Coeur Mining Inc (CDE) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Coeur Mining first-quarter 2015 financial results conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Bridget Freas. Please go ahead.

Welcome to our first-quarter 2015 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 today.

Mitch, please go ahead.

Thanks, Bridget. I can't think of a company that's been more active than we have so far this year. We've had a lot of significant developments. We closed two important acquisitions that should generate solid returns, reduce our costs, and boost our cash flow.

The acquisition of the Wharf Gold Mine in South Dakota should lift the Company's cash flow this year by 30%, and further weights our overall country risk profile more toward the US and, as our fifth operation, it brings better balance to our portfolio of mines. And then we recently completed the acquisition of Paramount Gold and Silver a couple of weeks ago, which consolidates a high grade deposit previously split by a property boundary, and adds six other silver and gold deposits next door to our Palmarejo operation in Mexico.

The combined high grade deposit, called Independencia, will become a second source of high grade underground ore to supplement the rising production levels from the nearby Guadalupe underground mine. And it only requires about $15 million or $20 million of capital and another eight months or so to get it into production. We see Palmarejo becoming our lowest cost and largest mine during the next 18 months, with all-in sustaining costs heading toward $10 an ounce, once mining from both deposits gets ramped up to over 4,000 tons a day, about half of that coming from Guadalupe and about half of that coming from Independencia.

On the heels of closing Paramount, we announced an updated reserve for Palmarejo. We saw reserves increase by 89% and gold reserves up by 76%. Nearly 80% of these new reserves are from the assets we acquired through the Paramount transaction at a silver grade that is 31% higher. Palmarejo's reserves now total 54 million silver ounces and 876,000 gold ounces.

Compared to just 15 months ago, when we kicked off our transition plan at Palmarejo, silver reserves have increased 30% and gold reserves have increased 54%, despite using much lower metals price assumptions. Most importantly, the average silver reserve grade has increased 32% and the average gold reserve grade has increased 55%.

And then last month, we introduced a re-scoped mine plan for our Kensington Gold Mine that reflects the impact of the high grade and growing resource at the Jualin deposit. We plan to start development of an exploration drift over to Jualin this summer at a cost this year of around $6 million, and then start drilling the deposit from underground.

Once production from Jualin is up and going for a full year in 2018, our total production is expected to be about 149,000 ounces at a cost of about $730 per ounce of gold. Compared to last year, that's a 34% increase in production and a 23% lower operating cost, driven by 25% higher grades.

Recent drilling results suggest considerable upside to the mine plan, with the potential to grow the resource at Jualin, and make 2019 and beyond look similar to the production and cash flow profile we are showing in 2017 and 2018. The resource at Jualin is over three times the current average reserve grade, and represents only a portion of one vein out of five known structures that are sitting stacked on top of each other.

As far as highlights from the first-quarter results we issued last night, our all-in sustaining costs dropped 8% to $17.66 per silver equivalent ounce compared to the fourth quarter. And for the primary silver mines of the group, production costs were $13.71 per silver equivalent ounce, which were down 5%.

Rochester was able to reduce its cost 6% down to $12.95 per silver equivalent ounce and generated $13 million of free cash flow during the quarter. That's the highest since back in the fourth quarter of 2012, when silver averaged a little more than $32 an ounce and gold was just north of $1,700 an ounce. Despite all the changes taking place at Palmarejo this year, the mine managed to reduce its cost by 7% in the quarter to $14.56 per silver equivalent ounce. And Kensington averaged a bit higher grade during the quarter, which resulted in costs of $797 an ounce and solid cash flow of $8 million in the quarter.

Overall, the two acquisitions, the new plans set out for Kensington and Palmarejo, and Rochester's continued growth, are the key components of our overall strategic plan that's expected to result in 30% higher production levels, and all-in sustaining costs in the $14 an ounce range, that should lead to very strong free cash flow starting late next year and into full-year 2017.

From our perspective, there are two priorities that are critical to our ability to deliver these results. The first one is keeping our eye on the ball and continuing to execute the way we've been doing, which means maintaining our primary focus internally, not externally. Clearly, we have a full plate right now.

And then, the second one is ensuring we have sufficient capital plus a comfortable buffer to fund the key initiatives to get us to where we are trying to go with the Company, especially in an environment of weak and volatile silver and gold prices. And we have a few simple principles that we are sticking to on this.

The first is maintaining flexible and patient capital structure. And by that, we mean minimal covenants and restrictions, and long-dated maturities for the bulk of our existing debt. The second principle is keeping a short-term priority on liquidity versus deleveraging. As we see it, with significant free cash flow expected to start kicking in late next year and beyond, there's plenty of time for us to prioritize deleveraging. Until then, liquidity and flexibility matter more to us.

The third principle is maintaining a stockholder-friendly and non-dilutive approach and mentality toward any outside sources of capital. And we place a really high priority here on the per-share impact of any financial decisions we make.

And then fourth and finally, and maybe most importantly, we place a high priority in trying to first unlock and free up liquidity from inside the business before relying on any external capital market alternatives. And there are five main angles we are always working to accomplish this.

First is in the area of capital expenditures, both the amount to be invested and the timing of those investments. We are constantly evaluating scenarios and opportunities to shift the timing of the capital we plan to invest over the next couple of years at Palmarejo, Rochester, and Kensington, in order to balance our liquidity needs with the objective of not disrupting the strategic direction of these important assets, and the high returns we expect to generate from these investments.

The second area is obviously operating costs. We should see lower operating costs this year at each of our mines with the exception of Palmarejo, which is in a big transitional year, as it sets itself up to be a low-double-digit, all-in sustaining cost operation starting late next year.

Although we have costs heading in the right direction, we are still pursuing anything and everything we can to accelerate this downward trend. Areas like process improvements, maintenance practices, efficiency enhancements from larger-sized equipment, for example, are areas receiving a lot of attention here. And then obviously paying $0.85 a gallon less than a year ago on the 12 million gallons of diesel we expect to consume this year helps. Then having a Mexican peso at over [$15] helps too.

A third area we work hard on is working capital. We are pressing very hard there to reduce supplies inventory, improve maintenance downtime, narrow the lag time between production and sales to keep as little cash tied up in the operations as possible. We also have substantial VAT receivable balances in both Bolivia and Mexico, which can be the source of tens of millions of dollars in cash this year for us.

We also focus very hard on nonoperating costs. This year's G&A exploration and predevelopment costs are on track to be lower than last year. But we keep pushing hard to reduce those expenses as much as we can without undermining our strategic objectives.

And then the fifth and final area are just looking at our portfolio for any opportunities to monetize noncore assets. And we are always evaluating the assets in our portfolio to determine what we might have that isn't a critical component to our strategy, and we may look to monetize those, assuming someone is willing to pay an attractive price.

What excites me more than anything is the fact that our strategy is designed to build equity value, irrespective of what silver and gold prices do. If metal prices happen to go up, that would obviously be great for stockholders. But if metal prices stay where they are, or even decline, we should still be a significant generator of free cash flow starting late next year, with a very low and sustainable cost basis.

So as you monitor our performance during the remainder of the year, there are a handful of key milestones you should watch for. At Palmarejo, there are obviously a lot of moving parts. You should watch to see that we get the mining rates at Guadalupe up to 1,500 tons a day in the third quarter, on its way up to 2,000 tons a day next year.

Also, you should monitor our development rates over to Independencia. We should get over there around year-end, and start getting that deposit ready for mining during the first part of 2016. Our drilling results from Guadalupe, and from targets located in between Guadalupe and Independencia, are also important to monitor, as we expand and extend and try to further enhance the life of mine plan of Palmarejo.

And with the amount of process improvements we've made to the plant there, you should also monitor our recovery rates during the balance of the year to make sure they are increasing. And then, finally, at Palmarejo, you should watch for open pit mining to end in the third quarter of this year, and underground mining in the old Palmarejo areas end around year-end.

At Kensington, as I mentioned, we'll spend about $6 million this year on Jualin development, in addition to about $10 million on underground development at the main Kensington deposit. At Rochester, you should watch to make sure we are seeing the full-year impact this year from the higher mining and crushing rates on both our production levels and unit costs, like we did in the first quarter of this year.

And then at Wharf, you should monitor our second-quarter results, since it will be the first quarter where we'll be showing sales and cost and cash flow from that mine. Our guidance for the 10 months or so of this year where we'll be the owners of Wharf is weighted more toward Q3 and Q4, but Q2 is -- will be the first quarter where we'll show the financial results from owning Wharf.

As we sit here now in May, I see us doing the right things, doing the things we said we'd do. The Company is definitely heading in the right direction, but we definitely need to stay focused on our plan, on the things we can control and remain disciplined. And if we do this, we believe our stockholders will be well-rewarded over time.

So, with that, I'd be happy to take any questions.

(Operator Instructions) Arjun Chandar, JPMorgan.

Can you discuss the evolution of your liquidity position following the end of Q1? Also, what is the minimum amount of liquidity you need to run the business? And what levers do you have to pull to manage the balance sheet in the face of anticipated near-term cash flow pressure as you ramp up towards that 2017 date?

Peter, go ahead.

Yes. Just a general evolution of the liquidity position, the big uses aside from operations were the acquisition of Wharf for $102 million. And then we drew down the bridge loan at the end of the quarter for $50 million to mitigate that. And that takes us to the $180 million level that we finished the first quarter at Arjun.

And then your question about minimum liquidity that we look for in the Company to run the business, traditionally, we've said $100 million. Candidly, in the environment that we are in right now, with the expansion plans that Mitch outlined over the next year and a half, I would bump that number up to $150 million. We need to keep a solid buffer through this time period. So, that continued focus on liquidity is something that we are very focused on at this point.

And Arjun, just to circle back to my comments on -- to address your question there around the levers, and our priority is first looking inside the business to see how we can free up liquidity. I mentioned CapEx, working capital; obviously anything more we can do on operating costs, G&A, and potentially any noncore asset sales. So those are kind of the five levers that I feel like we have our hands on at any given time.

Does that answer your question?

Yes. Yes, that clears it up. Thank you very much.

Craig Johnston, Scotiabank.

Thanks for taking my call. Yes, most of my questions related to the balance sheet. But just also wanted to assay what you are looking at in terms of predevelopment expenses going forward into 2015 and then even beyond into 2016, 2017?

Yes, sure. Hi, Craig. I think for the full year, predevelopment should be around $10 million. The biggest chunk of that this year under US GAAP, we need to expense deal fees. So, I think $6 million of that $10 million relates to deal fees for the Wharf acquisition and the Paramount acquisition.

Included in that $10 million as well is about $2 million or $3 million of holding costs for La Preciosa and for Joaquin down in Santa Cruz, Argentina. So, as you look at -- think about 2016, those deal fees obviously won't be there, but those holding costs likely will remain.

Okay. Thanks.

Our retirement obligation is in that as well -- the accretion in it.

Okay. And that's around $1.5 million a quarter?

Right.

Okay. And then just on the VAT receivables, any kind of color you can provide on expected timing? Or is it kind of a black box there?

Boy, it's a -- that's a good way of framing it. You know, in Bolivia, we -- you know a lot of it is a matter of staying very hands-on and maintaining a presence with the authorities to make sure that they do adhere to a timely refund schedule.

A lot of that just gets kind of gummed up with typical administrative and bureaucracy kind of delays. But there is a pretty well-defined schedule there in Bolivia that we have been able to stick to. But it's definitely a hands-on kind of relationship that helps make sure that those amounts come back.

In Mexico, kind of the same thing, I guess. There is a chunk of VAT, about $24 million that is hung up with the Hacienda there in conjunction with an ongoing question around treatment of the gold royalty agreement with Franklin Nevada that I think we'll hopefully have that resolved here later this year. And that should free up that good chunk of the Mexican VAT. But then everything above and beyond that in Mexico seems to stick to a pretty routine schedule.

Okay. That's helpful. Thanks, Mitch. That's it for me. Good quarter, guys. Thanks.

Thanks, Craig.

Garrett Nelson, BB&T Capital Markets.

What was the interest rate on the $50 million bridge loan? I'm just trying to determine the quarterly interest expense we should be --?

LIBOR plus 250 basis points, Garrett.

Okay, thanks. That's all I have.

Okay. Thanks, Garrett.

And this concludes our question-and-answer session. I would like to turn the conference back over to Mitch Krebs for any closing remarks.

Okay. Well, thank you, everybody, for your time. Appreciate your interest and your questions. And we look forward to updating you on our progress at the end of Q2. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.