Coeur Mining Inc (CDE) 2018 Q2 法說會逐字稿

Good morning. Welcome to the Coeur Mining Second Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jonathan Chung, Associate, Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining's Second 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.

I would like to remind everyone that our press release and some of our comments today include forward-looking statements from which the actual results may differ. Please review the cautionary statements included in our press release and presentation as well as the risk factors described in our recent 10-Qs and 2017 10-K.

I'll now turn it over to Mitch.

Thanks, Jonathan, and good morning. Thank you, everyone, for joining our second quarter earnings call. As we head into the second half of the year, we are on track to deliver solid 2018 results. We increased our full year production guidance earlier this month, and we have now reduced our full year cost guidance ranges, mostly due to the strong performance of our Palmarejo operation in Mexico. Meanwhile, we are well positioned to deliver on several important initiatives that advance our strategy of discovering, developing and operating a balanced portfolio of high-quality precious metals mines in safe jurisdictions.

For the quarter, we reported revenue of $170 million and net income of $2.9 million, representing quarter-over-quarter and year-over-year increases. Adjusted EBITDA increased 52% year-over-year to $48 million, and all-in sustaining costs declined 6% to $14.65 per ounce. Quarterly cash flow was impacted by 2 items we've previously discussed with you.

We invested approximately $26 million during the quarter at Silvertip to complete our initial drill program and to bring the mine closer to commercial production, which we expect to happen this quarter. And we paid $31 million of Mexican taxes early in the second quarter, about $17 million of that related to 2017 earnings and about $14 million of that related to year-to-date 2018 earnings.

In terms of our second quarter results, Palmarejo led the way once again. Both gold and silver production were about 40% higher year-over-year, driven by higher grades. Costs were below $7 per silver equivalent ounce for the third consecutive quarter at $6.64 per silver equivalent ounce. The new ADR plant, we constructed for $2.4 million and started up in April, has already generated over $4 million in savings by mid-July. It's a great example of the kind of returns that optimization investments like these can provide and why they rank so high among our capital allocation priorities, which are laid out on Slide 8.

As we anticipated, Wharf and Rochester both delivered stronger quarters compared to the first 3 months of the year and are expected to build on this momentum during the second half. In fact, Wharf's production increased 25% and free cash flow increased from slightly negative in the first quarter to over $10 million in the second quarter. That brings the cumulative free cash flow since we acquired Wharf in February of 2015 for $99 million to just over $135 million and climbing.

Kensington positioned itself during the second quarter to begin delivering on the plan we summarized in April that showed a 25% increase in the mines overall reserves, a higher overall average gold grade, lower per ounce costs and stronger free cash flow over an extended mine life. Mining from the Jualin zone is a key component of this plan. Our dewatering efforts are succeeding, and we expect mining activities to pick up from Jualin during the second half of the year. Approximately 10,000 ounces of gold at an average grade of about 0.5 ounce per ton are expected from Jualin this year, which is expected to drive Kensington's production levels higher and per ounce cost lower, especially in the fourth quarter of 2018.

And as you can, hopefully, tell, we remain focused on allocating capital to opportunities with the potential to deliver solid returns and facilitate further cash flow growth, cost reductions and higher margins over longer mine lives. Funding and delivering on Silvertip to ramp up is currently our top priority. Once up and operating at steady state early next year of about 1,000 tons per day, this operation will become a high-margin source of cash flow for the company and will be a key component to our expected growth in cash flow and production.

After completing mill commissioning in March, the team has increased processing rates to just over 500 tons per day. We expect to declare commercial production this quarter and reach 750 tons per day by the end of the year.

Our total year-to-date investment in Silvertip is approximately $49 million, with about $26 million of that occurring in the second quarter. Slide 9 in the accompanying deck provides a breakdown of our investments through June 30.

We are maintaining our full year production guidance at Silvertip of 1.5 million to 2 million ounces of silver and 23 million to 28 million pounds of both zinc and lead or approximately 4 million to 5.1 million silver equivalent ounces, which includes ounces produced prior to reaching commercial production.

Our investments at Rochester to incorporate high pressure grinding roll technology, or HPGR, to the crushing circuit are moving ahead. Slide 13 provides a summary of the PEA we published earlier this year and highlights the substantial impact this expansion is expected to have.

Slide 14 shows the location of the current and planned surface infrastructure involved in this planned expansion. The first phase of this investment is to upgrade our existing ex-pit crushing facility later this year. We expect to complete all front-end upgrades prior to installing an HPGR unit in the first quarter of next year. In parallel to upgrading the ex-pit crusher, we will decommission our smaller in-pit crusher, which will reduce overall throughput from the current 15 million tons per year to about 13 million tons per year next year. However, this lower throughput level is expected to be offset by lower operating costs from the elimination of the in-pit crusher and by higher assumed silver recovery rates from the HPGR crusher.

The second phase of our investment at Rochester includes the construction of a new larger-scale crushing facility that will support the operation for the balance of its anticipated mine life. The current facility is about 50 years old and is located near the edge of the pit, where mining is scheduled to take place in future years. This new facility will reuse some of the equipment from the ex-pit upgrades mentioned earlier, along with the installation of a second HPGR unit. This new plant is being designed to support throughput rates of approximately 20 million tons per year. This new crushing facility, a new leach pad and larger Merrill-Crowe plant are being permitted through POA 11 for which we expect approval in early 2020.

One of our other top capital allocation priorities I'd like to briefly mention is our near-mine exploration investments from which we are seeing strong results. Our total year-to-date investment was $28 million, up 53% compared to the first half of 2017.

At Silvertip, we completed a 44,500-meter drilling program on schedule and under budget. The program was focused on infill drilling and discovered several new high-grade mineralized zones. We issued a separate release this morning that provides more details about the success of this program. And given this success, we are accelerating our drilling efforts and have kicked off a $4 million second phase, focused on expanding resources and testing perspective targets. We remain on track to file our first 43-101 technical report later this year that will include an initial reserve estimate and will incorporate most of the Phase 1 infill drilling results.

At Rochester, our near-mine infill drilling immediately southwest of the pit in the Sunflower area has intercepted shallow, higher-grade mineralization.

At Palmarejo, we invested a total of $7 million in exploration through the first 6 months of the year. Slide 11 shows the location of the various veins and targets that have been drilled so far this year. Nación, which is located about 300 meters west of Independencia, is a good example of the quick payback we can generate from our near-mine exploration investments. We began drilling Nación just 2 years ago, and we are now developing toward it and expect it to begin contributing about 400 tons per day of mill feed by later next year. We hope to follow a similar path with the Zapata discovery, which is located about 200 meters west of Guadalupe.

At Kensington, we invested a total of $5.4 million in exploration year-to-date on drilling that targeted previously known high-grade structures that have the potential to become future sources of higher grade ore. We remain optimistic about Kensington's potential given the number of historical mines in the district, many of which are now new targets that have never been drilled.

I want to briefly highlight a series of slides contained in today's presentation that summarize the key elements of the company's ESG priorities. Whether it's our environmental stewardship, our support of local communities and our people, or our best-in-class corporate governance practices, you will be hearing more from us about our efforts in all of these areas. Our ESG programs are a key component of our strategy and fundamental to our overall success as an organization.

We are excited and proud about how we do things at Coeur Mining, and we are looking forward to showcasing these efforts going forward.

So just to wrap up quick, overall, the first half of the year, basically, went according to plan. Our top priorities during the second half are to successfully achieve the ramp-up at Silvertip, to set ourselves up for success at Rochester as we start taking the initial steps to upgrade its crusher facility, to deliver higher production levels at lower cost at Kensington with higher-grade contribution from Jualin and to sustain the strong performance at Palmarejo. Overall, we are well positioned to deliver strong production and cash flow growth from our 100% North American platform of precious metals assets.

So with that, let's go ahead and open it up for any questions.

(Operator Instructions) The first question comes from Mark Mihaljevic with RBC Capital Markets.

I guess, my first question just deals with Silvertip. Just wondering if you can give us some more operational details kind of as you've got a few months now behind you on the mining side of things, how the grades have been reconciling and then how the plant's been performing in terms of recoveries and the payables that you're getting on the concentrates.

Yes, yes. Frank, go ahead.

Mark, this is Frank. We began commissioning activities on the middle of the March. So we've got several months under our belt right now. We think about the process facility in terms of segments, like crushing and feed systems to the grinding circuit, the grinding circuit, the flotation circuit for lead concentrate, zinc concentrate and then also pyrite concentrates, and then we have the back end of the plant where we do our dewatering activities to package up products for shipment and also feed into our dry stack tailing system. So in our due diligence work, we had identified a number of areas within those segments that until we get actually turn things on and get things running, it's a bit difficult to figure -- understand just how big of an issue these things would be. So we've been systematically working through all of since March. Today, we've increased plant availability a full 25%, targeting more, still more work to do. That's been accomplished through some significant downtimes that were scheduled in both May and again in -- early in the month of July. Those are completed, and we're just taking these things off. So addressing the mechanical issues and then operational issues and that's become more about the operation itself. We're fully emerged in optimizing these circuits, the grinding circuit for optimal grinds. We're going to need 2 different types of grinding going on in that circuit to support the lead flotation process and zinc. It used to be a little bit finer than the zinc. So we're currently busy getting ready to commission or regrind mill there. Adjusting the reagents, getting a good feel for the pH controls and required -- getting some instrumentations installed on this rather old plant has been quite useful to us here in recent times. So things have been progressing. We're seeing much better availability on the mill. We've consumed all the order that was sitting in front of the crusher and stockpile, and we're starting to flow out fresh ore out from the mine itself into the crusher and into the plant. We're seeing recoveries for lead and zinc on the upward trend. Tonnages per day are coming along as we had planned. We're not quite to a point where we're averaging 500 tons per day, but we see the frequency that we hit that level on a big increase. And one of the things I'm quite pleased with is that the grade of material that was in the stockpile from the beginning or what's coming out of mine now is tracking very well with our research model that we took onboard during the acquisition. And it just -- it couldn't be better than what we're seeing right now. So it's progressing. I'm pretty pleased with the direction we're headed at the moment.

Okay. And just in terms of payables and the concentrate you're producing. Is that performing as expected as well?

Yes. The grades of the products that we're producing are coming up. We still got a bit of work to do there through the optimization of the flotation circuits. But we've been, since March, shipping zinc around every -- just between 2 and 3 days and shipping lead about every 3 to 4 days. Ships -- shipments have been active since March as recently as just a few days ago.

Okay. And then, I guess, nice exploration update from there this morning. So what type of update or what type of benchmark should we be using when we evaluate the resource update and initial reserve that's expected later this year?

Well, we organized our drilling plans for this year around, what we call, Category 3 drilling, which is infill within the existing resource model that we acquired at the acquisition or at the time we acquired it. So that drilling has been very useful. We're improving our block model. The mine engineers are currently working with that block model now to optimize the mining plants that come out of that. We're seeing a very useful data confirming what we thought we would find, and we're actually experiencing some nice surprises in various areas of the mine, and that's kind of highlighted in the press release that went out on exploration. So on the operations side, we've been real focused on that kind of drilling to improve our mine plans and help us build out life-of-mine model that would have perhaps a little risk in it due the knowledge that it yields. And then Hans is here, and I think he might like to talk a little bit about the longer-term exploration.

Mark, just to -- this is Hans. Just to finish up on that comment about what you're expecting in October, if you look at the figure 10 on our slide deck, there's some subtle lighter shades that are the original interpretations. So that would be the basis for our original resource model. And you can find that in our press release when we bought the mine. The expanded resource model from our new drilling has the new shapes. So if you wanted to kind of just estimate what you would anticipate for a size difference, you can sort of see that in the graphic there. We're -- like Frank said, we just got the model now, and we're working through the numbers publishing in October. The ore body itself is getting a hard look right now by an expert geologist. We're building our first stratigraphic column and then we're launching on the district program. And so the next phase of drilling will basically be expansion of, mainly, the discovery zone and then future drilling next year and beyond would be growth, and we see a lot of potential here at this -- in this project, just because most of the focus historically has been in the Silver Creek area, where the known resources were and trying to develop that. So everything is looking really positive right now. I'm very excited about the project.

There is one other point I'll add as well, Mark, which is that this drilling that we've been conducting in the mine, a lot of it was aimed at trying to identify areas where we will be able to do our mining by the transverse longhole method, where it's more about finding oriented and better unit economics for that kind of mining and cut and fill, which will be taking place rest of the mine. And we are seeing some areas where that will become an opportunity. Premature to say how much of the mine will be long-holed, but that -- I guess, that work is going on right now. Will be good for the economics at the mine.

Awesome. And then, I guess, shifting gears over to Palmarejo. Obviously, you guys have had a lot of success in that a faulted off area at Independencia. That's given you some really nice grades the past couple of quarters. I was just wondering, if you had a sense of how much of that area is left? And how long you could still be getting those benefits for?

Yes, we've actually -- it's been more than just a couple of quarters that we've been experiencing that grade benefit that we've been seeing and as we mine along the contact, hanging wall, foot wall contact in the central and to the upper parts of the mine, while the drilling that we had done historically found that this material, the recovery core was not that great. The material was so altered. And we're actually in there mining now. And it requires a little additional ground support and so on. But given the fact that a lot of sample didn't come out of these particular zones, it's been a great positive reconciliation aspect for us. We will be mining in the areas that I'm describing right now for the rest of this year, well into next year, and it's -- I can't really say that these grades will be sustainable over that entire period of time, but certainly for the next quarter, it should be a distinct possibility.

(Operator Instructions) The next question comes from Michael Dudas with Vertical Research.

Mitch, turning to Rochester. The expected crusher upgrade and talk a little about the timing of the switch out and the process from 15 million to 13 million tons per year, and how that plays through and the timing of the better recoveries as you see it, I guess, going into '19. And then secondly, on the overall, on the new plant and the crusher, an update on timing. You mentioned 2020 on permits, but is there a chance that things can move along a bit quicker? I know they've been putting a lot more focus on anything through out there in the state of Nevada. So I want a little feedback on that.

Yes. Frank, do you want to?

Sure. It's worst time, I think you know that. I think, as Mitch covered in his opening remarks, this is a -- we view this as a 2-phased process to get HPGR and service at Rochester. The first phase is already in the ground in the real short-term, like towards the end of this year. The replacement of an existing cone crusher or secondary crusher that sits behind the jaw crusher, the primary. And replacing it with a larger cone crusher, which will then be reused when we make the bigger move some years later. And then that will fill into what we installed the first of 2 HPGR units in early next year, and that's about as much as we'll be accomplishing in its first phase, while the remaining engineering and design and so on continues for what we plan to do out in 2020 and 2021. As far as the permitting is concerned, things are moving very efficiently out there in Nevada, with the regulators that we're working with. But we're still pretty much holding to the time line that we've discussed previously that, that would become available. That permit would be in our bag of -- in the timing that we need for installing the remainder of the HPGR equipment and moving that fixed plant crusher we operate today and getting it out of the way of the mine.

I think the -- Mike, the -- this initial phase, capital wise, late this year and then early next year, and I think, we flagged this in the PEA release earlier this year, it's around $20 million to $25 million to accomplish what Frank mentioned there in terms of this cone crusher and then this first HPGR unit. And then you go down the road to say 2020, 2021, there's more significant capital, obviously, when you think about everything that we'll be doing there as far as an entirely new crusher facility, leach pad, Merrill-Crowe, the whole, basically a new surface infrastructure out there. And that's all reflected in that PEA. We filed that first half of this -- sometime in the first half of this year. That can give you a better handle on what the kind of capital. It's a big capital project, something that we're, obviously, already thinking a lot of about and planning for and -- but the benefits and the impact on Rochester are so significant, I think the rate of return on the entire capital, both this first phase and that subsequent phase, is well north of 30%. And really not only drives cost down, but extends that mine life through a lower cut-off grade and pulls forward that -- the -- those silver ounces through the HPGR technology. So it just has so many great benefits for us, but it's a big focus. Silvertip got to get that up and going first, and then the next big initiative is going to be capturing all of the advantages that HPGR can offer or is offering out at Rochester.

No, I totally support the process -- the thoughts there on that. And then just looking at second half capital spend versus what you have, timing on the Mexican payment and looking into 2018 and bleeding into '19, how much, without giving up too much on the planning front, are we going to be cleaned up on Silvertip or is that going to bleed in the first half of '19 and will we see just expectation on growth capital moderating a bit? Or is that still going to be focused much more given some of the other opportunities you may find?

Yes. So first half CapEx company-wide was $80 million or $85 million. That should decline in the second half of the year, mainly because of Silvertip. I think second half Silvertip CapEx is closer to $20 million. And then that sort of offsets then with some incremental capital that we'll be investing down there at Palmarejo to access that Nación deposit. But overall -- and you saw in our release that we upped our CapEx guidance range to -- from $120 million to $140 million to $130 million to $150 million to kind of factor that all in. But even at that higher range, if you compare the first half of $80 million to $85 million, we're going to be down a little bit in the second half of the year. And then as you look forward in 2019, Silvertip will drop way down, and we'll be back closer to that kind of $100 million target for CapEx. Keep in mind between Palmarejo, Kensington and then Silvertip, there's about $75 million of annual underground capitalized development each year, that is the lion share of our ongoing annual CapEx planning.

As part of the $100 million.

Yes. And then we'll see some incremental capital in 2020 as we get into this Rochester expansion.

That was just helpful to flush that on the timing of the CapEx as we move forward as metal prices have come down here a little bit.

The next question comes from Mark Magarian with UBS.

Mitchell, I just had a question regarding cash flow. So the stock, obviously, not performing particularly well. There's, obviously, various reasons, taxes, CapEx for the second quarter in a row, pretty decent free cash flow burn. Looking into the second half, especially now with the previous question mentioning, obviously, future -- CapEx at Rochester going forward in the future, can we expect operating cash flow and free cash flow to start to normalize some more and steady, which should, hopefully, keep the balance sheet in good shape for that CapEx in the future, especially with lower metal prices because otherwise, someone like me, who's shareholder here, is going to start to think, God, you guys are going to dilute again? So what's there to say on that?

Yes, liquidity-wise, ending the quarter was $123 million of cash, $75 million or so available under our credit facility, and then with -- according to plan, our cash flow grows now starting in the back half of this year for a variety of reasons. Starting with Silvertip, as we cross the threshold into commercial production and ramp-up those mining and milling rates, Silvertip stops being the consumer of cash that it was in the first half and starts to become a source of cash. Obviously, we don't have the double whammy of Mexican taxes that we had in the second quarter that related to both this year and last year. And then you can go down the list of the other operations, Wharf should continue to have stronger cash flow. Rochester, Palmarejo should be more of the same. And then Kensington with this Jualin high-grade kick, it should be a source of operating and free cash flow as well. So the plan had always been that kind of midyear is when we sort of hit our trough point from a liquidity standpoint and then build up from there. So that's been the plan, and that's how it's gone so far, and that's how we expect it to play out throughout the rest of the year and into '19.

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

Just one question on your exploration program. Just big picture, when you kind of look out and in your presentations how you like to see the mining rate, Palmarejo go up over time. I was just wondering how you think about your exploration budget over the next several years. And your thoughts on in terms of extending the mine lives for the existing assets and kind of where you think you would like to be in terms of growing the reserves and resources and extending the mine life. And what type of investment you think that will take over the next several years?

Yes, sure. I'll start, and then Hans can chime in. We now accelerated, as you can tell and as you probably know, exploration is now running around $50 million in total on an annual basis. And it's important that we continue at that level with 80% plus of that money going into drilling programs around our existing assets. There is just -- given that the assets that we have in our portfolio that is one of the best places to deploy capital to generate good returns and have a very rapid impact on the economics of each of those assets as well as the overall company. Palmarejo, Kensington, Silvertip are the 3 largest chunks there, of that $50 million. We are -- given the state of the earlier stage exploration, end of the spectrum of our industry, there are a lot of interesting earlier stage projects out there that are not attracting any funding and it's giving us a chance to generate some value from the drill bit on the earlier stage side of the equation where we've slowly and sort of carefully grown that component of our overall exploration budget. And we just feel that fundamentally, as a mining company, one way to truly generate value is through the drill bit. And starting and prioritizing with the near mine, but increasing in a methodical way some of these earlier stage opportunities that we've started to take on and drill with some success. Hans, do you want to fill in?

Yes, I mean, Mark, as you've seen, the success at Palmarejo is a great example where we hit a real low in our drill activities there and realized we were behind the eight-ball, and now we're up to what we call steady state meeting reserve completion plus growing with new discoveries on the budget at Palmarejo. So I don't anticipate down -- slowing down for a while. We're finding new veins every year now, just as a process and with good teams, good people on site that are understanding the geologic model now. So that's a great example. Silvertip we're at the earliest stages of the exploration program, and I would perceive the same kind of success there as we're seeing at Palmarejo, if not more, because we bought a mine that was underexplored, and it's an immense land package that we've got to start tackling here. Kensington is more difficult as you probably thought, little more expensive to find gold there and mine it, but finding is just as tough. Rochester, we're starting to wind down with such a long mine life. We don't need to spend as such money at Rochester. And similarly, Wharf, we don't need to spend as much money there, because it's such a well-defined plan of operations there. And then as Mitch mentioned, the pipeline is one place I spent a lot of my time and the opportunities are coming in the door right now, because the capital markets aren't funding early stage gold explorers, and they're looking for funding sources, like Coeur and other cash flowing companies. So it's a matter of prioritizing those and picking the good ones. So it's definitely an exciting time. And we -- like Mitch said, we don't see things slowing down for us in the near future. But we'll slow it down if we need to, to make ends meet for sure.

It's having a profound impact on our -- just on our income statement as well, when you look at -- and there's a good slide in the deck today, Slide 16, in the bottom left there that shows, as we funded our exploration, prioritizing near mine, growing the reserves, extending the mine lives has a positive impact on our amortization line on our income statement, which to the extent we can keep doing that, it's going to help boost the bottom line. We -- I think, this year, our full year amortization is going to be something like $150 million. So the more we can spread that out over more periods, the better our earnings will look too. So there's a whole host of reasons to keep funding the levels of exploration that we're now at.

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

Okay. Well, hey, thank you everybody for taking the time. I know there are a lot of companies reporting today. We look forward to speaking with you again in October to talk about our third quarter results, and in the meantime, enjoy your summer. Thanks.

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