Coeur Mining Inc (CDE) 2015 Q4 法說會逐字稿

Good day and welcome to the Coeur Mining Inc Fourth Quarter and Year-end 2015 Financial Results Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rebecca Hussey, Senior Analyst, Investor Relations. Please go ahead.

Welcome to our fourth quarter and full year 2015 earnings conference call. There are slides available on our website to go along with today's remarks. Please review the cautionary statements and the risk factors in our latest 10-K for risks and uncertainties that could cause actual results to differ from any forward-looking statements made today. Mitch, please go ahead.

Thanks Rebecca, and good morning everybody. We appreciate the opportunity to talk to you about our 2015 results and give you a brief company update. I'll start with a few takeaways from our perspective and then we can open it up for questions.

Probably the biggest takeaway we see is how we're delivering industry-leading cost reductions. Costs continue to decline by large percentages and at a very rapid rate. Our full-year 2015 all in sustaining costs of $14.32 per realized silver equivalent ounce was down 22% compared to 2014 and down 30% compared to 2013. Third quarter and fourth quarter all-in sustaining costs were in the mid $13s. That's a far cry from nearly $20 an ounce just a couple of years ago and even more impressive when you consider the fact that we're not benefiting nearly as much from weaker foreign currencies like most of our non-US peers are. These cost reductions weren't just limited to operating costs. Our G&A was down 20% last year and over 40% compared to just two years ago. These lower cost together with higher production levels resulted in significantly higher cash flow last year. Overall production was up due to the acquisition of the Wharf gold mine last year and due to quality production growth at our Rochester and Kensington mines. The company's full-year operating cash flow doubled to $114 million and full-year EBITDA was $101 million, up 19% over 2014 despite significantly lower prices last year. Another take away from our perspective is how our liquidity remained at a very comfortable level through year-end despite the heavy investments we're making to drive down costs even further.

Cash and equivalents remained right around $200 million, which is quite a bit higher than what I think many of you expected it to end the year, and as a result of effective cost controls and working capital management. Since 70% of 2016 estimated CapEx of $90 million to $100 million is expected to take place during the first half of this year, we expect our cash to decline before starting to build during the second half of the year. The main drivers of the expected positive free cash flow are the lower second half CapEx, rising production rates from the higher grade, higher margin Independencia deposit of Palmarejo and the end of old Franco-Nevada gold royalty at Palmarejo.

With costs down, cash flow up, declining debt levels and cash holding steady. Our leverage levels and ratios have come down a lot. Just nine months ago, our net debt-to-EBITDA ratio was 4.2 times. It's now at 2.9 times and falling as these trends all continue. What's driving this strong performance is the solid execution of the many important initiatives taking place at our five mines. I'll give you a quick update on a few of them.

The transition at Palmarejo is continuing as planned thanks to solid planning and a great team. 2015 ended on a positive note, especially given all the moving parts as we simultaneously transitioned to two new higher-grade underground mines and away from an open pit mine and an old underground mine. We are now mining the Independencia deposit about 800 meters away from the Guadalupe mine, a little sooner than expected.

As you'll recall we consolidated ownership of Independencia last year when we acquired Paramount Gold and Silver, and we think it's going to be a terrific new source of ore for us at Palmarejo for many years to come. Meanwhile, mining rates over Guadeloupe averaged about 1,700 tons per day during the fourth quarter and should average around 2,000 tons per day during 2016.

Overall production levels at Palmarejo are expected to climb throughout this year as we accelerate mining rate at Independencia up to about 1,000 tons per day by year-end. Palmarejo's capital expenditures should total around $40 million this year, which is close to half the Company's total expected CapEx. Most of this investment at Palmarejo was to facilitate the underground development at Guadalupe and Independencia that we need to achieve the targeted production levels that should allow us to drive cost down even further and lead to strong free cash flow on the back of those higher grades. There's still scraping a little bit of ore out of the pit here in February, but that should wrap up this quarter and mining from the old Palmarejo underground should end by September. As we saw in the fourth quarter, with such a big drop in tons milled due to a lower open pit mining rates, Palmarejo's production levels and unit costs are expected to improve during each quarter of 2016 as we build mining and milling rates back up from higher margin underground mining at Guadalupe and Independencia.

One last point on Palmarejo. It's worth pointing out what the team there has done in the processing area to boost recovery rates. A full 15% higher silver recovery rate and a full 10% higher gold recovery rate from a year ago. Along with all the other changes to Palmarejo taking place, those higher recovery rates should make a big difference going forward. Out in South Dakota, the Wharf acquisition has been a terrific addition to the Company. We owned it for 10 months in 2015 after paying about $100 million in cash for it. The mine ended 2016 with a very solid fourth quarter. Gold production was up 38% to 32,000 ounces, costs were down 20% to $570 an ounce, and free cash flow was $17 million just in the fourth quarter. In fact, free cash flow totaled $29 million during the 10 months of the year that we owned and operated the mine. Wharf looks to be set up for a great 2016. Over 90,000 ounces of gold is expected to be produced at cost in the low-700s and only $8 million of expected CapEx. It should be an important and steady source of cash flow for the Company this year.

Up in Alaska, Kensington had a record year in 2015. It delivered consistent operating performance throughout the year, resulting in gold production of 126,000 ounces at costs of $798 per ounce. So far, we've spent $8 million on development of the Jualin deposit. And according to our PVA we put out in April of last year, we anticipate spending another $20 million to $25 million until we start mining from Jualin next year. The underground development work in Jualin was started last August and now has advanced a little over 2000 feet. We expect to encounter the Jualin ore body once we've advanced about 7000 feet. So we're almost 30% of the way there.

Drilling stations are now being prepared underground there to facilitate an extensive drilling program of about 14,000 feet on Jualin this year to try and upgrade the resource and hopefully expand the size of the deposit. We expect Kensington to have a similar year in 2016 in terms of production and operating costs. CapEx there, this year is expected to be a little higher, about $30 million, mostly for underground development at both Jualin and at Kensington in order to access higher grade ore that sets up Kensington to achieve an even further drop in costs and to realize strong and consistent free cash flow.

At Rochester out in Nevada, we expect the investments we've made to scale up the operation and drive down unit costs to really start paying off. Over the past three years, we've invested about $50 million in larger mining equipment in more crushing capacity and in several other areas intended to make Rochester a more efficient operation. We've now nearly doubled Rochester's mining and crushing rates, and we've reduced mining cost per ton by over 40%.

We're starting to see the impact of these efforts. Production in 2015 was up 13% over 2014 and costs per ounce were down by 18%. This year in 2016, we plan to mine and stack close to 20 million tons out on our existing leach pad, almost double from 2012 when we started this transition at Rochester and up about 20% compared to just last year. This should lead to even higher production rates and lower costs this year compared to 2015.

We're now starting to receive permits for the next leach pad expansion scheduled to take place in 2017 and we expect to receive the Record of Decision from the BLM in the next month or two.

Our strategy at San Bartolome to leverage our unique processing facility to purchase and process higher grade ore from throughout Bolivia is really having an impact. Almost 30% of our ounces in the fourth quarter came from these third-party purchases of higher-grade material, which helped us to drop cost to levels we haven't seen there in years. We think we can keep up this level of Wharf purchases during 2016 which should help San Bartolome generate solid cash flow.

Switching gears slightly, I want to briefly mention what's happening on the exploration front. Slide 17 in the materials we provided, summarize some of the highlights. Last year, over 90% of our exploration dollars were focused on adding higher grade ounces around our existing mines where the success rates are higher and the payback is quicker, we have some very promising targets that we identified and drilled in 2015 and have more exploration planned this year. At Guadalupe, we discovered the widest highest grade mineralization to date in deeper areas of Guadalupe. We'll be starting 10,000-meter drilling program there later this quarter. And then in between Guadalupe and Independencia, we have two new discoveries called Los Bancos and Nacion that will also receive more drilling this year. We've identified and drilled a new high-grade silver-gold zone at Rochester called East Rochester, which is located only about 300 meters from the existing pit, which we'll evaluate further in 2016. And as I mentioned, we plan to begin underground drilling at Jualin, up at Kensington, later this quarter. Now Jualin is a series of five known veins stacked on top of each other. The existing resources on number four, which will receive the majority of the drilling dollars here in 2016, but we also plan additional drilling on Number 5 vein, which we've already drilled, but do not yet have a resource on it.

One other thing I want to quickly mention before we open it up to Q&A is our year-end reserves which we put out yesterday as well. We used prices of $15.50 for silver and $1,150 for gold for the next two years. And then, we used longer term prices thereafter of $1,750 for silver and $1,250 for gold. Last year, end of 2014, we used $19 for silver and $12.75 for gold. As of the year-end, gold reserves rose 33% compared to a year-ago to about 2.4 million ounces, mostly due to the addition of ore. Our silver reserves declined from 281 million ounces down to 156 million ounces because we reclassified La Preciosa's 119 million ounces of silver from reserves to resources. Palmarejo's reserves increased the most of all of our operations, 46% increase in its silver reserves and 41% increase in its gold reserves. Interestingly, over 60% now of the Company's silver equivalent total reserves are now located in the US and about 90% are located in North America.

There is a good slide in today's materials, slide 11, that shows the growth in reserves and grades at Palmarejo over the last two years since we started down the path of remaking that operation. Palmarejo's silver and gold reserves are up a lot as I mentioned, which is due both to the success of our exploration efforts as well as due to the Paramount acquisition. But it's the average grade of those reserves that I think is worth pointing out. Over this two-year period of time, our average silver grade at Palmarejo (technical difficulty) average gold grade is up 49%. Together with the end of the old Franco-Nevada gold royalty in a few months, this all bodes really well for Palmarejo's future and the kind of cost and cash flow we expect from this important operation, which in turn, should help drive our Company's cost down even further than they've already dropped and leads to strong cash flow for a long time to come.

Okay, with that then let's go ahead and open it up for any questions that you might have.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Michael Dudas, Sterne Agee CRT.

A couple of thoughts, one on Jualin. As you move through to get towards the ore body, you mentioned it's 2,000 and you have total of 7,000. Is that total or is that left to go? I couldn't understand what you were saying.

That's 7,000 total. And we've done 2,000 of that 7,000.

How comfortable you are with mining, labor capacity and such as you get to -- once you get to your target, are we set there or do we still have more work to do?

Frank?

Mike, we will be fine. We plan to balance our existing workforce towards both Kensington mine, Raven and Jualin. We are not anticipating any head count increases.

Terrific. And maybe a little more light on the Bolivia profile, I mean that's kind of interesting how you're getting some of this work. Can you maybe give a little more color on how that's occurring and how sustainable that might be given some of the situation that's going on in the country?

Yes, we're fortunate in that. Our oxide facility there is really the only one of its kind in Bolivia. We've always focused more on just the mining of the material off of the Cerro Rico mountain itself, but when we look around last year in the face of lower prices and talked about ways that we can adjust to allow San Bartolome to make positive cash flow even at lower prices. Turning sort of outward and looking throughout the country for sources of ore who lack that processing capacity where we could pay a lower rate than what it takes for us to mine off of the mountain and boost our overall grade, made a lot of sense. So we put together the resources there on the ground, a team that conducts these ore purchases and we blend and stockpile at the plant. And overall recoveries have not been affected. The overall grade has gone up and as a result, you've seen these costs now go down by a pretty healthy amount.

And Mike, you can see there in the first three quarters of the year, costs were quite a bit higher than the fourth quarter when we really got going in earnest on this initiative just maintaining, what we did in the fourth quarter throughout this year, then we think is sustainable and Bolivia is a very well-endowed country in terms of its geology. So we think that there's plenty more to continue to do. We'll be careful in terms of how much we do to make sure that we're blending and mixing in a way that maximizes the plant's efficiency. But we think we're on to something there that will help in put San Bartolome back into the category of being a net cash flow contributor to the Company.

And final thought. Certainly, you've been managing well the cost and the grades throughout the organization and given where prices for gold and silver have been the last few months, the second half of last year and not so much less, a month or so. Are you thinking different about how you're managing the business as you get closer to the cash flow generation cliff that we're getting to in the second half of the year, in an environment of higher price, different prices? Is there a change in focus or thought maybe of what's next?

It's fun in price environments like we're seeing recently to start thinking a little bit differently compared to the grind of the last couple of years. But we keep reminding ourselves that the absolute number one priority for all of us is to see all of these initiatives through and really get through that kind of strong free cash flow outlook that we've been talking about now for the last really two or three years as we put all these different pieces in place, the people in place and we really don't want to fall short on what we can see here, this company being able to do on a sustained basis. So we got to keep the focus ahead of us on these very tangible kind of initiatives that we've been focused on now for the last couple of years and see it through. And that's really no change to how we are running things. We've got to get cost down, cash flow up, and maintain it.

Jessica Fung, BMO Capital Markets.

Good morning, guys. Just a few questions, a couple of little detail. The recoveries at Palmarejo improved pretty well last quarter. Can you give us some more details on what exactly was undertaken at the plant to achieve these recoveries?

Sure. Frank?

Hi Jessica, this is Frank. There are several things that we've accomplished. We're still optimizing the blending process on the front-end of the mill facility. At this point, we're doing it based on increase in metallurgical knowledge on all of different ore streams that come in. We've establishment met testing programs on orders that we're producing and we will be producing in the future. So we just optimized the blend with the objective of maximizing plant recovery. That's one element.

Second is in the Merrill Crowe, part of the mill flow sheet, we've increased capacity and we've improved recoveries, and that circuit's Co. As those gold and silver ounces pass through there, they're just one step away from being in the product that [we shift]. We've improved performance there.

And then the third is that we've introduced -- we had converted in 2014, converted the CIL circuit, which is a top leaching circuit that have a lot of carbon unit. We took all that carbon out and enhanced the recovery -- the extraction of gold and silver in that particular plant. We actually gone back and now use a little bit of carbon in just two of the eight cakes that adds an additional incremental number of gold and silver ounces that we recover and we process those outside the mill facility.

And then the fourth is we have a tailings thickener. And it's the last piece of equipment in the entire flow sheet. We've just established very tight operating controls around that thickener and have had much a great success in limiting or reducing the number of ounces going in tailings in Palmarejo.

In addition to all of that, we're operating at lower throughputs. And so the residence time in each of the (inaudible) operations that we treat the ores increase. And that's helpful. So, it's a number of different factors but it's all added up to a pretty significant benefit to us.

With the lower throughput, presumably that will continue into 2016 as you guys are ramping up the two underground veins. Do you expect maybe recoveries to come off a little bit then in 2017 as you guys ramp up your throughput, despite sort of all the other structural positive changes you've made?

No, we expect that things will continue as they are based on how we come around managing this plan out. We'll never see the throughputs, at least in our current plans that we used to achieve say two or three years ago when we were really exceeding the plant design capacity. When we ramped up, these underground mines, we will be processing nominally 4,000 to 4,500 tons a day. We used to push the plant to 5,500 tons a day and higher. So we'll always have that retention time benefit there, but all these new practices that we put in place are going to pay dividends going forward.

Perfect. And then my second question is Rochester delaying the construction of the next leach pad. Do you foresee any kind of capacity constraints this year there?

No, we won't have any capacity constraints. We're putting more out on our Stage III leach pad now, and it's got capacity through there at some point in 2017. So we'll start reconstruction efforts on Stage V this year, and we'll finish off the pad construction next year. It's all the timed to fit where we can accomplish a seamless transition from one pad to the other without the impact on production.

Perfect. And then my final question, I just wanted to get your thoughts on potentially hedging, whether it's currency or the metal prices as we've seen the move out in the last little while?

Jessica, it's Peter. Certainly, we have had a very active hedging program in silver and gold. Our last hedges ran out July of last year and we've stepped back from that. If we see a decent recovery in silver and gold prices, in particularly silver, above our costs, above our all-in sustaining costs and sort of view that hedging requires us to be generating margin and really the focus is on hedging margins specifically. So it's something that we're monitoring on a constant basis, and will certainly plan to do in the future. As for currency or other hedges at this point, it's not really our intention to do that. We will focus on metal prices themselves.

And Jess, it's Mitch here. Jessica, when we talk about hedging, we're talking about downside protection, and leaving the upside alone, but put spreads that kind of protect us on the downside, but leave the upside alone.

Very important point. That's the exact strategy that we've used over time and it's actually gravitated to hedging more silver than gold just given the inherent volatility of silver.

Chris Thompson, Raymond James.

Good morning, Mitch. Good morning, everybody. Just got a couple of quick questions here. We'll start off with Palmarejo. And what's happening in Independencia? I think I said that correct, getting better at that. Just grade reconciliation, what is your understanding, what are you noticing obviously beginning to develop into that deposits? Can you just comment on that?

Yes, Chris. Let me just describe where we're at it in a moment. We're not quite in a position to start looking at the reconciliation, but we've developed declines [over to the ore horizon and got there] as we predicted late last year. And we're starting the development work in and around the ore body itself. We've intercepted the vein network, primarily we're targeting first two times at this point in time, and we're seeing some nice grade coming out of that. But it's really still very premature to start talking about reconciliations. Through mid-year and by the end of this year, that will definitely be something that we will track at that point in time.

Alright, fair enough. Just a quick comment if you would on how are you going to be managing the production of tons, I guess, from those that the tons that obviously, associated with the Franco royalty and those that aren't?

Well, you just think about -- you step back and you look at what the source of mill feed was last year compared to this year. 60% of the tons last year to the mill came from that open pit compared to I think this year that will only be about 5% of the total tons milled will come from the open pit here just in the first month or two. Guadalupe, last year was about 25% of the total tons that went to the mill. This year, it's about 75%. And then, the old Palmarejo underground was about 15% of total tons to the mill. And then, I think for the full-year 2016, the old Palmarejo underground represents about 10% of this year's total milled tons through September. And then, the rest is really that balance from Independencia that will start essentially at zero tons per day earlier in January and get up to about 1,000 tons a day by the end of the year like we said. We will be -- the focus of the development work that Frank was talking about, does prioritize the east side of Independencia, which is the old Don Ese side of the Independencia ore body, which is free of any obligation to Franco-Nevada. So we'll be starting the mining and the prioritization of the mining off of the old kind of area of interest that the Franco obligation covers. But here in 2016, that's not going to be a big of a driver, just given -- we still have the old gold royalty agreement in the end until about September and those Independencia tons aren't really high enough to make a big difference until really at the last probably two months of the year.

But then in 2017, you look at the total tons coming from Guadalupe of, call it, 2,500 tons a day, and then about the same 1,500 to 2,000 tons a day coming from Independencia. Almost all of those tons from Independencia will be royalty-free or gold stream free. Does that help kind of get to your question?

Yes, that's great. Thanks, Mitch. Thanks for that. That's good. Just, I guess, quickly moving on the Kensington, the sort of mill throughput we saw in Q4, would that be representative of what to expect for this year? Any chance of an increase on that?

No, there won't be a substantial increase about what you saw in the fourth quarter. I think it'll be status quo throughout 2016.

All right, perfect. And then finally, just on Wharf. I understand this is probably a quarter-to-quarter sort of variation, I guess, in production tons to be expected more sort of seasonal than anything else. Can you just expand on that a little bit, what we going to see on a quarter-by-quarter basis this year? I'm talking about ton placement, more than anything else?

We target normally 14,000 tons a day crush rate to the ore placement on pads. And if you look at the year soon after the acquisition, we stepped up each quarter on what the tons of ore that will be mined. We made some improvements in the crushing area where we could improve availability of the crusher itself, increase the run times, and really just kind of got up to the peak of where they have historically operated. What you saw on the fourth quarter is pretty much going to be status quo going forward.

Right. And more on the golden reward there, Frank. What do we see as far as production rates from that in the quarter-by-quarter basis this year?

Yes. We will be mining there in part of second quarter and the third quarter before we have to suspend the operations. The plan was this year that we would be mining out the remainder of gold and rewards. I'm thinking in terms of April through roughly October timeframe. And yet we'll still be drilling over there. And there's a possibility that before we have to spend the mining operations, we might identify more material for next year. We hope we do.

Craig Johnston, Scotiabank.

Just one quick question as everybody else has asked some pretty good questions. Just on the working capital management in Q4 and looking out into 2016, with the increase in accounts payable, decrease in accounts receivable, do you see a big swing say in Q1 in the opposite direction that you saw in Q4 or maybe is this a new level of both those balances.

I think the latter is a good conclusion. Craig, it's Peter. But obviously in this environment, we are working hard to squeeze working capital a little, and you said as a source of cash. So holding those balances, making that assumption through 2016, I think it's a pretty good assumption.

This will conclude our question-and-answer session. I would like to turn the conference back over to Mitch Krebs for closing remarks.

We appreciate your interest and your questions today. Thanks for your time. I know it's a lot obviously happening and as you can tell a lot happening here at the Company and all of which I think moving us in a really positive direction. So we look forward to speaking with you again in May to discuss our first quarter results. Thanks again for your time.

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