Coeur Mining Inc (CDE) 2013 Q4 法說會逐字稿

Good morning, my name is Valerie, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter and year-end 2013 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Bridget Freas, Director of Investor Relations. Bridget, you may begin.

Thanks Valerie. Welcome everyone to our fourth quarter and full year 2013 earnings conference call. I am Bridget Freas, Director of Investor Relations. We have posted slides to accompany our remarks on our website at www.Coeur.com.

Please review the cautionary statements on slide 2 and the Risk Factors in our 2013 Form 10-K for risks and uncertainties that could cause actual results to differ from today's forward-looking statements. Joining me are Mitch Krebs, Peter Mitchell, Frank Hanagarne, Joe Phillips, and dialing in from Palmarejo is Hans Rasmussen. Mitch.

Thanks Bridget. Hello everyone. Thanks for joining us today, I know that it is a busy day and busy time here with year-end results. We are going to start following a different approach and format for these calls, starting with today's call. I will cover a few key highlights, and then we will get right into the Q&A. We want to make this time as efficient as possible for you guys, and don't want to just sit here and read back to you what you can already read in the release, and in our slides. I will have about 10 minutes of comments, and then we will get right to it. You can ask anyone here anything you would like.

Another thing we will be doing differently going forward is in how we report our costs. There are four big changes that I want to highlight. One is as you saw in the release, we will start reporting an all-in sustaining cost per silver equivalent ounce metric, for all of our operations combined. Now that number last year was $18.94 for the full year, and it actually dropped in the fourth quarter to $16.92, which was about a 12% decline. The second change is that we will report our primary silver mine costs on a cost applicable to sales per silver equivalent ounce, and then we will do the same for our one gold mine, Kensington. The three primary silver mines in the fourth quarter, their costs on that basis were $11.97, and for the full year we are at $13.81. And then applying that same methodology to Kensington, the costs per ounce were $667 an ounce in the fourth quarter, and $890 an ounce for the full year. Slide eight in the deck shows these metrics for each operation.

The third change is going away from the by-product calculation on costs, to using silver equivalent ounces sold. We just think that is a more accurate depiction of the true margins from our operations. I don't know about you guys, but we spent a lot of time talking with investors about a mine like Palmarejo, where our costs on a by-product basis are $2 and change per ounce, and how to get to a margin per ounce from that number, whereas doing it on a silver equivalent basis for Palmarejo last year that cost was $13.25. And that's a lot easier to tie back in to the true profitability and an accurate metric and measure for each of our operations, especially for our Palmarejo and for our Rochester where gold makes up such a big component of the business.

And in the case of Palmarejo, that's almost 50% of the revenue. Deducting that as a by-product really distorts things. We just think that overall we need to do everything we can as a Company to simplify the way we report our Company's results, especially for those investors that aren't as familiar with our industry. The more generalist type of investors, I think they oftentimes get scared away from our sector, and companies like Coeur, when they see these sometimes quirky metrics. We are trying to make the way we report something that is easier to explain to people outside of our industry. I think it is important that we try and attract those types of investors into our sector.

Another thing we spend a lot of time talking about with investors is the Franco Nevada royalty that applies to 50% of the gold production out of Palmarejo, and how that is handled and where that is picked up. It is confusing. Because there is a minimum obligation there, and a lot of you guys know this as well as anybody. But there is a minimum obligation of 400,000 ounces tied to that royalty. We'll hit that probably in about 2.5 more years of production out of Palmarejo, but until then that royalty is treated just like a debt. It is on the balance sheet. You will see the out flows associated with that in the financing section of the cash flow statement, so it doesn't hit our production costs, and it is truly an obligation of the entire Company. Once we hit that minimum then it will flip into operating costs at Palmarejo. But until then it is treated like I said like a debt.

Now in 2013 we paid Franco about $57 million in total on that royalty, and if that was in our production costs, that would add about $1.73 an ounce on a silver equivalent basis. For Palmarejo alone, that $13 per silver equivalent ounce number I mentioned, would be about $4 an ounce higher. Again, I think that is important for everybody to understand where it is and where it isn't, and why it is not in our costs right now. Obviously people can adjust for that accordingly. And slides 12 through 15 then show each of our operations and their historical costs by quarter going back to 2011 on the by-product way that we have been doing it, and then on the silver equivalent methodology going forward. Starting then with next quarter we will drop the by-product way of reporting costs.

Slides three and four layout some of our 2013 and fourth quarter highlights. One thing worth flagging is there was a little over $15 million worth of metal that shift in the fourth quarter, but weren't picked up in sales. Went to the balance sheet so that is something that will spill over here into the first quarter, and that slightly skewed our fourth quarter revenue. Slide five outlines the framework that we have been following for over a year now, to help us maximize cash flow and reduce costs at our sites, and reduce our capital spending as well. It's been leading to great results. Obviously this work is ongoing. Capital spending is down big time from where we were just a few years ago.

Our guidance for this year is $65 million to $80 million with almost all of that going towards just sustaining and capitalized exploration. The results are really starting to bear themselves out. When you look at our cost per silver equivalent ounce over the last year, three of our four operations are down pretty significantly, Palmarejo by 27%, Kensington by 33%, Rochester by 6%, and San Bartolome was pretty flat. We are making some really good progress, and like I said those efforts are ongoing.

The next key highlight I want to flag is our exploration program, and the increase in reserves and resources we announced on Tuesday. You probably saw that reserves increased by 16% for silver and 12% for gold, even after taking into account last year's production and using lower metals prices. We chose to go with $25 an ounce for silver, and $1450 an ounce for gold. We spent a lot of time thinking about that, and we think those reflect reasonable long-term price assumptions. We did though also internally run those same reserves at $20 an ounce for silver, and $1250 an ounce for gold. And the decline from what we reported was only about 6% to 8%, so there wasn't a lot of sensitivity to running them at lower prices. We feel comfortable, with where we came out in terms of our year-end reserves and resources.

Last year we spent about $34 million in total on exploration , about $11 million or $12 million of that was capitalized focused just on reserve conversion work. With those dollars we replaced and added a total of 115 million silver equivalent ounces of just reserves, and that is all-around existing infrastructure. That's not La Preciosa, that is not anything other than just mines where we have existing reserves. That's really good bang for the buck. That's about $0.10 an ounce discovery costs. We all know that a lot of that increase came from Rochester, and a big chunk of that increase was not necessarily due to drilling activities. It was due to the removal of some restrictions relating to that claims dispute that we had in place.

But even if you remove all of Rochester's increase from our Company-wide increase in reserves on a discovery cost per ounce we were in at about $0.45 an ounce. That's a good metric for us when you look at where producing silver companies trade between $5 and $10 per silver equivalent ounce, it really does highlight the fact that we need to keep allocating money to exploration around our existing mines, where we have existing infrastructure and resources because that's a great return on those dollars. Slide 17 provides some additional information on our growth in reserves and resources.

Although exploration at our existing mines is our preferred way to grow, there are three other paths we are pursuing for growth that I want to highlight quickly. One is through internal development of existing projects and our main development project as you know is the La Preciosa project in Mexico. We got that last year when we acquired Orko Silver. The feasibility study is moving ahead, we are still targeting mid-year this year, and we are seeing some opportunities to improve the economics compared to the PEA, despite the headwinds of higher taxes in Mexico and the lower price environment. We are encouraged there.

We also in terms of growth established Coeur Capital. Late last year we made an acquisition of a company called Global Royalty. And that, although a small contributor to the overall business right now, it is an attractive component to the business with the higher margins, the less volatility that comes along with those streams and royalties, and we see some opportunities to further grow that business. We are targeting more of the $3 million to $30 million kind of new opportunities to expand Coeur Capital. It is really attractive when you think about the margins that we see in Coeur Capital are over twice the margins that we see in the traditional operating side of the business. To the extent that we can continue to grow Coeur Capital, we think that is a good thing for the Company.

We are actively looking at acquisition opportunities. We see some good values out there, some interesting opportunities that come across our desks. It is important for us to look at our existing portfolio though, and really prioritize opportunities based on the impact that they have on our business. For us we are looking more in terms of anything significant, we are looking at current producing, current cash flowing opportunities, where we can add another operating leg to the table, which would provide us with some additional diversification, reduce our costs, increase our margins, hopefully further improve our geo-political risk profile. We are continuing to actively evaluate opportunities like that. Probably our lowest risk, highest return opportunities that we have inside our Company is Rochester, and further expanding that, and that is something that over the next 10 to 20 years is really going to be a cornerstone for the Company, and a key priority and despite having a disappointing end to last year, we remain very excited about Rochester.

I do want to take a couple of minutes to talk about Rochester's performance in 2013, and in the fourth quarter in particular. The fourth quarter was better than the third quarter, but we did not see the level of ounces out of the pads that we were expecting. One factor was the delay in getting permission from the state to begin leaching activities in the fourth quarter, and that all lead to us simply running out of time until the ounces began to flow out of the new pad. As part of our year-end activities we have reviewed and updated our own recovery models. We do expect to be more accurate going forward on the short-term forecasting. We have always been confident in the long term recovery curves at Rochester, but heap leach operations are not an exact science as you guys know.

That said we do feel good about our 2014 plan and guidance for Rochester, and as we go through the year and as additional ounces will build as more material is crushed, stacked and leached, which means production during each quarter this year should be higher than the preceding quarter, so we look forward to a good year, and that will really I think help round out our whole portfolio of mines, in terms of operating consistently and clicking on all cylinders.

Another operation I want to spend a couple of minutes on before wrapping up is Palmarejo. We did make a good decision there late last year to not complete the development and put the underground mine into production there at Guadalupe during 2014 here, given lower prices. It just wasn't the right economic decision. Until we move other ounces into the mine plan to offset those ounces from Guadalupe that we decided to remove, we are reflecting lower expected 2014 production levels at Palmarejo in our guidance, so based on the drilling that was done in the second half of last year and additional drilling taking place now, we are optimistic that we will more than offset these ounces in areas where we are already mining, particularly in the Tuscon-Chapotillo pit, and by extending our underground mining activities in the 108 Clavo. We are also looking at how we can mine certain higher grade sections of Guadalupe that would be economical at current prices.

So to wrap up, 2013 was a transitional year for our sector and for our Company. Over the past two years we have been upgrading this Company in ways that we believe will lead to the kind of consistency and performance that our stockholders demand and deserve. We have been working to instill a new mentality and attitude, new processes and systems to improve our execution, our planning, and that will help us better mitigate and manage risks as an organization. We have been pushing for greater centralization to ensure more consistency and standardization. We have implemented more meaningful and powerful incentive programs that reward performance and promote alignment around certain key priorities and objectives throughout all levels of the organization. And we are now starting to see the results of this work.

Other than Rochester's fourth quarter, we had a really good quarter and we are off to a really solid start here in 2014. So as a management team here we are going to continue to keep our focus on maximizing margins and cash flow, and on generating returns on all the investments we make, whether that's in people, exploration, new projects, expansions or acquisitions. Thanks again for joining us on the call today, and we will go ahead then and move to any questions that you have.

(Operator Instructions). Your first question comes from Michael Dudas.

Hey Mitch, and everybody, good morning. I commend your new outlook from the financials and how you are thinking about it. I think it's going to be helpful.

Thanks, Mike.

First I guess at Palmarejo, continuing your thought about some of the drills results to offset Guadalupe's removal, when we get a better sense of that, and is it a little too early to see that we can find some more ounces going into 2015 given some of the work you have done?

Yes, and Hans is calling in from Palmarejo, so feel free Hans to chime in, or Frank. We are as we speak updating our resource model, and our mine plans to incorporate all that drilling from late last year. It is, as you know, an ongoing process that never really does stop. But I do think here in the first half we will have some updated, an updated mine plan that will reflect even more drilling here in the early part of this year that we'll communicate, and that will give a little more visibility. And then as we go into 2015 and see the results of what we all think is a much better, more targeted, more strategic drilling plan at Palmarejo here at 2014. I think that is really when we will see some greater visibility in terms of the, and be able to communicate it externally, in terms of a longer term view for Palmarejo. Hans, I don't know if you have anything to add to that from Palmarejo.

Later in the year we will definitely have an update from Palmarejo. Right now we are looking at the program, and it is probably going to be the most focused program ever, in terms of taking multiple resource models, sitting down with multiple groups within Coeur and deciding actually where to drill. And out of our decisions here that are occurring now in Palmarejo we are focused on mainly the open pit, extending the life of the open pit because that's where most of the tons and grade are coming from right now. Then later we will work on extending the life of the underground. That's ongoing like you said, and updates will come later in the year. But the future looks really good right now in looking at the models and where we are going to drill.

I appreciate that. Second, two more questions. One, from La Preciosa, can you share some critical path thoughts, or what we have been seeing as we get closer to finishing the study mid-year? Is it more from a recovery capital productivity issues? And how much of an offset on the tax side is it being helped with the economics?

Joe, do you want to take that, and Peter if you want to chime in on the tax piece after Joe?

Yes, Mike, this is Joe. We have been having a lot of fun with the La Preciosa study here in the last couple of months. Everybody has talked a lot about the negative aspects of the new mining royalty, but there are actually some very positive things going on as well.

Mexico has open opened up the ability to generate electricity, and we found some very significant opportunities to save money on our power costs. We are very pleased with the results of our metallurgical studies and finding some ways to trim down the capital. We are quite excited about it.

And then strictly from a tax perspective, the tax does add some additional cost to our existing operation of Palmarejo and also La Preciosa measured in 2014, in the $2 million to $3 million range, and in terms of impact on La Preciosa. We are looking at ways to mitigate the impact the tax, things such as operating leases for the mining fleet and other areas, to address ways to reduce the impact of the EBITDA tax on La Preciosa, and [the] areas that will be more than offset by the benefits that Joe has identified.

Excellent, Peter, thank you. Mitch, one final quick question on Coeur Capital, how do you see it a year from now? Do you anticipate maybe getting more like royalty companies to acquire? Or do you anticipate you will see some opportunities that you will be acting on to increase the cash flows? It seems like a very interesting concept internally with the Company, and of course with returns you should want to make it grow pretty quickly? Thanks.

Yes, it is interesting, and it is a differentiator for us and our Company, an attractive and complementary business to the traditional mining side. We are focusing on cash flowing royalties that can have an immediate impact, and in a year from now I think this year, Mike, our free cash flow will be around $10 million out of Coeur Capital. I think it is easy to see it more than double in a year from now. In terms of current cash flow, there are some, with the challenging capital markets that we've seen, companies looking to obtain funding from Coeur Capital through the sale of a royalty or stream. We are evaluating those. It is not our number one priority, but it does give us another arrow in the quiver as we think about ways to expand the business and achieve higher returns. That's kind of how we view Coeur Capital.

Thanks, Mitch.

Sure, Mike. Take care.

Your next question comes from Chris Lichtenheldt.

Good morning everyone. I'll say the same. I like the silver equivalent cash cost and the transparency with respect to the royalty, et cetera. It is all very helpful. My first question is with respect to Kensington. Earlier this week you obviously released a significant, your reserve included a significant decline in the grade, reserve grade for Kensington. I'm wondering if you can help us understand a little bit what you will do or hope to do to offset the lower grades going forward in order to make that mine profitable?

Frank, do you want to take that?

Sure, hi Chris, this is Frank. The reserve grade that you see in our recently published statement is a reflection of ore that will be delivered to the mill, but also the development ore that meets the classification as a reserve although at a lower grade, development material that has to be moved to get out the higher grade material. As we overall pulled the reserve grade down incrementally year-over-year. Now that's what is encompassed in the reserve grade, and the tons involved, and as we mine and carry out our mine plans, though, we still target delivery of material to the mill feed point of a range between 0.18 and 0.19 ounces per ton.

And we have the flexibility to decide depending on actual development ore grade taken on a day-to-day basis, whether it is just wasted, or it can be stockpiled for future use. We have those options and we take full advantage of that as we carry out the operational plan for the mine. We actually have a development capacity or ability this year to move within the process facility a low grade stream of material, which really puts us in a position to be able to produce some of that what is lower grade development ore coming out of the mine. We are able to through a sizing step remove low grade material and ship that off to the site, and substantially upgrade the grade of material that then advances on to the flotation plant. We try to feed the mill at a 0.18 to 0.19. We are able to do a few things in the grinding circuit to remove a sub-economic grade of material which enhances the grade of what is fed into the flotation plant. We have been doing that, and doing this late in 2012. We expanded the capacity to do this in 2013, and have further plans to take further advantage of this going forward.

So when we talk about our four buckets of maximizing cash flow and one of them is revenue enhancements, this pebble reject circuit is a great example of a revenue enhancement opportunity. Fair to say?

That's right. It fits that criteria very well.

Okay, that helps.

Does that help, Chris?

Yes. That definitely helps. So the low grade material in Kensington is in the reserve because you have to mine it anyway? Is that part of the reason?

Well, we have to remove it to get at other ore, but it also met the criteria required to be considered a reserve. It is economic.

I'll leave that there for now then. Secondly, with respect to the Palmarejo reserve is there any Guadalupe in there, or should we assume you've removed all that now?

No, it is in there. With reserve prices of $25 and $14.50. That's economic in our reserve. That sits in the total Palmarejo reserve. We just chose not to prioritize those tons.

Would you be able to tell us how many tons and ounces?

I know it is broken out in the TR that we have filed. I don't have the numbers here handy. We can certainly point you to those.

Yes. We can dig it out then. I appreciate that. Then my last question quickly here on Rochester in the third quarter you mentioned part of the issue is the permitting, et cetera. I do recall from the last conference call, I think there was a lot stacked at the beginning of Q4 that I guess we have to assume didn't produce as expected. Can you give us a little color on what the leach cycle actually is there? How much of your recovery you achieve in the first month or three months, based on what you previously expected?

Sure, we have a recovery profile which tells us that over an 18-year period our maximum recovery for silver will be 62%. We backed away from that very long time frame into the near term, in the first year of leaching of crushed material we averaged a 45% recovery rate. Any incidental run of mine material that we put out there would recover at about 35%. That's in our one-year time frame. And then it is about a 60 to 90-day cycle that we need to time our movement of solution to fresh ore after breakthrough has been achieved. That's when we know that the pregnant solution grades will decline, and it is sort of how we manage things in the near term. Month-to-month, actually quarter-to-quarter. Those are the relative timings that we work with.

How are those different for gold?

Gold recovers very, very quickly. We have an ultimate recovery of gold of 92%, that all takes place within probably the first six months of leaching that we have it under leach. It is nice to get the gold out more rapidly.

That is great. I will leave it there. Thanks a lot.

Thanks Chris.

Your next question comes from [Craig Johnston].

Hi there. All my questions have been answered. Thanks.

Great, okay.

Your next question is from John Bridges.

Hi, Mitch, everybody.

Hi, John.

Thanks for the results. Just wondered if we could dig a bit deeper into the disconnect at Rochester on the recovery. You mentioned the delays with permits and that sort of thing, but is there something else happening there which is new and affects the outlook for the operation?

No, John, this is Frank. It is a combination of things that went on there late last year. We had a number of construction projects underway. The key one that opened the door to begin leaching on fresh ore was completed at the end of the third quarter. We began leaching the material had been stacked over a two to three-month prior to that on October 1st. That was all related to phase one of the expansion. There was a phase two which included increasing capacity on that leach pad up the side hills of the valley that it is nestled in. You can envision that heap leach pad, that area that we filled in with ore and also began leaching on during the phase two of the project is sort of like a horseshoe shape. We were able to get a substantial volume of ore placed in there in the fourth quarter, and under leach as we sequenced with the environmental permit timing and cycle.

There were some short-term delays in receiving these permits, but generally we did pretty well. It was really just that volume of ore that was placed behind the buttress, which ties to what we call the phase one expansion and its depth, that we have to know to rely on when will it breakthrough and start to report to the process facilities. That time was a bit longer than we had expected. We did get pretty rapid breakthrough in those thinner sections that went around that horseshoe I am trying to describe. We did get a nice bang out of that, but it was offset by the center of mass for the whole pad which was the central core, and it was producing but at lower grades, and volumetrically it kind of diminished the effect that we got out of that horseshoe.

Okay. Well, you have a much bigger reserve to go out there, so it's going to keep you busy for a few years.

It will.

Thanks a lot, guys. Good luck.

Thanks, John.

Your next question comes from Andrew Kaip.

Hi, Mitch.

Hi.

Look, I've just got a question on the corporate level. Last year's corporate G&A escalated quite rapidly with the move to Chicago, and now you are forecasting somewhere in the $43 million to $48 million range. How should we expect that to flow? Should it be slightly higher in the first half of the year and then declining, or do you think you're going to see it stabilize and be pretty constant through the year?

Andrew, it is Peter. Our anticipation is that's going to be pretty level loaded through 2014, certainly the impact, the drop from 2013 to 2014 relates to having completed the move at the end of September, as well as some other costs that were in 2013, some legal expense and consulting expense and some related to the transactions that were completed and the move itself as well.

To add to that, Andrew, it's Mitch here. Without a doubt last year as we saw a lot of companies cutting back G&A, and we were going in the opposite direction. That can lead to a little bit of an unsettling feeling, but I just really feel confident and I think as we get here into 2014, we are seeing the benefits of having a corporate office that is well designed to support the kind of Company that we are. For years we didn't have that. For a lot of unique reasons going in the opposite direction than a lot of companies last year is exactly what we needed to do to just kind of play catch-up from an organizational standpoint.

I think if we really want to have the kind of consistent results, better planning, better execution that we all want here at this Company, we need exactly what we have in place now. You look at it on a G&A as a percent of revenue, I think now we are finally in the kind of middle of the pack. Whereas before, I think we were running too lean and without the kind of resources and skills that a company like ours needs. I think what we have done in 2013 has really put us in a position to be the kind of Company we want to be going forward.

Right. At certain times when you ramp out an infrastructure, you probably ramp to a larger capacity than what you think. Do you think that there are potential savings within your corporate organization that you will be able to realize over the next couple of years?

For sure we have put ourselves in a position to be very scalable. So as we grow, G&A doesn't need to grow now, and that is part of the plan, so I think from that perspective I do see on a relative basis, or on a percentage of revenue basis it would decline as we grow, as we plan to. If we were in a price environment that required us to go the other direction, sure we could pull in the horns a bit if we needed to. I am really sensitive to cutting into the bone and putting us in a position to where we lose the ability to run a highly efficient and quality company. I think putting in place what we have now and staying with it, and focusing on how we can drive more efficiencies out at the operating level, and in the projects, and in our planning, that's where the savings is really going to come.

Thanks very much.

Thanks. See you.

There are no further questions at this time. I will turn the call over to Mitch for closing remarks.

Okay, well we appreciate you taking the time. Again, I know you are busy. As I think you have heard from all of us, we are excited about the year ahead, and we will remain focused on operating our mines safely, and continuing to reduce our costs, and delivering on our guidance and the expectations that we have set.

We look forward to updating you as our progress advances over the course of the year. Thanks again for your time this morning.

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