced were mostly from residual leaching. 2011 metal sales were $57 million, operating cash flow was $3 million for the year.

Slide 22, we received notice in late November, 2011 of a claims dispute regarding unpatented claims at Rochester mine, following Rochester's inadvertent failure to pay annual mining claim maintenance fees. We subsequently restaked the disputed unpatented mining claims, and are pursuing legal action. In our lawsuit, we contend that the defendant trespassed on Coeur's possessary rights of these claims, violated federal safety standards and violated the right of exclusion and control of the property under Coeur's deal and approved plan of operations.

We were granted a preliminary injunction in December that protects the active mine areas. We will vigorously defend our rights and possession of these disputed claims in a case set to go to trial in November, 2012. This dispute has no impact on our year-end 2011 reserves for the seven-year life of the mine production. We cannot predict the legal outcome of the court case which could have some impact on Rochester's 2011 mineral resource estimates. Mining activities continue at the mine, and are unaffected by the dispute.

As previously announced, production levels at Kensington have been reduced since last November, to complete several key projects designed to improve operational efficiency and consistency. Fourth-quarter production at Kensington was 13,047 ounces of gold and cash operating costs were $1,800 per gold ounce. Metal sales were $33 million, operating cash flow was negative $4 million. Total year-end production at Kensington was 88,400 ounces of gold and cash operating costs were $1,088 per gold ounce. Full year metal sales totaled $151 million, while operating cash flow was $36 million.

On slide 24, you can see that in 2012, Kensington will be a story of two halves. As planned, first-quarter 2012 production will be the lowest of the year. Second half production is expected to pick up as planned. Reflecting this year's production profile, cash operating costs per ounce are anticipated to be approximately $1,750 per ounce for the first half and then improve to $800 to $1,000 per ounce for the fourth quarter. Good progress being made during the transition period to achieve a higher and sustainable level of production at lower costs, underground development activities are on schedule, which will provide operational flexibility and facilitate infill drilling and exploration work.

Construction of the pace plant is nearly complete. Upon the commissioning the definition drilling program is ahead of schedule and most new surface facilities, including another dormitory, along with an expanded kitchen and dining facilities are now in use. Others will be completed when the weather improves. Through our accelerated development in the underground operations, we are opening up a new mining area in the lower region of the deposit to complement the mining from the upper region. We expect to have four to six working phases in each of the two regions to enhance our mining flexibility. Don Birak will now provide an update on exploration activities.

Thank you. The accelerated pace that we anticipated in the early third quarter continued into the fourth. At the peak of the program, we had 14 drills in operation. Drilling and trenching in the second half of the year was more than double what we completed in the first. The largest component of this program was devoted to Palmarejo. With a record exploration budget of $40 million in 2012, we've commenced drilling at the same accelerated pace we had in late 2011. Strong focus again on Palmarejo followed by Joaquin, Kensington and San Bartolome.

Highlights of last year's programs at Joaquin, Palmarejo and Kensington are shown on this slide 27. We're especially pleased with the work at Joaquin which led to the completion of the first mineral resource estimate for two deposits, La Negra, La Marocha on this more than 28,000 hectare joint venture property. At Palmarejo, we completed the first core drilling and trenching on the La Patria deposit, resulting in an increase in contained ounces of silver and gold inferred resources. This more than 1.8-kilometer long zone of veins and stock works requires much more drilling, which is part of our 2012 program. In late 2011 we conduct additional drilling on the Raven zone in Kensington and will continue that program into 2012. Finally we conducted extensive exploration drilling at Rochester in 2012 and have plans to continue that work this year.

Turning to slide 28, we chart our exploration expense activities since the Palmarejo acquisition in 28. You see the change reflects the effect of the global financial crisis of late 2008 and 2009. It also shows our accelerated program that began in 2011, coincident with reduced Company-wide major capital expenditures and a rising metal price market. 2011 and 2012 exploration programs ranked second and first respectively in our history. The breakdown of 2012 costs into expense and capitalized components is also shown. Associated with this ramped up program, we have rescheduled our key drilling to upgrade inferred mineral resources to measured and indicated for the first half of the year and exploration for the new resources into the second half. This will allow to us synchronize estimation of mineral resources and reserves, mine planning and budgeting.

The next two slides look at changes in silver and gold reserves and resources over the last four years. First, silver on slide 29. we have maintained a large silver reserve and resource base despite annual increases in depletion. In 2011, our silver ounces contained in mineral resources increased significantly from 2010. This bodes well for conversion to reserves with new technical and economic analyses and modeling scheduled early in the second half of 2012.

We see a similar pattern in gold. Comparing this to the exploration funding chart on the prior slide, one can see that there is a lag between changes in resources and reserves as exploration and development costs increase or go down. Extrapolating this to 2012, our increased exploration pace, which commenced in the second half of 2011 and continues today, should result in expanded reserves and resources for 2012 and into 2013.

On to slide 31 now, here you see an aerial image of the current Palmarejo mine area, and the surface projection of the two main mineralized structure zones, La Blanca, La Prieta. There are five main ore zones located on these two structures. Zapatio and Tucson sit on La Prieta 108 and 76 on La Blanca and Rosario occurs at the confluence of the two structures. All of the zones but notably Rosario 76 and 108 remain open for expansion. We have three drills operating at the mine now and expect to maintain that pace into the third quarter. The smaller map on the upper right shows the entire district with the major Northwest-oriented mineral trends. We have recognized four such trends in the district that have not yet fully explored their extent or for other parallel structures.

Now we shift to La Patria. La Patria occurs about 10-kilometers south-southeast of Palmarejo. This past year, we completed nearly 13,000 meters of drilling and trenching and completed in those trenches 90 new trenches to constrain the funeral mineral resource models from drilling all the way to the surface. In the surface trenches, we see the mineralized stones averaging 4.4 meters wide but locally over 20. With a few exceptions drilling is still only completed on wide centers in the three main zones of higher grades remain open at depth. For 2012 we plan to complete another 12,000 meters of drilling, collect samples for metallurgical testing and prepare an updated mineral resource estimate.

Turning now to slide 33, rounding out our discussion of Palmarejo is Guadalupe. Here we drilled over 20,000 meters of new core principally in Guadalupe Norte and the bulk of that in the second half of the year. We plan to drill another 19,000-meters in the first half of 2012 on Guadalupe. The access development is underway from the north end of this more than 2.5-kilometer long zone. So this drilling followed by resource reserve modeling will be integral to the new mine planning and budget process. I'll turn this back over to Mitch.

Thanks, Don. We have now positioned Coeur to capitalize on the transformation that is well underway here. We have significantly de-risked the business in terms of development risk, construction risk, startup risk and balance sheet risk, and are quickly making progress on our objectives of operating more consistently and efficiently. This all translates into significant cash flow now being generated.

2011 was a record year for the Company and 2012 is shaping up to be a repeat, driven by strong performance at Palmarejo and San Bartolome again. Kensington will begin contributing strong results in the second half of 2012 while Rochester will add a full year of production for the first time from the new leach pad that was built last year. We expect our expanded exploration program to lead to increases in silver and gold reserves and resources in 2012 and provide one component of our disciplined growth strategy. We will be pursuing high-return internal growth projects in 2012, while also looking to external opportunities to further bolster our growth pipeline. We expect to see the current positive climate for silver and gold continue throughout 2012, which will help propel the Company to a very productive year and beyond. As we move through the year and execute our plan, I expect to see our transformation continue. Operator, we're now ready for any questions.

(Operator Instructions). Our first question comes from the line of Jorge Beristain with Deutsche Bank

My questions were two. One is on the update of the legal claims at Rochester, you could just mention -- you did mention in your press release that it would have very little impact on the resource, but could you also talk about ultimately if you seek to convert some of that inferred material to prove an improbable, what the kind of percentage of loss could be related to that claim jump? That's my first question.

Yes. Hi, Jorge. It's Mitch here. It's hard to say. It likely would have some impact on the resources that we reported as of December 31. It's clear that the reserves are unaffected and that's our primary focus in terms of the next seven years. We'll just have to wait and see how things turn out with the legal action before we can really get a handle on what the impact, if any, would be to the resources.

Jorge, did you have a follow-up?

Our next question comes from John Bridges with JPMorgan.

I guess not. Just wondered, Mitch, you've had I guess almost a year now to look at the operations in a new light with a different hat on and I just wondered how you are thinking about tweaking the strategy and what you thought about the right strategy for the silver companies when --

John?

Okay, that question was removed out of the queue. Our next question comes from the line of Andrew Kaip with BMO Capital Markets.

We've got some questions on your expenditure levels for next year. The first one is, how are you planning on reducing your G&A down to around the $26 million range?

Yes. I'll ask Frank to take that one, Andrew.

Andrew, this is Frank. If you look at the year-on-year performance, we did have an increase in G&A costs from 2010 to 2011. I think it went up approximately $7 million. Roughly half of that is tied up in severance payments related to the departing CEO, and the lion's share of the rest was associated with legal fees that were expended both in the corporate group and on behalf of our Mexican property. So as we look at this year, you see the guidance that we provided there.

We're looking for a substantial reduction in G&A. A lot of that will have to do with bringing legal expenses, monitoring those closely, bringing those into control. We won't have the issues related with a departing CEO and beyond that, we have a plan in place where we're going to have some targeted reductions in some key areas, some of which have already been achieved as we begin the new year, a lot of discretionary fees and different types of funding taking place in the political front, where we're trimming our contributions back. We've done some good work to reduce our insurance costs, where those are absorbed in the G&A of the corporate group, but a lot of it is allocated out to the sides, but we're doing well there, in addition to a number of other areas that have been targeted.

Okay. The second -- I guess just to follow up on that, in your budget for your G&A numbers, how much is being allocated to legal costs for Rochester?

I'm speaking from memory, but it's in the neighborhood of $2 million.

Okay. The next thing I'd like to get a sense of is just at Rochester, here the residual leach operations are continuing, if I'm not mistaken, and I'm just wondering how much of the 2.6 million-ounces to 2.9 million ounces of silver are attributed to residual leaching?

Yes. Leon, you want to take that?

Sure. The leach curb drops off very quickly, so as we go through this year we expect it to drop significantly, where pad 3, which is the new pad will be the majority of the production. So we can estimate what the residual would be, but it would be a pretty small amount.

You look, Andrew, at 2011 total production and that was almost all residual leaching. Compare that to 2010, you'll see a pretty significant decline, and then to take that into 2012 you virtually see no residual leaching contribution and all coming -- all the guidance ounces -- almost all the guidance ounces are off this new pad.

Okay. And then just finally with respect to your exploration expenses, you've provided a great breakout of your capital expenditures. Can you give us a sense of the breakout of the exploration expenditures?

Yes, Don, go ahead.

Hi, Andrew. This is Don Birak. I think on the slide -- one of the slides in there, there's a breakdown between the total capital and the total expense exploration costs.

Okay.

You see the total budget's right at about $40 million about $16 million is for capital and the rest is for expense, exploration as well.

Okay. And then can you break it down by project?

At this stage the biggest -- the lion's share of this is Palmarejo. That's been our biggest component in the last couple years and it remains there. That's going to follow by work that we're doing on Joaquin which is going to be expensed and working towards the feasibility study and then after that, other properties fall in line, Kensington, Rochester, San Bartolome.

Okay. All right. That's good. Thanks very much.

Our next question comes from the line of John Bridges with JPMorgan.

Hi. Are you there?

We already answered your question, John.

Is that what happened? What did I say that was wrong?

Sorry, John. Go ahead.

It's your fault, Wendy, I'm sure.

It must be.

Yes, Mitch, I was just thinking you've had probably a year in the seat now, in the hot seat, and I just wondered how you thought about strategy for silver producers in these markets when finding new deposits is probably more difficult than it's been for a long time?

Some days it feels like more than a year being in the hot seat. I think it's been seven months and it's a good question to ask. I think what we as a team see and what we're pursuing and I think a lot of the themes that we're pursuing are probably relevant to the industry, really focusing on the exploration getting more out of what you've already put in place, whether that's land positions or infrastructure. Leveraging those investments so that you can -- really there's no better way to earn a return on a dollar than putting it back in the ground, proving up an ounce and processing that through your existing infrastructure. And so we're focused on districts, on places where we can leverage what we have put in place, and as you well know, we've invested a lot of capital over the last four or five years in infrastructure. And we want to squeeze every last dollar of return out of those investments that we can and look at them on more of a regional basis when it's applicable.

There's the geographic question. I think our geographic diversity is fairly concentrated in Palmarejo and in San Bartolome. So Mexico and Bolivia, and I think for us, it's important to add some additional geographic diversity, as well as diversity in terms of number of operating assets. Although we have four operating mines and one non-operating interest, really I think Leon pointed out the majority of that again is driven by Palmarejo and San Bartolome. So to get our production and our cash flow spread around to as many assets as possible is something that we're focused on as well.

I saw in your write-up that you've made investments in 25 smaller mining companies?

$25 million in five companies.

Okay, sorry. How would you characterize your relationship with those? Is that a partnership arrangement? Is that more of an investor different companies have different attitudes towards this?

Yes. The investments are pure equity investments, no additional rights or anything like that, but the -- and they vary from company to company, but for the most part, I would say it's a relationship -- it's more than a passive relationship. It's one where to the extent that we can share technical knowledge or expertise really with one another, we do so. There's some similarities between some of those companies' projects and assets that we currently operate.

Site visits and again some exchanging of technical information takes place, and what we want to do is keep a close eye and monitor these to see which ones are meeting their milestones and progressing their projects along their timetables to where they could potentially fit into our overall growth profile, in terms of size and location and exploration potential. And so it's not a capital gains driven decision. It's a longer term strategic portfolio that we have and not all of them will end up becoming what we'd like to think that they might become, but hopefully a couple do and we can have that be part of our longer term growth strategy here.

Okay. Great. Many, many thanks.

(Operator Instructions). Our next question comes from the line of Adam Brooks with Sidoti & Company.

A few quick questions here. Can we talk about how the claim dispute at Rochester would possibly delay the addition of another leach pad?

Leon, do you want to?

Well, we're proceeding ahead with our permitting of what we call pad 5 and our plan of operations 9. So at this point, we're moving ahead with all of our plans.

Okay. And quickly at Palmarejo, just looking at the guidance for this year, gold production down a little bit. What's the main driver there?

The main driver at Palmarejo is the gold grade.

Okay. Thank you.

Our next question comes from the line of Jorge Beristain with Deutsche Bank.

Hi, guys. I'll try again. I'm not sure how much of it was public last time, but my question was really to Kensington and that obviously your first half costs are quite high at around $1,750 an ounce and if there was anything extraordinary in there besides the fact you're obviously operating at a much lower than ordinary utilization, but there are any extraordinary expenses, any kind of drilling ahead or any kind of exploration work that you may be doing that is raising the cost above a normal rate?

I'll take a crack at it and, Leon, chime in or Randy or anybody, but the costs really on an operating cost basis are pretty flat. There's additional capitalized expenditures relating to the definition drilling and underground development and some of these projects that Leon mentioned. It really is the denominator of the equation that we will give rise to those higher costs and that will really be the driver behind the lower costs then in the second half and particularly in the fourth quarter.

Got it. thanks very much.

Our next question comes from the line of John Bridges with JPMorgan.

Hi. Just testing the channels again. I just wondered, I know you've been focused on putting some new skills into the Company. Just wondered how things were on the labor side. I know it's a key issue in this industry today.

Yes. It is, John, in all levels and in all functional areas, technical, managerial, you name it. We've had a lot of success here putting together, I think I'm biased, but a team here and out at the sites in terms of site leadership that is highly motivated, smart, experienced people who have collectively made the decision to come and work here at a Company that's got an exciting future and a lot of potential, and I think we're all going to be beneficiaries of that whether it's the technical services group, whether it's the Randys of the world all the way through.

The new GM up at Kensington is great. We've got a new GM at Rochester now as of a few weeks ago, but the pay for miners is definitely -- we're seeing some real pressures there. Just like everybody, I guess. I don't know. Leon, do you have anything to add to that?

No. It's worldwide. It's not just North America. There's a huge escalation in salaries and competition right now for skilled labor.

Okay. Yes. It sounds like you're making a lot of progress. Many thanks and good luck, guys.

(Operator Instructions). Our next question comes from the line of [Robert Mueller with Beauregard Trust].

Good afternoon, gentlemen. Looks like a nice quarter. I have two questions. What is the prospect for a dividend in the next six months, and would you make it monthly? And the second question is, would you consider Pac Manning Rye Patch, just gobbling the Company up let their management work on their previous things and have you expand Rye Patch/Coeur activities in the areas which they perhaps have grabbed?

I'll take the second question and then, Frank, you can take the first. Like we said, as far as that claims dispute there at Rochester the reserves that we have there, 20 million-some ounces of silver and 270,000 ounces of gold are really not affected by this, and our focus is on delivering on this ramp-up with the new leach pad and producing the maximum number of ounces that we can off this new pad, while pursuing these expansion opportunities. How things might play out is obviously in the future for us, and we'll deal with that as time goes by, but no appetite or interest in pursuing the path that you asked about.

Okay

Robert, I'll speak for a minute regarding dividends. It's part of a big picture that we're looking at. As we seek to sustain and the grow the current profitability that we've enjoyed say in 2011, we view a number of ways to accomplish that and I think Mitch touched on a couple of them before. We view investments and high rate return projects that are available to us internally as a high priority allocation of capital that we believe leads to shareholder returns. We also believe and obviously our spending for this plan in the area of exploration, spending, allocating capital at the drill bit is a means of bringing back good returns.

But then you start to get down into these other opportunities and ways that share capital can be returned to shareholders and dividends are being evaluated. The prospect for announcing a policy one way or the other is high at some point in the future and we have stated that when we get to a point where we've achieved a certain level of operational consistency, we're going to be comfortable with moving down that path. Couldn't say today, that we worked out all the details as to whether that would be monthly or how the frequency of a payment would be, but it's definitely on the list of things to be evaluated. But a little bit more focused at the moment on continuing to achieve those shareholder returns to lose some of these other mechanisms

Okay. We'll stay tuned. Thank you.

And there are no further questions at this time. I will now turn the call over to Wendy Yang for any closing remarks.

Thank you, operator. Thank you, everyone, and I hope you will join us for next quarter for the first quarter of 2012, and certainly a brand-new year for us. We will be out at the BMO conference next week, as well as with UBS up in Boston. So hope to see some of you at those shows. For those of you who will be visiting in Toronto hope it's not going to be freezing as it normally is. So thank you, everyone, and you know where to find me and we appreciate your support. Thanks. Thank you, operator.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.