Coeur Mining Inc (CDE) 2012 Q1 法說會逐字稿

Good afternoon. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coeur d'Alene Mines Corporation first-quarter 2012 quarterly financial results 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.

Ms. Stefany Bales, you may begin your conference.

Thank you. Welcome to our first-quarter conference call. I'm Stefany Bales, Director of Corporate Communications. This call is being webcast on our website at www.coeur.com where we have also posted our first-quarter 2012 financial results slide deck to accompany our remarks. A telephonic replay of the call will be available on our website for one week following today's call.

We will be discussing some forward-looking information today, and we caution our audience that such statements involve risks and uncertainties that could cause actual results to differ materially from projections. Please review the cautionary statements shown on slide 2 of our financial results slide deck. 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 our call today are Mitchell Krebs, Frank Hanagarne, Leon Hardy, Randy Buffington and Don Birak.

With that, I'll turn it over to Mitch.

Hello, and thanks for participating in our first-quarter call. Beginning on slide 5, we had a very solid first three months of 2012. Our Palmarejo mine in Mexico and our San Bartolome mine in Bolivia both started the year strong. As planned, our Kensington mine in Alaska spent the majority of the quarter positioning for a return to sustainable production, while our Rochester mine in Nevada completed its first full quarter of active mining after a five-year hiatus.

As we move through the second quarter, we are seeing more of the same from Palmarejo and San Bartolome, and higher production out of Rochester and Kensington. This should all translate into a very strong second quarter, and keep us on pace for a great 2012.

Equally important, we are already seeing the impact of our ramped-up exploration initiatives, especially at our Kensington and Palmarejo mines. We expect to report results throughout the remainder of the year, and to end 2012 with increases in both reserves and resources.

We are frustrated that all precious metals equities, including ours, have seen a significant short-term correction despite the fact that silver and gold prices remain at very healthy levels. We don't see the fundamentals for either metal as having changed. The US fiscal outlook isn't improving. Europe's issues are not going away, by any means. And loose monetary policies around the globe are likely to remain in place.

For silver, industrial demand is projected to grow over 4% annually over the next three years, while investment demand remains strong. Meanwhile, mine supply grew only 1.4% last year. Lastly, we are maintaining our 2012 full-year guidance as we laid it out to you in February.

Now, Frank will take us through the first-quarter financial highlights.

To underscore Mitch's comments on prices, slide 7 shows the Company's average realized prices during the first quarter. And that they increased 4% for silver and 24% for gold over the year-ago quarter, to $32.61 per ounce and $1,702 per ounce, respectively. Year-to-date, silver is up 8% and gold has risen 7%. These very attractive prices allow us to generate significant cash flow.

Quarterly metal sales increased 3% to $205 million due to higher prices and a 17% increase in the number of ounces of silver sold compared to last year's first quarter. Silver contributed 68% of the Company's first-quarter sales, compared to 56% during the first quarter of 2011. Operating cash flow before working capital changes increased 4% to $93.8 million, and adjusted earnings were $41.5 million, or $0.46 per share, 11% and 10% increases, respectively, over first quarter a year ago.

First-quarter production spending was flat, and actually declined by 25% on a per-ounce basis to $6.29 per ounce. This was mostly driven by a drop in costs at our Palmarejo operation.

While we're seeing the same cost pressures as other companies in areas such as diesel, consumables and labor, our operations are offsetting these pressures through efficiency gains. Our G&A costs also declined during the quarter, down 38% compared to the quarter a year ago.

Cash, cash equivalents and short-term investments total $153.2 million at the end of the quarter, and increased to approximately $175 million at the end of April.

Turning to slide 8, our 2012 financial and operational guidance remains unchanged. We expect to produce 18.5 million to 20 million ounces of silver, and 210,000 ounces to 230,000 ounces of gold. Cash operating costs are expected to range between $650 and $750 per silver ounce this year. Costs at Kensington, while high in the first quarter, are expected to decline throughout the remainder of the year, and average $1,150 to $1,250 per ounce for the full year. Capital expenditures, exploration, and G&A expenses all remain on track.

Now, moving to slide 9, it illustrates that the Company kept its share count level for nearly two years. As we mentioned before, we are evaluating a return of capital policy for shareholders, and expect to have more to say about this mid-year. We're focused on achieving operational consistency at all of our mines. We believe that a dividend or share buyback program is important, but that it should not impede the Company's ability to deploy free cash flow into high-return growth opportunities in order to generate value for our shareholders.

With that, I'll turn it over to Leon.

Starting with slide 11, both Palmarejo and San Bartolome, our two largest operations, had strong first quarters. Our Kensington gold mine made excellent progress during the first quarter, and is now in full production ahead of schedule. There is still work to do and projects to complete, but I'm pleased to report that Kensington is on the way to becoming a more consistent, sustainable producer.

Operations at our Rochester mine in Nevada are gaining momentum, and are on track for a strong 2012, now that the mine is back into production after construction of a new pad there last year.

Looking at slide 12, silver production increased 19% to 4.9 million ounces, while gold production declined 17% due to the planned temporary mining reduction at Kensington. Consolidated cash operating costs dropped 25% to $6.29 per silver ounce, while Kensington reflected reduced operating activity during the year.

On the next slide, Palmarejo metal production sales and operating cash flow all posted solid double-digit gains compared to last year's first quarter. Increases in the number of tons milled and recovery were the main drivers to this strong performance.

Palmarejo's first cash operating costs of minus $2.27 per silver ounce were sharply lower compared to last year's $4.80 per ounce. Palmarejo accounted for 60% of the Company's first-quarter sales, and 84% of its operating cash flow.

Slide 14 shows San Bartolome's first-quarter silver production of 1.6 million ounces, exceeding budget. And was 7% lower compared to last year's first quarter. The operation processed lower-grade material during the first quarter, and was impacted by heavier-than-normal rainfall. San Bartolome contributed $41.4 million in sales, and $20.8 million in operating cash flow for the first quarter.

Moving on to the next slide, we announced on April 26 that Kensington was resuming full production ahead of schedule. You'll recall that we made the decision late last year to temporarily reduce mining activities in order to complete a number of projects to improve operational efficiency and consistency at Kensington. Excellent progress has been made on these projects, which include completion of an underground paste backfill plant, an upgrade of the mine's electrical infrastructure, and construction of several surface facilities. Underground development and infill drilling are also advancing ahead of schedule.

The mine produced 7,400 ounces of gold in the first quarter at a high cost. However, the cost is expected to decline as production increases over the remainder of the year. We anticipate full-year production of 82,600 ounces to 86,500 ounces of gold at Kensington, at cash costs of $1,150 to $1,250 per ounce. Approximately two-thirds of this production is expected to take place during the second half of the year.

Slide 16 shows photos of the projects now wrapping up at Kensington.

Turning to slide 17, Rochester has just completed its first full quarter of operations with the new leach pad in place. As a result, silver production increased 32%, and gold production increased 265%. Production is expected to increase further in the second quarter and throughout 2012.

Rochester's cash operating costs were $23.35 per ounce during the first quarter, and are expected to decline as production increases throughout 2012. Rochester's metal sales rose 31% to $18.8 million, and operating cash flow increased from less than $1 million in the first quarter of 2011, to $7.2 million in 2012.

There is an outstanding legal dispute at Rochester involving unpatented claims. This dispute does not impact any of the operations reserves. We maintain that Coeur Rochester has valid possessory rights, and superior title to the claims in dispute. The matter is scheduled to go to trial in November.

Now, Don will take us through the exploration highlights.

Thank you, Leon. Moving to slide 19, our $40-million exploration program in 2012 is 53% higher than what we spent last year. We continued drilling in the first quarter at the same pace we had in the second half of 2011, with up to 16 drills and crews operating at our properties.

We completed nearly 72,000 meters of drilling and sampling in the first quarter, and we expect to continue this pace during the second. Several programs generated positive results this quarter, most notably Guadalupe, Kensington and Joaquin. In addition, we continue exploration activities at San Bartolome and Rochester.

Slide 20 shows highlights from our Palmarejo program. Over half of the Company's first-quarter exploration activities took place at Palmarejo, with six drills in operation, two of those underground, and four on surface.

The primary goal of drilling in the Palmarejo district is to increase mineral reserves by expanding and upgrading inferred mineral resources to at least indicated confidence levels. We plan to turn our focus to drilling in the second half of the year to identify new resources and testing new targets.

Shifting to slide 21, drilling at Guadalupe was focused on the northern part of this plus 2-kilometer long system, which will be the initial production area next year.

Slide 21 shows a longitudinal section looking southwest, and some asset results from drilling in the first quarter, as well as some from 2011. Infill drilling continues at Guadalupe with three drills, and the system remains open for expansion in all directions. We expect to have all planned infill drilling in the northern half of Guadalupe completed before the end of the second quarter, and then shift our drilling to other targets to identify and expand mineral resources.

The next slide shows another very important part of our 2012 program taking place at Kensington, where we operated four core drills in the quarter. The majority of this drilling took place in Block K of the lower part of Zone 10. The zone spans over 400 vertical feet, and remains open at depth for future expansion.

A program of 35,000 feet of drilling is planned for 2012. Near the end of last month, we had completed over 70% of the program. We are excited by the results at Block K, and will keep three drills turning there until the program is complete. As this drilling wraps up, we intend to shift to other targets.

In addition to Block K, we also drilled at Raven, and on a new target due south of Kensington with one core drill. Later this year, we expect to add a surface drill to the Kensington project, and drill several targets in the immediate mine area.

Slide 23 shows our exploration at Joaquin in Argentina focused on infill drilling of inferred mineral resources at the La Negra and La Morocha deposits.

In these two deposits, we have defined 20 million contained silver ounces of indicated mineral resources, and 48 million of silver in the inferred category. Coeur currently has a 51% share of these ounces.

Drilling was also performed to collect metallurgical tests for Joaquin. Late in the first quarter, exploration focused on the eastern part of the La Negra zone. In this slide, you can see La Morocha and La Negra drill hole locations, and we have highlighted the location of several infill holes.

Mitch?

Thanks, Don. Our focus on operational consistency and execution over the past nine months is paying off. And we are now positioned for an even stronger second quarter and a solid 2012. Palmarejo and San Bartolome are operating efficiently and consistently. Our decision to take a time-out at Kensington to improve operations is proving to be the correct one. There's still much to do, but our people are doing a great job. Additionally, Rochester is gaining momentum, and is set to have a strong initial year of new production.

I'm excited about what's happening on the exploration front, and I'm looking forward to where we'll end the year on reserves and resources. We view exploration as the lifeblood of our business, and one of the many ways to create value for our shareholders. So, we're drilling as aggressively as we can. Look for us to implement a return-of-capital policy mid-year. And in the meantime, we'll do everything we can to contain costs in order to expand our margins and provide the best leverage to prices we can for our shareholders.

Thanks again for your time today. Operator, we're now ready for questions.

Jorge Beristain, Deutsche Bank.

Jorge with [DB] here. Two questions. One is if you could enhance a little bit your comments that you just made at the end about your return on capital policy. When you said defined by mid-year, is that July-August or in line with your next quarterly results? And along what lines are you thinking?

Yes, hi, Jorge. When we say mid-year, yes, it's probably most likely in conjunction with our second-quarter announcement which will be in early August. And at this point in time, subject to the Board's discretion. And right now everything's on the table and we'll continue to evaluate all of those alternatives between now and then.

Okay. And my second question was, if you could give us some update on the political color in Bolivia in light of their inaugural nationalization of this year in electric utility from the Spanish. What's your sense as to how the government's attitude is toward the mining sector through Comibol? And there were some attempts made last year that were put down. But if you could just talk about what is it about your structure in Bolivia that makes you think that your assets are secure down there.

Yes, sure. We continue to operate at San Bartolome efficiently and effectively. The key there, like we've said before, is really how we hold our mining rights through a series of leases and joint ventures, leases with Comibol itself and the joint ventures with several of the local cooperatives. And that has really been the key to our ability to continue operating at San Bartolome the way we have and the way we expect to continue operating there.

Our relationships there in Bolivia, both at the local level and national level, remain, I'd call them, positive. And in the meantime we continue to generate a lot of cash flow out of our San Bartolome operation.

As far as the nationalization announced on May 1 of the Spanish utility, it's kind of like Argentina in that it seems to be a fairly specific targeted thing that the government has done there that, as far as mining goes, is far away from our area of focus. And we believe that we'll just continue to do what we've been doing there.

And sorry, Mitch, I don't want to monopolize here, but just to clarify. You operate in Bolivia through ownership of these joint ventures with locals. In your filings it said that you own 100% of San Bart's. But could you quantify through these JVs what is the real local ownership content of the mine?

Yes. We have leases and joint ventures. We have 100% of the economics, so that might be the 100% you're referring to. Now, we pay royalties in exchange for those joint venture and leases. So Comibol and the cooperatives get from us anywhere from 2.5% to 4% royalties from our mining activities. So we have 100% interest in the mining rights through those arrangements and by virtue of those arrangements they get royalty payments from us.

Okay, thank you.

Jeff Thorpe, Sonoma Capital Management.

I apologize. My question has been asked.

Roger Lipton, Lipton Financial Services. There are no further questions at this time. I will now turn the call back over to Mr. Krebs.

Okay. Thank you, everyone, for your time and interest in the Company. Operator, we do see a couple of other people that have entered the queue, if anybody else wants to ask a question.

John Bridges with JPMorgan.

Just wondered, could you give us a little more background on the fair value adjustment and what triggered that?

Yes. I'll let Frank take that one.

Hello, John. This is Frank. In the fair market value adjustments there are three or four key areas. We have concentrate sales, foreign exchange, the Franco-Nevada royalty, and then also some zero cost collars on gold at the Kensington property.

The biggest driver in all of that is the Franco-Nevada royalty. It typically would dominate what's happening in that account on a quarter-to-quarter basis. It represents nearly 100% of the quarter-over-quarter changes you see between 2011 and 2012.

The components that factor into the Franco-Nevada royalty are, of course, the level of production that we've achieved, how gold prices have run quarter to quarter. And those two factors, if you look at 2011 versus 2012, gold price is up substantially. We increased incrementally a little over 3,000 more ounces in the first quarter 2012 than 2011. And that's the explanation for that increase.

But what was the surprise? What were the triggers that caused such a big change?

There really isn't a surprise for us. We, of course, watch this closely quarter to quarter and we anticipated that with the higher gold prices this would be a predictable outcome.

Okay. So could you give us a bit of guidance as to whether there will be adjustments like this in coming quarters this year?

As you watch the price of gold and make your estimates of what gold production will be achieved at Palmarejo, the scenarios that are favorable to our bookings are when gold prices remain flat or decline. And it's more unfavorable if prices are on a steep upward trend.

John, it's Mitch here. There's a minimum obligation associated with that royalty of, I think, 240,000 ounces. So that liability on the balance sheet that changes from quarter to quarter is an estimate of what those future royalty payments to Franco-Nevada will be over that minimum obligation. So as gold prices increase, that estimate of those future payments goes up and that adjustment gets taken through the P&L as a non-cash fair value adjustment.

As gold price goes down, we would see obviously a non-cash adjustment going the other way. That's one of the reasons we show the adjusted earnings, is to back out the noise associated with those changes from quarter to quarter in those estimated future payments.

Just remind me, when does this move out of the cash flow and into the income statement? Is it in a year or two's time?

The 240,000 ounces should roll off here over the next three or four years, I think, as we have it scheduled out. That royalty is tied to 50% of the gold production out of Palmarejo. Last year Palmarejo produced right at about 125,000 ounces, so in that year 62,500 ounces went towards that minimum.

So if you just do the math there as far as 240,000 ounces left, I guess that equals about four more years.

Okay. Anyway best of luck with the rest of the operations which seem to be working nicely to plan. Good luck, guys. Thank you.

Chris Lichtenheldt with UBS.

Congratulations on a good quarter. First wanted to ask, just at Palmarejo, all the exploration you're doing. Can you remind us if all the ounces that you're looking at now, all the areas you're looking at, would those all be subject to the Franco royalty? Or are there areas there that you can explore that would be outside of that?

No. The area of influence for that royalty covers all of the immediate mine area, as well as the areas outside of the immediate mine area where we currently have drilling taking place.

So on slide 20 with Guadalupe and all the other stars, pretty much all that would be captured by the royalty. Is that right?

Yes. That image there is basically a reflection of the area of influence on that royalty, or for that royalty.

Okay, perfect. Secondly, at San Bartolome you're still mining, I think, well ahead of reserve grade. Can you give us a sense of when that would come down and when you'd be into the lower grade material?

Leon, you want to answer that?

Our grades vary depending on which phase of the mining we're in. And we're current mining in phases 5 and 6. Both of those have a higher grade than the lower areas. So, on a mine plan basis we'll keep stretching out the mine plan as much as we can, but we're right now we're pushing about two years of higher grade.

Okay. And then what do the areas beyond 5 and 6 look like in terms of grade?

It comes down. I think if you take a look at our life-of-mine schedule, you can pretty well pick that off the chart.

Okay. That's what I figured. Okay, great, thanks.

And then lastly just on Kensington. I don't think you've revised your cash cost forecasts for the year. But given things are going more quickly than you expected, could those costs be better? Or is the quicker-than-expected nature of the work there just going to be offset by other inflation-type costs? Or can you just comment a bit on that maybe?

Yes. I wouldn't expect anything outside of that range that we've provided here. Obviously what that means is that by the fourth quarter we'll see costs on the low end of that average, given where we are in the first quarter, or where we were in the first quarter.

So we'll be seeing costs as we end the year in the $900 range to pull that average down. But I think for the full year that average will be right around that $1,150 to $1,250 an ounce range.

Okay. That's perfect. Thanks a lot.

There are no further questions at this time. I'll now turn the call over to Mr. Mitchell Krebs.

Okay. Thanks, everybody, for your interest and time. And look forward to speaking with you again in early August. Take care.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.