Coeur Mining Inc (CDE) 2018 Q1 法說會逐字稿

Good day, and welcome to the Coeur Mining Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference to Courtney Lynn. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining's First Quarter Earnings Conference Call. Our results were released after yesterday's market close, and a copy of the press release and slides for today's call are available on our website.

Before we get started, I would like to remind everyone on that our press release and some of our comments on the call include forward-looking statements from which actual results may differ. In addition, we recently completed the sale of our Bolivian subsidiary. Because of this, we have presented San Bartolomé as a discontinued operation and excluded it from any consolidated operating metrics or financial results discussed unless otherwise noted.

Please review the cautionary statements included in our press release and presentation as well as the risk factors described in our latest 10-Q and 10-K.

I'll now turn it over to Mitch Krebs, President and Chief Executive Officer.

Thanks, Courtney, and good morning, everybody. Thanks for joining our first quarter earnings call. We're off to a good start and are well on track to deliver a solid year in 2018. Yesterday afternoon, we've reported quarterly revenue of $163 million and net income of $1 million. Adjusted EBITDA was $50 million and free cash flow was negative $27 million. Capital expenditures totaled $42 million, which was about 80% higher year-over-year and reflects the higher level of investment at Silvertip during the quarter.

We also saw timing-related working capital items increase by $18 million during the first 3 months of the year. The standout performer for us was Palmarejo once again. Its silver production was 31% higher, free cash flow totaled $18 million and costs were below $7 per silver equivalent ounce for the second consecutive quarter. Just 3 years ago, Palmarejo's costs were $13.52 per equivalent ounce, nearly 2x higher than they were in the first quarter, and that was back when we were still in the initial stages of transitioning the operation to underground mining at Guadalupe and Independencia.

Mining at Independencia continued in a high-grade faulted zone during the quarter that we had conservatively modeled. This area requires extra ground support, which is why mining rates were lower. As we move away from the primary stopes in this faulted zone, mining rates have started to increase and grades have started to decline slightly. We expect to see a small increase in grades, again, later in the year when we mine the secondary stopes in this zone.

Palmarejo's production levels are also expected to benefit from a new on-site ADR plant we anticipate commissioning by month-end. This ADR plant is a great example of the kind of incremental investment opportunities we are always seeking at our existing operations. It had a $2.3 million upfront investment, should have a payback of about 2 months, and is expected to deliver over $5 million in annual savings.

Our first quarter financials reflect a small number of items worth mentioning. I already mentioned the $18 million increase in working capital, which is expected to reverse during the remainder of the year. The second item worth highlighting is the shift in our CapEx away from development capital to sustaining capital and the impact on our all-in sustaining cost, which we have spoken about on previous earnings calls.

With the ramp up of mining and development rate at Palmarejo, Guadalupe and Independencia mines now essentially behind us, capital that was previously categorized as development CapEx is now categorized as sustaining CapEx, which obviously impacts our all-in sustaining cost. The same applies to certain Jualin-related development CapEx up at our Kensington mine that is now classified as sustaining CapEx.

Compared to the first quarter of 2017, sustaining capital increased by over $1.30 per ounce, making it the primary driver of the increase in our all-in sustaining costs from $13.30 to $14.33 per ounce. If you're looking at the slides accompanying the call today, Slide 9 has a chart on the left side of the page that highlights this trend in shift.

The third item worth pointing out is the impact of higher diesel costs. I'm sure you're seeing this with other companies this quarter too. Although, our consumption levels were flat year-over-year, overall, diesel prices increased 20% given the rise in oil prices.

Last item to note is the decline in amortization expense on our income statement. It dropped by over 25% from $39 million to $31 million, or roughly $0.40 per equivalent ounce compared to a year ago. This decline was a result of the success of our expanded near-mine exploration programs and the significant reserve increases we reported at year-end. Slide 13 has a chart on the right side that highlights this downward trend.

In addition to strong operating and financial performance, we've also delivered on 4 important strategic milestones so far in 2018.

Number one, we completed the sale of San Bartolomé in Bolivia, which was our highest cost operation with the shortest mine life. In terms of geopolitical risk according to the Fraser Institute, Bolivia was 86 out of 91 jurisdictions surveyed last year. We are now 100% North American focused with an attractive balance platform of U.S. centric assets.

The second major milestone was the commencement of production at our new Silvertip mine in British Columbia, slightly ahead of schedule. Silvertip will be high-margin source of cash flow for the company once it's up to steady state levels. During the remainder of 2018, mining and milling rates should gradually climb up to 750 metric tons per day and then reach 1,000 metric tons per day early next year.

We'll submit a permit amendment application for the 1,000 metric tons per day rate covering the life of mine in the next few weeks, and we expect to receive the amendment some time around year-end.

The third major strategic milestone was the completion of the PEA and rescope mine plan for our Rochester mine that reflects the addition of the high-pressure grinding role technology to the crushing circuit early next year. This HPGR technology, which our team has evaluated for nearly 2 years is expected to improve Rochester's silver recoveries from 61% over 20 years to 70% in just over 2 years, resulting in lower unit costs, significantly, higher cash flows and margins, a longer mine life and a more than two-fold increase to Rochester's net asset value from $280 million to just over $600 million. Slide 10 provides a summary of the PEA and the positive impact this will have on Rochester.

And yesterday, we filed an updated 43-101 technical report for Kensington, reflecting the strong impact of relatively small amount of high-grade ore can have on its operating and financial performance. Some of the main highlights from that technical report are summarized on Slide 11, and they include a 2-year mine life extension, which was driven by 25% increase in overall reserves and a 10% increase in the average reserve grade. There was an initial reserve estimate for Jualin included in this technical report of over 74,000 ounces at a grade of 0.47 ounces per ton, which is 16.1 grams per ton, which is more than double the average reserve grade of the Kensington Main zone.

This is obviously not a lot of ounces, but at the daily mining rate of 100 to 200 tons per day, this initial reserve contained in 160,000 tons will provide 3 to 4 years of high-grade mill feed to help meaningfully boost Kensington's production and cash flow.

Production in 2019 through 2021 is expected to increase by about 13% compared to last year to over 130,000 ounces per year, and costs are expected to drop to under $850 per ounce over that same period of time compared to $920 per ounce that we saw there last year.

And most importantly, average annual free cash flow is expected to be over $30 million over that same period of time, which represents a significant improvement compared to last year's free cash flow at Kensington of $1.4 million.

Kensington's large resource of 713,000 ounces of measured and indicated resources plus another 300,000 ounces of inferred resources provide us with a significant and largely untapped opportunity to further extend the mine life beyond 2022 with additional drilling.

I'd say Kensington's economics and reserves keep moving in the right direction and will keep working to further enhance this operation and deliver more of the potential we believe exists there.

This includes drilling several high-grade, historically producing vein located close to existing infrastructure, that haven't received much attention over the years. We think these have the potential to become additional sources of high-grade mill feeds, similar to Raven and Jualin.

Now looking ahead rest of the year, there are few things we want to flag for everybody. First, at Rochester, second quarter production is expected to be higher and costs are expected to be lower due to the timing of leach pad recoveries before turning back to our first quarter levels by year-end. Starting in the fourth quarter, we plan to decommission one of our existing crusher plants and begin installing the first HPGR unit and have it up and going by this time next year.

Despite the additional capital required for this project, we still expect CapEx at Rochester this year to remain in the range of $7 million to $15 million and the mine to generate solid free cash flow for the full year. While production levels are expected to increase in the second quarter at wharf, production at Kensington will be more back half weighted as we finish up dewatering efforts in Jualin during the third quarter. Production at Jualin will then ramp up in the fourth quarter with mining rates expected to climb to approximately 100 tons per day in 2019.

At Palmarejo, its second quarter will be impacted by the $30 million to $35 million of expected cash tax payments, including $17 million of cash tax payments relating to 2017 earnings that we had anticipated making late in the first quarter. As a result, we expect Palmarejo second quarter free cash flow to be slightly negative to neutral after factoring in these tax payments.

We remain on track to complete the initial drilling program at Silvertip and file our first 43-101 technical report that will include an initial reserve estimate later this year. The priority of this drill program is infill drilling of the existing resources to improve our mine planning efforts. And as we achieve run rate mining and milling rates in early 2019, our drilling focus will shift to resource expansion later next year.

That's the extent of our prepared comments. So with that, let's go ahead and open it up for any questions.

(Operator Instructions) The first question comes from Joseph Reagor with Roth Capital.

First thing, you mention the impact of diesel prices being higher. I think, the other day we reached a 3-year high in the first time. They've been backing here $70 in a long time for oil here in the U.S. With your cost guidance and the impact of that in Q1, if diesel prices remain at this level, is there any risk that your guidance for the year might have to be revised in the future?

Good question. I think you'll note the actual costs at our mines relative to the guidance ranges that we put out for the full year, were tracking pretty well, kind of low-end; if not, below the low-end. So I think we feel good that we have enough buffer built-in to accommodate a sustained higher oil/diesel price. A couple of our operations, I know, budgeted for an unexpected higher diesel price throughout the year. So a little bit of it is already kind of baked into our guidance. So, I think, will get to the midpoint of the year and see where we are, but at this point we feel actually really good where we're trending relative to our full-year cost guidance.

Okay. And then moving on to Silvertip, any more you can give us as far as how things going there? Maybe anything about the timing of when commercial production should be achieved that way we can account for the initial production properly on an income statement or cash flow basis?

Yes. Let me start with Frank, and then to the extent, Peter, you want to fill in any of the accounting, we can hit that too. Frank, you want to give Joe a quick update on how things are going at Silvertip?

Sure, will do. This is Frank. Joe, things are going quite well out there. They're going as we have planned. We're commissioning both the mine and the process facility. The challenges that we've started with the mine that have very little open void space to receive backfill material. So as we mine and ship quarter of the mill to be processed, a lot of the gangue minerals that come out of that process, nonconcentrates materials have to go back underground to backfill the areas.

So the real challenge is going to be in the next few months, may getting to an optimal balance between the mine and the process facility. Things are going well. We're starting out like kind of from zero-based, as I said, but things are progressing as we have planned. We have been able to achieve at this point in time, the mill throughput that we thought -- where we thought we would be at, at this point. We're averaging in the neighborhood of 300 tons per day. Now we expect to get to the point, where we would declare commercial production, roughly midyear, loosely defined as we're at a stable processing rate of 60% to 80% of the nameplate capacity that we intend to achieve this year, which is 750 tons per day by the end of the year, will move up to 1,000 tons per day early next year. So we're looking for that to happen around midyear. At this point, things remain on track for that.

Okay. And then Peter, on the accounting side?

Yes. I think Frank provided a succinct definition, Joe, of the accounting for a commercial production. In the interim, proceeds, costs, et cetera will continue to run through predevelopment, reclamation and other on the income statement subsequent to declaring commercial production. And if it will, obviously, as you're implying, revert to typical revenue accounting for zinc and lead concentrate sales.

Our next question comes from Mark Reichman with NOBLE Capital markets.

Just a couple of questions. First on Kensington, I know the improvement in performance is expected in the back half of the year, and I was wondering if you could just talk a little bit more about that in terms of the average gold grades? Would you expect those to be pretty much in line with what was experienced in the fourth quarter of '17, the 0.22 level? Or would they be slightly lower than that as reflected in the PEA? And then what might you expect in terms of uptake in production?

Yes. It's Mitch here. I'll take a crack at that, Mark and then Frank -- we have Terry Smith here too, who is our VP of North American operations, if you want to provide any other color. But I would say the fourth quarter of last year is where we -- is something that we hope to achieve again and sustain starting at some point next year. Once we get into Jualin later this year and get that high-grade ore coming into the mill on a sustained basis. I think you should look at this year as being more of a kind of an ounces per ton basis kind of 0.19 to 0.20 throughout the balance of 2018. Then Terry, if you like to comment...

Yes...

Yes. And then production, you pretty much -- in terms of tons mill in production, not much of a -- too much of a change there in terms of upside in the second half?

I'd say, the full year guidance of Kensington of 115,000 to 120,000 ounces, we still are good with. But that does assume a bit more of that comes kind of third quarter and then more so fourth quarter, but not quite up to that fourth quarter of 2017 level.

Okay. And then capital expenditures, you know, for the full year, they were kind of anticipating that $120 million to $140 million in the first quarter were kind of a little over $42 million. And I was just wondering, if you could just maybe address kind of how those capital expenditures are spent over the ensuing 3 quarters? Are they back-end loaded? Or -- And then also, related -- not really related, but on the Silvertip, I know there's that $25 million payment that is tied to the receipt of the permit, I was just curious as to whether that would be paid in the fourth quarter or whether that would be a first quarter 2019 event?

Yes, sure. I'll give you some thoughts on CapEx, overall. It is kind of a front-loaded year for us. And the majority of the reason for that is, as you would expect Silvertip. And so each quarter, I think, throughout the year, you'll see a slight decline in our overall CapEx. But as you just think kind of mine by mine really quick, Palmarejo and Kensington, which are 2 underground mines and where there's a heavy amount of just underground capitalized development, those are pretty, pretty steady state. There's a little bit more capital at Rochester in the fourth quarter tied to that HPGR installation. But, overall, CapEx there at Rochester, like I mentioned, is going to be somewhere between, I think, $7 million and $15 million for the full year. Wharf has very little capital at all.

And so that the real thing that tilted to the front half of the year is really the CapEx of Silvertip. And then in terms of that payment, due to the sellers of Silvertip that's tied to the receipt of that permit amendment, I think, the terms of the deal stipulate that, that payment is due 15 business days after we receive that from the regulators. So right now, I think, we said in my prepared comments, around year-end, whether that's this side of year-end or slightly the other side of year-end, we'll just have to see. But then shortly after that, that money goes out. So we'll see when that actually hits.

Okay. And then just last question, just on the -- just so I understand a little better. With regard to the Mexican tax -- cash taxes related to Palmarejo, I think on the fourth quarter call, you said, you kind of expect $35 million of which -- $35-plus million of which about half of that would be due in Q1. And now, we're having it at $40 million to $45 million, 0 was kind of incorporated in Q1, but kind of expect $30 million to $35 million in Q2. I was just curious if they could just kind of talk or address the timing those payments in a little more detail and kind of the change in expectations?

Sure. I would say -- it's Peter Mitchell. The reference to the '17, that was actually paid on April 2nd, March 31st, which is Saturday. So it was already accrued at year-end, but ultimately, paid in compliance with Mexican law in -- at the very beginning of April, that was $70 million. And then the $40 million to $45 million that were kind of guiding to -- for total cash, outlay for 2018, is really just a function of -- if we're updating our forecast on a quarterly basis and looking what our pending cash tax liability in Mexico is a function of that latest forecast, so you are correct and that has moved up a little bit since our last conference call, but that's our expectation at this point...

And that's really driven by Palmarejo's strong performance relative to...

The next question comes from Karl Blunden with Goldman Sachs.

This is Jing Chen on for Karl Blunden. So you have made some solid progress on Silvertip [rent]. So are you guys seeing any other attractive asset you may consider acquiring? And what is in your M&A pipeline at this point?

Yes. We're always trying to improve the quality of our asset that we operate. And so we're always evaluating those. We have, I think, some pretty good discipline built-in now to our evaluation process, driven really by the geographic footprint that we are focused on in terms of Mexico, U.S. and Canada. So anything that we find that can make the company a better company in terms of margin, mine life, cash flow, accretion on a per share basis, rate of return, we kind of owe it to ourselves and our stockholders to evaluate those. And so we're always evaluating things.

And I'd say the opportunity set out there is not huge, but it helps to have some pretty defined filters, so that we're only focusing on the right things. We're looking at both existing current producing and cash flowing assets. We're focused on growing and enhancing our pipeline of future growth, really all driven by the underlying or overarching premise of quality over quantity. We're not trying to get bigger for the sake of getting bigger, we're trying to get better. And if there are assets out there that can help us accomplish that, we'll roll up our sleeves and take a good hard look at it.

The next question comes from [Chiu Pat] with CIBC.

Its -- I guess, I'm [Chiu Pat] today. It's Cosmos here. Few questions, may be first off -- yes?

You got a new nickname.

I guess. Hopefully, it doesn't stick. But maybe first off on CapEx, Mitch, you've talked quite a bit about CapEx, already, but I just want to put some numbers to it. So it was higher I think in Q1, $42.3 million in terms of total CapEx. But given that you've maintained your full year guidance of $120 million, $140 million in terms of CapEx. Simple math, so I can just work it out, right, back at what happened in Q1 divided by 3, that should be the average run rate in terms of what I should be expecting for CapEx for the rest of 2018.

I'd say if you picked a number in our CapEx guidance range of 1 -- the midpoint, say, of $130 million, you would see kind of on a 2/3s, 1/3 split. 2/3 of that would be in the first half of the year, 1/3 in the back half of the year.

Okay. Yes, yes, I just want to make sure that I'm comparing apples-to-apples and making sure those numbers I'm picking out of the income statement is comparable to what you have in the -- in your guidance?

Yes. Okay.

Yes. And then in terms of the Rochester here, I just want to confirm, Mitch, have you made a go-ahead decision yet on the high-pressure grinding rolls? It's just a bit unclear, because I guess, previously, in March with the tech report, it kind of said, a decision to proceed with the rescoped mine plant has not yet been made. And Coeur expects to continue evaluating and optimizing the HPGR option, expects to make a development decision by early 2019. But from the literature since then and discussions today, it seems like you've -- have you made the go-ahead decision?

Yes. The Board approval, the units are ordered, and we're getting ready for decommissioning of that, what we call the in-pit crusher at the end of the year, and then tucking this HPGR unit onto the what we call the ex-pit crusher. And we start seeing those benefits then over time in 2019, but really starting in the second quarter.

Okay. Got you. I just want to confirm. But -- and then in terms of switching gears a little bit, going back to Silvertip here, in terms of getting -- right now, you're at about 300 tons per day, I believe, in April. You're trying to get up to 750 tons per day -- metric tons per day by the end of 2018. Is it, I guess, Frank sort of talked about that, but is it sort of just opening up more working faces? More stopes? And then is that really what you need to do? And do you have enough equipment as you open up more stopes?

Frank, you want to answer Cosmos' question?

Yes, sure. Well, Cosmos, you're pretty close there. As we developed mine further and open up more mining areas, we'll produce more tons from the mine and then those will go through the process facility. As I mentioned, we kind of started out at a 0 basis with the mine that needed to have development begin. So the ramp-up really ties to that. So we're looking at, nominally, getting to about half of what we're really targeting by early next year, by the end of the -- by midyear this year. And then in the second half, getting additional 250 tons per day out of the mine. And then in the first quarter of 2019 get up to that 1,000. But it is about growing the mine and then getting the mine in the process balanced with the common point being backfill material.

And then although, I guess, getting into too much detail here, but how many levels are you mining at today? How many open stopes do you have today? And how many do you actually need to get up to like 750 tons per day? And what are you kind of targeting?

Well, not very many, that's a pretty sure answer. This is rather compact small mine and we got some pretty good size and shapes that we're working with. So to come up with 500 to even a 1,000 tons per day may, ultimately, only require about 1 or 2 -- well, 2 rounds of a blasting per day. This is a pretty compact mine with very rich material in every stope that we develop, so it's really nice.

And then maybe the last thing on Silvertip. I see that you've spent $18.6 million in Q1 sort of commissioning it. Could you give us a bit more detail in terms of how much of that was on the plan? How much of that was underground development? And how does that sort of compare to what you would expect to spend in Q2, Q3 and Q4?

Frank, can you answer that?

Well, I'll take a shot at it, yes. The majority of that $18 million is being booked as predevelopment cost. The majority of that for March -- at least, in March when the commission the mill with the -- a good portion of that spending, at least, in March. Prior to March, January and February, it was more about capitalized drilling and some surface infrastructure developments. Just our offices, we've had -- we've launched a very good size drilling program, but we also had to invest some capital in places to recover and store the core, and get our core logging done. And there's been a fair bit of surface infrastructure work going on. So it's adding its drilling predominantly, but now as the mill is running, we'll have a pretty good chunk of predevelopment costs that will represent those of the predevelopment category going forward and that's kind of where things are at, at the moment.

One more point, you know, it's a relatively small mobile fleet. Because, like I said before, the mine is not a really huge mine. We've got a couple of loaders and a couple of bolters on order, and that's it. But they haven't actually arrived yet.

And drilling, do you use like, what jumbos? Or do you use jackleg or --

No, we're using mechanized drills, and we will go to [Vultures]. They have been using whatever mining development took place prior to our ownership was all very manual like Jacklegs and so on. But we know that we'll have higher productivity and lower cost by going to more mechanized means of doing that work.

And on that CapEx, it has been included in your budget.

That's right, yes.

Okay. Great. And maybe one last question from me here, in terms of just, at the corporate level, I guess, Mitch or Peter. I see that your all-in sustaining cost came in lower than your full year guidance. I believe, it was $14.33 an ounce. Your full year guidance is $15 to $15.50. Did you beat your internal budgets? Did you expect Q1 to be lower than your full year guidance?

I would say, it's Mitch. It's a mixed bag. I guess, part of the benefit of having a portfolio of assets. Palmarejo was ahead. I think, Rochester was ahead. Kensington and Wharf slightly above, but everybody got good plans in the case of Kensington and Wharf to get those back down throughout the remainder of the year. And, hopefully, Rochester and Palmarejo can sustain the good trends that they established in the first quarter.

The next question comes from Dalton Baretto with Canaccord.

Congratulations on a really strong quarter. Just a couple of questions from me. Just first on Silvertip. As you ramp up over the year, there is some fairly restrictive logistics issues in BC, both in the mainland and port side. Do you guys have logistics capacity wrapped up or committed?

Frank, do you want to take that?

Yes, sure. Well, yes, we're pretty well set on the logistics side, which are challenging because of distance and the remoteness of the side, but we've got full trucking capacity to get our concentrates off the side with 2 locations to send our concentrates.

All the materials that are inbound to the mine are coming in. There has been plenty of logistical support for that at this point in time. It's a bit labor-intensive. You get off of the main highway and you still have about 25 kilometers of dirt road to get into the side. We're having to escalate trucks and do things. And through the winter -- when winter weather that's really bad, help trucks in sort of get up to the side, but that should calm down as we get out of winter. But yes, we have -- -- we're in pretty good shape, logistically.

Okay. Great. And then your concentrate, is that all committed to [ocean] partners at benchmark terms?

Yes. We have third-party relationship and will broke all the concentrates through them.

Okay. And then may be switching gears to Rochester at the HPGR there. When I look around and I see HPGR deployment, places like (inaudible), the typical use is to manage power consumption while your crashing harder rock. Now I know you get some recoveries improvement just by the way the rock breaks, but I'm actually surprised at how much of improvement you guys are projecting. And so, I guess, my question is, how comfortable are you with those projections? And then secondly, as you build these projections based on the scale-up curves, what is the area tolerance around those curves?

Yes. Well, we're very confident given the amount and the volume of test work that we've done to make the disclosures we've had, we're very confident. And there is probably a plus or minus 2% to 3% contingency around those figures that we're disclosing. We've done a lot of test work. And yes, you're right about the energy. Well, we're actually end up comparable, if not slightly higher installed horsepower to crush our material, but it will be done at a much more efficient power consumption. So that and then combining with the better maintenance attributes, that's the kind of the basis on what you see in that PEA.

The next question comes from Mark Mihaljevic with RBC.

So couple of questions. First off, can you just give a bit of a color on how the infill drilling at Silvertip is going? And what portion of that resource do you think you'd actually be able to include into a reserve category given, obviously, you'll be constrained on what you can put into the mine plan?

Hans, Frank, either of you want to take that?

Yes, I'll take it.

Go ahead, Frank.

No, go ahead. It's fine.

The drilling is doing great. We're ahead of schedule now, up to 6 rigs. The budget was for 30,000 meters by June 30th and we're up to -- we're drilling 2,500 meters per week right now. The core looks good. We're hitting zones where we expect to hit them based on a very loose resource model. And in some cases, the zone is thicker. The grades that we are getting back, which are delayed by about 1.5 months on turn around, are looking good, if not better than we've modeled in the areas that we've got the model. So just based on what we typically see in our deposits like Kensington, which are quite erratic, yet high-grade, we would expect something like 50% conversion of the resource.

Okay. And I guess kind of on the same vein there, obviously, large M&I and inferred resources at Kensington, just wondering what you guys assume internally for resource conversion? And what portion of that resource is just under drilled versus the portion that doesn't quite make it given the capital commitment to get there or development work that you need to get there?

Hans?

Yes, there is a -- Kensington, as you know, is quite complicated and we're getting close to the edges of the deposit per se as we know it. So part of the conversion will be difficult in the inferred and M&I.

Having said that, we expect about 50% overall conversion there. So we're looking at another 4, 5 years in mine life, if everything converts like that. I do expect more growth. We're launching a district-wide program this year. And that program will be looking for more Jualin and Ravens equivalence. And now that we're starting to understand the structural setting of these types of veins. And -- so I think things are going to advance a little bit more this year than prior years in terms of how we explore the district. Whereas, prior years we've mainly focused on what we know and where we're going to infill and how we're going to make the mine more profitable. Now, we're going to start looking at the growth in the district. So a 50% conversion on the M&I and inferred to answer your question. And then look for us to start doing some step-out drilling this year.

Okay. And then, I guess, following on that step-out drilling, how far from the mill do you think would still be economical? What's the target area that you're looking at right now? And what type of commitment are you putting into that?

Yes. There's 2 things I can reference for you. One is the map we've got in the Kensington news release, and then there is several really good maps in the technical report. And coincidentally, the mining engineers just happen to put a tunnel along the trend of these new targets. So if you look at where the tunnel is relative to where, say for example, Jualin and then a straight line up to Raven is, that's where we'll be drilling it in and those are literally hundreds of meters from mine infrastructure. So that's our focus. Similar to what we do at Palmarejo, we stay within a corridor that if we find something to capital to develop is minimal, we'll do the same thing at Kensington.

And just in terms of dollars, I think, of -- of our overall exploration expected to spend this year, I think, between expense and capitalized, we're looking at right around $10 million, probably 2/3 of that's capitalized, 1/3 expense to support those priorities.

So, I guess, a, reasonable assumption is that the majority of the drilling will be on those earlier-stage targets this year? And do any of these historical mines still have old resources? Or data that you guys can leverage off of? Or are you just kind of -- know that there were these old mines and they're going in very early stage?

Frank?

Mark, we have been able to locate historical documents, but, in many cases, it's not compliant data that we're able to, so we're going to have to do some drilling and make sure we achieve compliance on those before we disclose things like that. But they'll give you a good indication.

Back to the point about the capitalized versus stepout drilling. The capitalized drilling is back-ended this year. We won't really get to that until about mid-summer to late summer. We're waiting for some development work to get us into some areas like in the upper part of Kensington. Those are pretty high confidence infill capitalized drilling dollars, so that's good money well spent, but it will be later in the year when we spend that money.

The step-out drilling will start in the summer. We expect to start drilling one of the targets called Seward, anytime in the next month or so, and then at the other ones later on. There are surface occurrences where historical mining took place but like Frank said we don't have anything that we have confidence resource. They're just historic production numbers that where from the early 1900s on these veins. And those actually were the veins that were mined earlier in the history of Kensington.

The next question comes from Michael Dudas with Vertical Research.

Mitch, can you remind us maybe look towards may be late this year, early next, your current targets for balance sheet ratios? And how comfortable you are to achieve those targets? And what can you look at more sustainably longer term?

Peter, you want to..

sure. Yes, Mike. Current leverage ratio, total leverage around 2.5x, we're comfortable with that. But certainly, over the coming -- by the end of the year, that should start to come down. We are anticipating generating some free cash flow this year. But I think, the majority of that will take place in the 2019. In terms of ratios that we're comfortable with, but as I said, we're not uncomfortable with where we are, but watching our leverage come down and having the flexibility with the revolver in place to apply that free cash flow and deleverage the business is an advantage for us. And I would say 0 net debt is a good long-term objective for us. And I think with this asset mix, et cetera, it's something that we're adamantly capable of accomplishing as well.

That's well said. And Mitch, I don't know, you had a meeting with some of your Silver Institute and industry colleagues last week. Can you share some thoughts on what you think is happening out there in the market place and some of the interest and excitement on silver is warranted this time?

Yes. It was an interesting update on last year's supply, demand numbers for silver. I thought that the things very interesting to me was the declining, overall, supply of silver globally for the second year in a row after what I think was 14 -- 13 or 14 years in a row of supply increases, we're now seeing that trend reversed itself. So that was one big take away. Industrial demand, actually grew. The big driver was solar panels. Photovoltaic demand was, I think, it was 80 million or 90 million ounces now. A dozen years ago, that was something like 5 million ounces. So the growth is significant. It's expected to continue. Same thing with automobiles. Everybody talks about batteries and all the battery metals. And seems like Silver doesn't often get its fair shake in those discussions, but silver is a very critical metal in terms of the electrification of cars. The additional technology that's going into cars now. All need silver. The amount of silver in the new automobiles now is about an ounce for every new automobile sold. And but, overall, global auto sales increasing. That's a growth segment for silver as well.

Coins, U.S. coin and bar demand has been incredibly weak, the last 2 years. And that has been somewhat surprising. Usually, there seems to be an almost insatiable appetite from the U.S. kind of retail segment for coins and small bars, but that has largely gone away. People speculate, but that may be given the strong broader equity markets. Just some of that money is going that direction rather than in the coins, but nobody really, really knows. But overall, it was a pretty positive picture. And I think, the declining supply I think usually, as you know, that when silver stretches out to the kind of ratio that it's at now relative to gold, where it's around 80:1, you generally will see at some point a kind of catch-up phase, that we all kind of hope and think will be coming.

I was struck the other day, just one other quick anecdote. I look at our 2013 annual report the other day, and our average realized price that year was about $1,325 an ounce of gold, which is, basically, where gold is today. But the average price of silver that year was $32 an ounce. it was twice of what it is today. So it's kind of amazing how much that stretched out despite the fundamentals improving. So I think over time there is good chance silver is going to catch up and we still have a good chunk of our business that's, obviously, tied to that metal.

Let's get back to the future, that's for sure.

This concludes question-and-answer session. I would like to turn the conference over to Mitch for any closing remarks.

Well, great. I appreciate all the questions. And we appreciate your time this morning. And we look forward to speaking with you again in July, which will be great and warm, to discuss our second quarter results. So thanks, again, for your time. Have a good day.