Coeur Mining Inc (CDE) 2014 Q2 法說會逐字稿

Good morning. My name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2014 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. Bridget Freas, Director of Investor Relations. You may begin your conference.

Welcome to our second quarter earnings conference call. There are slides available on our website to accompany today's remarks. Please review the cautionary statements and the risk factors in our latest 10-K and 10-Q for risks and uncertainties that could cause actual results to differ from any forward-looking statements made during today's call. Joining me are Mitch Krebs, Peter Mitchell, Frank Hanagarne, Joe Phillips, and Hans Rasmussen. Mitch, please go ahead.

Thanks, Bridget. Good morning, everyone; thanks for joining us. You'll recall that we reported our production results on July 8 which were on track with our budgeted levels. I think our second quarter financial results we've put out yesterday provide a lot of evidence of the progress we are making here at Coeur Mining.

Before we go to Q&A, I'd like to quickly touch on three areas we're particularly focused on and those are consistency in our operations, cost reductions, and cash flow.

On consistency, we continue to see more consistent and stable results from all of our operations in the second quarter. Palmarejo showed higher grades, fewer tons, higher recoveries, and fewer production ounces, with higher cash flow, all as planned. Rochester showed higher production and cash flow as planned. San Bartolome showed more consistent production and higher cash flow. Kensington also showed higher production with greater consistency.

On cost reductions, we delivered lower year-over-year cost across the board. All-in sustaining cost per silver equivalent ounce were down nearly 6%, CapEx declined 44%, G&A was down 37% and Exploration was down 24%.

A few other points I want to make quickly on our costs. It's important to note that Palmarejo's second quarter cost contained an annual workforce bonus payment of about $4 million which equates to about $1.00 per silver equivalent ounce. So if you back that out of our second quarter results, costs would have been around $13.00 per silver equivalent ounce.

At Rochester, our cost applicable to sales are obviously impacted by leachpad inventory variations. If you just look at our cost there on a cash basis, before inventory variations, our mining plus processing plus G&A costs were down 24% in the second quarter compared to the first quarter.

And at Kensington, our costs were flat, but are expected to now decline in the second half of the year to the mid $900 an ounce range due to higher grades in the mine plant.

And then, thirdly, on cash flow, these lower costs translated into higher cash flow despite lower silver prices. Cash flow from operating activities increased $40 million from the first quarter to just over $30 million. Free cash flow generated by our five producing assets totaled $22.5 million in the second quarter, the highest level in a year.

Based on our performance through the first half of the year, we've reduced our 2014 full-year cost guidance and we've tightened up our full-year production guidance ranges for both silver and gold. I also think we were able to check off some important priorities since our first quarter earnings call back in early May. The 48% increase in Rochester silver production, the 13% increase in its gold production and its jump in cash flow in the second quarter I think were all important data points that show that the mine is well on its way to a great year.

We also successfully negotiated terms for a new gold stream agreement with Franco-Nevada at our Palmarejo mine in a way that will significantly improve that operation's free cash flow going forward. We've provided a re-scoped mine plan for Palmarejo, like we said we would. It reflects our Company's priority to maximize cash flow versus maximizing the number of ounces that are produced. It also reflects the decision we made during the quarter to complete the development of the Guadalupe underground deposit, which contains over half of Palmarejo's total reserves.

The plan we laid out through 2021 includes a portion of our current reserves at both Guadalupe and Palmarejo as well as a select section of high-graded [furred] material at Guadalupe. This mine plan forecasts lower throughput, but higher grades, higher recovery rates, and lower costs than we've achieved at Palmarejo in the last year. We will further update the mine plan for Palmarejo at year-end, which will include drill results from the second half of last year and the first half of this year.

I think we also demonstrated during the quarter, our commitment to selectively deploying stockholder capital. The decision to complete development of the Guadalupe deposit at Palmarejo is a great example of this. Despite the importance of Guadalupe to Palmarejo's future, we made the call last year to stop that development work when we could not see a way to generate an attractive rate of return. We are only now deploying capital into Guadalupe after we were able to negotiate new terms that we expect will reduce the burden of the Franco-Nevada gold stream there, generated a less capital-intense development plan for Guadalupe and create a more robust re-scoped mine plan that focuses on selective mining of higher-grade material. Having Franco-Nevada contribute $20 million of their capital to get Guadalupe into production also helps boost returns for our stockholders.

Another good example is our decision we announced last week to defer construction of the La Preciosa silver-gold project in Mexico. We announced the results of the feasibility study last Wednesday. Although the project is a better one now compared to the PEA we put out last year, we're in no rush to build the project in a price environment that would allow us to grow production, but that wouldn't result in any value accretion to our stockholders. At a 10% rate of return, based on a $22 silver price and a capital requirement of just over $300 million, we are comfortable to wait until a point when we are confident that we can realize a higher return for our stockholders and when we have sufficient liquidity in place to fund construction. We plan to continue limited drilling and some optimization work there with the intent of further improving the project's economics.

Overall, our liquidity position remains strong and steady. We ended the second quarter with $317 million of cash and equivalents, about the same level that we had at the end of the first quarter. Net debt was approximately $163 million at June 30.

With the decision to hold off on La Preciosa announced last week, we're now focused on how best to manage this liquidity on our balance sheet. We recognize that our cash balance has a negative carry associated with it. We don't feel pressured to do something just for the sake of doing something. High liquidity in times of weak and volatile silver and gold prices is not the worst thing in the world and being well positioned to take advantage of opportunities that may arise to strengthen the Company is not such a bad thing either. In the meantime, we continue to evaluate and pursue modest-sized capital investment opportunities with quick paybacks at our existing operations.

So just to wrap up, I think we're doing a very good job of executing on what we said we will do so far this year. We're meeting and beating our production and cost targets, we've delivered on some key initiatives during the past three months. Our operations are performing much more consistently and we're positioning each of our operating mines for long-term success with a focus on stability and on squeezing as much free cash flow as we can out of each asset and we have the flexibility to take advantage of opportunities that may arise, that can strengthen our Company and our overall asset portfolio.

With that, let's go ahead and take any questions.

(Operator Instructions) Jorge Beristain, Deutsche Bank.

Good morning, Mitch and everybody. I guess, my question is just really on La Preciosa with the results from the [pre-fees in] and it's I guess uneconomic at this silver price juncture, would there be any accounting requirement toward the fourth quarter to take a write-down on the money spent on that project so far? I know you're still I think using about a $25 silver price for your cut-off. So, I just wanted to check the sensitivities, and if there has been a kind of triggering factor determined by your accountants there in terms of taking a write-down?

Hi, Jorge. it's Peter Mitchell. The answer to that question is, we will review it at year-end. There's certainly no requirement to do so, but we review carrying value of our mineral interest assets every quarter and we will review it at the end of the third quarter as well as the fourth quarter and make a determination at that point.

Thanks, Peter. Are you still using $25 an ounce as your cut-off price?

Well, the feasibility itself was done at $22 silver and $13.50 gold. Our reserves have not been updated since the end of last year and $25 was the price done on our reserves.

So, yes, thanks. I was asking what the reserves. Okay, thanks very much.

No problem.

Chris Thompson, Raymond James.

Hi, guys. Thanks for taking my question. Just two quick questions, just on Rochester, could you just provide a little detail on unit costs? I'm really what I'm looking for is cost per ton, I guess from a mining perspective and a processing perspective, and also G&A?

Yes, Frank?

Sure. Hi, Chris. This is Frank. In our open-pit mine, we're going to range a little above $1 here in the short term. I think over the long term, we'll be somewhere near $2 per ton as you look forward. Processing cost will be around $3.50, return on material placed.

Okay. And the G&A there, Frank?

G&A is less than $1 per ton.

Okay, alright. And I guess just moving on to Kensington very quickly, we have you I guess processing what is it, what about 1,600 ton a day, I guess metric ton a day at the moment from that facility? I know you can do more. Is there a plan to increase that once you feel more comfortable, I guess at the mine plan? My sense is you do.

Yes. We are currently mining and processing around 1,800 tons per day on average. Those are imperial times and we're pushing to see where we can get as close to 2,000 tons per day. At the same time, we're evaluating our plans to see if there are any opportunities to have produced good economics at levels even higher than that, but it's very premature, our work in that area right now.

Okay, perfect. Okay, guys, thanks a lot.

Yes, no problem, Chris.

Michael Dudas, Sterne Agee.

Good morning, gentlemen; Bridget.

Hi, Mike.

Mitch, about sustaining capital and you've done a pretty good job of [using it will] go out this whole month. Level of sustainability, these other some rate of return positive, capital [depending] that make the -- has been budgeted yet say for the second half of the year or (inaudible) where you have for 2015.

Mike, I had a hard time hearing you, but I think I heard sustaining cash flow levels which I think for the full year this year is somewhere in the $50 million to $60 million range. As we look forward, next year, that's a pretty good number just directionally. Most of that is obviously underground development at Palmarejo as well as at Kensington. We do now obviously have the Guadalupe development ramping up here in the second half of the year and I think we have what is it, Frank, about $8 million in the second half of this year. Plan to spend on Guadalupe underground. Does that get you what you're looking for, Mile?

Yes, that is, Mitch. And my follow-up question would be, with that net cash balance and the decision to defer La Preciosa, maybe you could remind us what your thoughts are relative to opportunities with some of the minority interest levels that you have and is the market -- are you seeing opportunities where the market might be coming to you here, now that you've made that decision and have some chance to put some capital to work [prudently for us]? Thanks.

Yes, yes, good question. We have as you mentioned quite a range of holdings in some non-producing companies where the valuations are probably the most attractive relative to the kind of other areas on the spectrum from especially on the producing cash flow generating side. Those seem to be priced almost as if there is an assumed transaction and you can't really see an attractive return on the few properties and few companies that are out there generating ounces and cash flow right now.

The development-stage area is where you will see more of the 0.5 P to NAV and below valuations, some distressed companies in terms of their own liquidity positions. And those are the situations that seem to come across our desk with more frequency, here recently. We're very mindful there that building up a big wall of capital requirements as we look ahead is not something that we want to do. We're very mindful of sequencing out any capital requirements in the future, but if something came along that could represent a very high rate of return relative to other uses for that capital, we'd obviously take a real close and hard look at it to see how it could fit into our overall profile.

In the meantime, allocating capital to things like a Rochester expansion that will be coming up here, again on the heels of some permit completion, hopefully in the second half of next year. Every time we build a new leach pad out there at Rochester, that's a high-double-digit rate of return and just a terrific use of capital, but if we can find some things externally that we could slot in, that get us some outsized returns, we'll obviously take a look, and there aren't those kinds of opportunities out there, but some of them are cheap for a good reason, but there are others that I think are unique and we take a look at a lot of those kinds of things.

Thank you, Mitch.

Yes. That's all, Mike.

John Bridges, JPMorgan.

Morning, Mitch, everybody. And --

Hi, John.

Just wondered La Preciosa, are there any holding costs that we should factor in going forward?

Yes, there is about a $2 million a year holding cost between land, some minimal community administrative ongoing cost, but it's right around $2 million a year. And there is no limit there. I mean as far as anything we have, we think we're not pressed for time in terms of there being some deadline in the next year or two or three or four. So we can hold that thing together for about $2 million a year going forward.

Okay, fine. There's no underground option just to go after the higher-grade material that might work?

Yes, actually, we looked real hard at that during the feasibility study, John. And Joe, you're on the phone, do you want to comment on that?

Yes, that's a common question. There are some higher-grade zones. Our ongoing concern has been the difficult structure and low Rock Mass Index that we think would make underground mining costly and maybe dangerous.

Right, right. Yes, I know it didn't look at before, but then it seems to be the flavor of the month to go underground and go after the high grades. And then, coming back to your previous answer on your Rochester question, a dollar a ton mining cost. That's presumably a mix of the stockpile reclaim and a little bit of mining or is any mining in there at all?

John, this is Frank. It's a mix of stockpile and we're mining in our open pit right now. We resumed mining in the open pit earlier this year and at the moment, we are 100% in that open it. So we'll be back into the stockpiles in our plan a little bit later this year, but that reflects what we anticipate as an average cost for both ore sources.

(multiple speakers) Let me just jump in there for one second, I should have done it maybe after Chris raised it too, just -- I think it's important to note that those mining costs per ton, you go back to the first part of last year, and that number started with a three. I mean that was over $3 a ton. And so, the guys have done a really good job of just being more efficient there and getting those costs per ton down to the levels that we're talking about today. So they've done a really good job, I just wanted to flag that. Sorry, go ahead.

No, that's amazing. And so, the dollar a ton estimate, is that for mines? I'm sure is that the mix that you expect?

Well, first of all, let me clarify something, I referred to $1 on G&A costs.

Sorry, I heard $1 on the mining.

No. We'll be probably closer to between a range of $2.00 and $1.50 per ton on the open pit mining.

Okay.

And it will be between, say, $3.75 up to $4.25 per ton for processing.

Okay, got it. Sorry about that. And then, just finally, you started the loyalty business a year or so ago and it probably falls within your earlier answer to buying purchase opportunities, but just wondered what your thought was specifically to royalties and then how the ones that you [port] already are doing?

John, it's Peter. The royalties that we have are doing okay and the portfolio has worked out. Two of them obviously within our organization already into where as a result of their Global Royalty Corporation acquisition that we did. And in terms of opportunities that we're seeing, they tend to be more on the development side than the cash flowing side, but we continue to look and source opportunities. And to Mitch's earlier point, as we look at opportunities, we really have to look at them in contrast to our cost of capital and ensure that new ones will generate significant returns for us over that cost of capital, and that's been a limiting factor on some of the opportunities that we've had a chance to look at over the first six months or eight months of our operation.

Okay, (multiple speakers).

John, just to add to that, I think -- I don't know if you've seen what Mandalay has put out recently on Cerro Bayo which obviously is an asset we used to own. That one's doing really well. And then, El Gallo continues to do well down there in Mexico, and those are two key components to the portfolio. But those guys are doing a good job there at Cerro Bayo.

Could you flex those onto to us sometimes because I'm not on the name list for that, it might be helpful just to [say] things like that.

Yes, yes, absolutely, we'll do that.

And (inaudible) proving up the underground at Guadalupe here this year and look forward to seeing what that looks like. Thanks a lot, guys.

Yes, yes.

Thanks, John.

Andrew Kaip, BMO.

Good morning, guys.

Hey, Andrew.

Hi. Hey, I've got a question, I've noticed that your pre-development/care and maintenance in your P&L has trended upward fairly significantly this year and can you give us an indication of what we should be expecting through the remainder of this year it's been? And what those expenditures relate to and then maybe looking into 2015 as well?

Yes, it's almost all in the first half, the La Preciosa feasibility study.

Okay.

There's also a little bit of Argentina and Martha-related care and maintenance, that is the only piece of that line that will continue into second half of this year and into 2015. And I think that's maybe on an annualized basis couple million dollars, at most.

Should we expect a La Preciosa care and maintenance to show up in that line item as well?

Yes, good point. I've got people nodding their heads at me, Andrew, that's right. So that, call it $2 million annualized holding cost would be in that line there going forward.

Okay. And then, are we going to see any costs related to Guadalupe development in that line item through the remainder of this year and into 2015?

That will all be capitalized.

Okay, great. That's perfect. Thanks very much.

Yes, no problem.

Matt Vittorioso, Barclays.

Yes. Good morning and thanks for taking my question. I guess just want to dig into the cost guidance a bit more. Certainly appreciate the reduction in the overall annual cost, but by my simple credit math here, you're still anticipating an uptick in the second half of the year. And I'm just trying to understand at which mines, should we be modeling higher cost than we saw in the first half or is there any meaningful difference between sales and production? I know you said that Kensington costs are coming down. So just want to better understand where the higher costs in the second half are coming from?

Yes. Hopefully, we'll continue tracking as we have through the first half of the year relative to that guidance and we can take another look at that as we go through the second half of the year, but I do think where we'll see higher cost applicable to sales is at Rochester on just a dollar basis given the expected continued ramp-up there in ounces coming off off the pad. I think on a per-unit basis there, we'll stay in that kind of $14 an ounce range for the full year at Rochester, but in terms of just aggregate dollars, that will be a contributor and to a certain extent as well, San Bartolome, again based on a higher throughput in the second half, would see relative to the first half of the year higher total costs applicable to sales, but again pretty flat on a per unit basis. And you're right. Kensington, on a unit basis, I mentioned, we'll see that lower due to the higher grades, but as Frank alluded to these higher tonnages that we're putting through the mill up there will also see higher dollar spend to go along with that, but again on a lower cost per unit driven by that grade.

Okay, that's helpful. And so, at Rochester then, just so I am clear in my own model here, so I think the production guidance is what 4,100 to 4,400 ounces there. Is sales expected to be meaningfully different from that production guidance? And at this point being halfway through the year, do you see any visibility to hitting maybe the higher end of that target? Thanks.

Yes. Our sales and production should be the same there at Rochester. In terms of our ability to hit the high end of the range at Rochester, I'm looking at Frank and sort of smiling, but I'd like to think that we could. Obviously, we'll see how the second half goes, but if we keep on track with our internal budget, we should be closer to the high end than the low end on Rochester.

Okay, thanks, again.

May I add a comment to that? We're comfortable in the range of guidance that we provided, but we're currently executing a mine plan this year that, as I said before, we're back in the open pit and we're targeting better gold rates there and we are seeing that start to flow through very nicely and you might have noted a little change on the gold guidance there as well, Matt.

Great. Thanks, Frank.

Adam Graf, Cowen.

Thanks, guys. Just getting back to the grade and throughput at Kensington there, I think prior numbers I had had lower throughput although I did have the grade increasing, maybe you could give us a little more color on how that's going to balance if you guys -- what's the path to averaging 2,000 tons today on a full-quarter basis and then what is the fully diluted head grade that you guys can maintain with that throughput?

Yes. I think the second quarter at Kensington, Adam, was around 1,800 tons a day. There is some upside to that although I think maintaining 2,000 tons a day on a sustained basis is not likely, but balancing between 1,800 and 2,000 throughout the second half of the year is what we expect to see. And on the grade side, I think first quarter was 0.17 ounces per ton; second quarter was 0.18. We'll see some improvement there, not a quantum leap, but I think to get to the 0.2-ish level in the back half of the year, would get us to where we are expecting to see in terms of ounces and costs on a unit basis.

And I would add to that, Adam, that the target to the end of the year is 0.18. So we're basically executing according to our plans at this point. We're pushing the tonnages up and trying to maintain higher average daily rates at all times. But those are mine grades and there's a feature that we're employing in the mill that helps us increase the grade of material that's actually fed into the flotation circuit and we get from this [math to kick] anywhere from 10% to 15% additional grade going into the actual recovery circuit. And we've been doing that for quite some time. So it's not just the 0.18 that's going on there.

And then, just for clarity, the throughput, the tons per day that we're talking about, that is on a calendar -- it's not on an operating quarter day, that's on calendar days. So you're accounting of every day of the year, not just the operating days that the mill is running?

That's correct.

Okay. I just want to make sure we're all on the same page. Thank you, guys, for the color. Appreciate it.

Thanks, Adam.

David Barilla, JPMorgan.

Hi, guys, how are you doing?

Hi.

Just a quick question on Rochester, there's quite a lot of volatility in terms of the amount of tons that you put on the pad. I'm just wondering what is the reason behind that and how should we look at that going forward.

Can you repeat it?

Yes, I couldn't hear the --

The volatility in terms of tons going out to the pad.

Yes. And --

(inaudible).

Well, we're seeing very little volatility now which is one of the great achievements we've been able to accomplish over this year and going back into last year. We're getting very stable, mining supplier board to our crushing plants and performing very well there with our crushing and delivering a very consistent tonnage and grade material out to the pads. So in my view, there is very little volatility in that. Now that we've achieved that, we're trying to find ways to optimize that somewhat taking advantage of short-term increases of volume and so on.

So on that 3.3 million is about what you're thinking about sustaining going forward?

3.3 million a quarter?

Yes, I think in 2013, we did 12.5 million tons. This year, we should be somewhere around 14 million tons for the full year and that's a key driver then as we look out over the coming years as to eventually get that up to close to 20 million tons per year as we can and then back to the point at which we see Rochester really becoming our largest asset in terms of ounces produced, both silver and gold and cash flow as well. And that's kind of the direction we're trying to go and obviously the permitting that we're advancing on is a part of that process to ultimately get up to those kind of crushing rates.

Right. Thanks for that, guys.

Sure.

(Operator Instructions) Andrew Kaip, BMO.

Sorry about that. Mitch, I've got one more question. Just on your G&A, ex the stock-based compensation, your corporate costs have come down quite aggressively Q-over-Q, and I'm wondering what should we be forecasting on a go-forward run rate for your corporate overhead?

Yes. Second quarter is a pretty good run rate for quarters going forward.

Okay. Alright. Thanks very much.

Yes.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Well, hey, thanks for taking the time to dial in today. We're encouraged by the progress we've made in the first half of the year and we look forward to speaking with you again either at our Investor Days in October and in New York and Toronto or at the very least November to discuss the third quarter results. So thanks, again.

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