Endeavour Silver Corp (EXK) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Endeavor Silver Corporation first quarter financial statement review conference call.

I would now like to turn the meeting over to Mr. Bradford Cooke, Chairman and CEO of Endeavor Silver Corporation. Please go ahead, Mr. Cooke.

Well, thank you and welcome everybody to this first quarter conference call. Our results for the first quarter 2008 were released yesterday, and I have with me on the call Hugh Clarke, our Vice President of Corporate Communications; and also our interim CFO, Dan Dickson to answer any questions you may have. As usual, I'd like to just go through and hit the highlights of the quarter fairly quickly and then open it up for questions. So without further adieu, let's dive into the financial and operating results for the quarter.

As forecasted, Endeavor posted what we would call an ordinary quarter in terms of production. We came in just over 500,000 ounces of silver production for the quarter. Thanks to the silver price, however, our gross revenues jumped 48% to $10.7 million and the production was only up slightly compared to Q1 last year and down slightly compared to Q4 of last year. The mine operating earnings again compared to Q1 of 2007 were relatively constant at $2.7 million and the cash cost of $10 an ounce were up sharply over Q1 of last year but 10% lower than Q4 of 2007. So at least the cash costs are now trending back in the direction we want them to go.

On the balance sheet, we still report a very healthy financial condition with approximately $20 million in working capital and almost $15 million in cash, and moving to the capital, we had capital expenditures during quarter of $3.9 million. Most of the capital projects are on time and budget. $1.3 million of the capital was for plant projects, $0.5 million on mine equipment, a little bit on buildings, and the balance of $1.8 million on underground development. I'll come back to the capital projects during the Q&A as well as our forecast for the rest of the year.

I'd like to move now just to the highlights of our exploration during Q1. We announced a significant extension to the Porvenir mine ore-body with a couple of deep holes that extend the ore-body to 400 meters in depth still open and there is one drill underground working to extend the Porvenir main ore shoot again further at depth and we expect to have some results over the next few weeks from that drilling program.

Over at Guanajuato, we had an exciting new discovery announced in February, only three months after we started drilling on the Guanajuato Project the announcement of the 3785 gold/silver mineralized zone to the North of the Savannah mine now gives us a brand new mineralized zone with which to complete infill drilling which is ongoing, there's a drill working there now and we hope to actually get that 3785 zone into a resource estimate over the next couple of months so that we can then have it in the mine plan by the end of the third quarter and potentially be drawing ore from it in the fourth quarter. So like Guanacevi we have made a new at Guanajuato and we are moving aggressively to define how large it is and how economic it is so we can bring it into the mine plan.

Moving to acquisitions we also announced in Q1 the acquisition of a new project called Navegantes it's just West of the Parral project in Chihuahua and it helps to give that project some critical mass. Navegantes is a historic project that covers almost two kilometers in length. It's a swarm of veins that had a history of small high grade production, numerous small shafts and stokes, but never been drilled, and of course, we love projects like that. Projects that have histories of production that have never been drilled play right into our business model. So those are really the highlights from operations, exploration and acquisitions.

And what I'd like to do now is simply open up the call for questions and answers, not only with regard to the highlights but with regard to remaining forecast for the year, our capital projects for the year which we have already announced should have a significant impact on our production going forward. So, Operator, let's open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from Rodney Stevens from Salman Partners. Please go ahead.

Hi, Brad.

Hi.

Okay, all right I've got a few questions here. First of all, can you just break down what's your CapEx budget is is for 2008 ideally between, separated between Guanajuato and Guanacevi?

The ballpark number approved the Board is approximately $13 million for the year, and I would have to dash off to my files in order to get the break down.

Is it primarily Guanajuato?

No. The plant projects at Guanacevi I think still take up a majority of the capital. Of course, mine development at Guanacevi and Guanajuato take up most of the balance of the capital and there's just bits and pieces for security and buildings and whatnot.

Okay, and what's your exploration budget for 2008?

The exploration budget is approximately $8 million and that is to complete 35,000 meters of drilling.

Okay. And in the quarter, there's a fairly significant decline in throughput at Guanajuato. Can you just elaborate on what's going on there?

Oh, yes. We actually did put a note in our year-end financials a month ago with regard to that. We basically acquired the project in the second quarter of last year and by the end of June, we recognized that there was a capital phase that was needed at Guanajuato so we commenced the reopening of old mine workings in July of last year and running all through the rest of last year pretty much maintaining the level of production that the vendor had prior to selling to us. It was in that capital underground development exercise that we discovered that the shafts needed more work than originally anticipated, so we actually closed all of the shafts on the project in January in order to undertake major safety upgrades in each shaft. I'm pleased to say that all but one of the shafts have come back on stream and but the main production shaft at Cebada, the one which we were relying on for most of this year, production at Cebada is scheduled for completion by month end. So what does that mean to our production profile? It meant that we were forecasting a pretty slow Q1, Q2 at Guanajuato about 100 tons per day but jumping to 300 tons per day minimum Q3, Q4 so we're expecting to triple our production in the latter half of the year.

Okay. Are you revising your production guidance for 2008?

No. Not at all. Like last year, where we forecasted significant growth but all of it coming in the second half of the year after the capital projects were done, we forecasted the same scenario this year, where if Q1, Q2 are flat, Q3, Q4 aggressive growth after the capital projects are done.

All right, and do you have the cost per ton number at Guanacevi?

If you'll bear with me actually I have it in my desk and I'll be right back.

Brad, I can answer that question.

Rodney, can you hear Dan Dickson?

Yes, yes, no problem.

Go ahead, Dan.

Rodney the cost per ton at Guanacevi which is total tons moved is $33 a ton. So that was for ton for development or waste or ore, so our total cost per ton was $33.

Per ton of ore?

Yes. I don't have it per ton of ore in front of me. It's something I can go back to my desk early next week and grab. Unfortunately I'm out of town right now so I don't have that number in front of me.

And do you have an estimate for Guanajuato as well?

I don't have that estimate here in front of me where I'm at. It's substantially higher really because it was an odd quarter with that shut down, so we weren't moving a lot of tons. It's a very skewed number. It probably won't be much value but it's definitely something that I can get to you when I get back into town.

Around a hundred per ton or so?

Pardon me?

Is it around a hundred per ton?

It's a little bit lower than that.

I think that requires some explanation obviously. When you report cash costs of $23 an ounce for a project like Guanajuato, people scratch their heads and say what on earth are you doing that's higher than the price of silver. Well, clearly, when you undertake a capital development and safety upgrade project like we have, then you have to make a decision about your operations and our decision was to keep on staff the vast majority of our operating personnel. We have put many of them to work on capital projects but in the plant, you've got an entire plant workforce that you're trying to keep together until the capital projects are done and although the cost of those plant personnel goes against operations. So what the $23 per ounce reflects, Rodney, is the fact that we made the decision to keep all of our operating team together while we went through the capital phase which means that our cost per ounce during the capital phase went through the roof and as soon as we finished the capital improvements particularly in Guanajuato, the shaft upgrades most of which are already done, then clearly, we'll be able to significantly increase the plant throughput. We've programmed to triple plant throughput starting in June.

Okay, understood. Do you have sort of a long range objective cost per ton for both Guanacevi and Guanajuato?

Well, expressed in cost per ounce, we're targeting less than $8 this year and less than $7 next year with a long term target of less than $6, so we think we would be comfortable in the 5 to $6 range long term. How do we get there? Conceptually there's three ways that we can drive costs down. Economies of scale by increasing throughputs at each operation should possibly impact cash costs. Reducing mine dilution which was a significant issue last year and as you can see from our Q1 cash costs, our dilution programs are finally starting to gain traction. That also improves cash costs, in other words it's the last waste you send through the plant then the lower the cost per ounce, and then a third one, I can't remember what the third one was to be honest. It's on the tip of my tongue. I'll come back to it.

And still gradual improve?

I believe that as with any operation, the three main criteria are throughput, grades and recoveries and actually that was the third point I wanted to make. So controlling underground mine dilution obviously impacts grade, and that impacts cash cost. Pushing up throughput positively impacts cash costs. And a third point I wanted to make was that getting more silver out of every ton you drive through the plant obviously then gives you lower cash costs as well. And a number of the capital projects we have under way at Guanacevi are focused on grade and recovery.

Okay, all right, I think that's it for now then. Thanks very much.

Thanks for your questions.

Thank you. (OPERATOR INSTRUCTIONS) The next question comes from Ralph Wagner from Wagner Investments.

Yes, good morning. Just to come back on this cost per ton, it's very sticky and it's very disappointing from quarter to quarter, if I listen to other conference calls like [Penaverde] and other large operators, they have a much better control over their cost and I think while you have an optimistic outlook but so far the optimistic outlook in the last two of three conference calls hasn't come to pass so obviously something is not moving to where you would like to see it or just some more explanation on that, please?

Yes, by all means. We recognized last year that one of the things that we had to sacrifice by growing so fast and remember we've grown 600% production growth in three and a half years, one of the things that we sacrificed was strong control over operating cost. These are not mature operations, you know? These operations are growing not only yearly but almost monthly, and when you grow that fast, then obviously cash costs are going to run a little bit higher than you want so they ran up on us last year and we decided that this year, our program, our business plan for the Company was to reign in our production growth so instead of forecasting for instance 50% production growth we forecasted close to 25% production growth and that should allow us to spend more time and focus on driving costs down. And in fact, Q1 the cash costs came down 10%. I would look for another modest reduction in Q2 and then as the throughputs go significantly higher in Q3, Q4, as we have forecasted, then the cash cost should come down significantly. That's why we were able to forecast just under $8 per ounce for the year. And that trend of driving cash cost down is equally important to us now as driving production up.

So I don't think it was any surprise that cash costs got a little bit higher than we wanted. We were just growing too fast, and Pan American, for instance, or Hecla or any of these other mature silver companies they don't have that issue because their operations are steady state. They have a fully built out infrastructure. They have a stable workforce, and so really, all they have to do is go to work every day whereas our challenge is a little bit different. We're always looking for more and better miners, more and better engineers, more and better maintenance people and this is virtually a monthly exercise as we grow the operations. Does that help, Ralph?

Yes, that helps. That leads me to the second question and that is, one which has been talked about in the industry and there are too many small silver companies out there and too many small gold companies out there. I think the new gold and metallic leadership there has recognized that and they're combining three companies and your periodic monthly target, Morgan talks about it too in his letters, the industry needs to consolidate and start trading at 4.50 in March of '07 and AMEX and it's a little better than $3 now and I think part of it is $160 million market cap is not cutting it for a lot of investors and I think the question I have is what thought have you given to or talked with people to combine and consolidate a number of these small companies in Mexico, Canada, and make a larger Company? A $1 billion plus company out of it?

So all good comments, Ralph, and in general, not only Endeavor but I think several of our junior silver producing peers are thinking along those lines also, so I think there's a general sense of it that there needs to be a round of consolidation amongst the junior silvers in order to create a mid tier. If you actually look at the silver producer space in fact the mid tier is now vacant with Hecla moving up to join the seniors and none of the juniors yet emerging to occupy that mid tier space. Endeavor would very much like to be one of the first Companies to occupy that mid tier space. If we wait until our two projects are operating at full capacity, it's going to take another two years and for that reason, we acted last year in contacting three of our peers to see if they were interested, and Ralph, you'll find this interesting, but last year, they weren't ready.

Yes, well, everybody wants to be the Chief. I seen the oil business do it. Everybody wants to be the Chief and that's a real problem because of the ego problem in corporate executives, but, I guess new gold and metallic came together because there was a major shareholder behind them.

Well, in fact there's nothing like a downdraft in the Stock Market to force managements to reassess what they've got and what they want, so we're restarting that process of talking to our peer group and just as we've grown in the past by acquiring privately owned mines, we don't have any problem with looking at publicly owned mines and we're just restarting that process. There's no guarantees by the way that Endeavor will be a buyer or a seller or anything but we're certainly interested to participate in the process.

Okay, that's great. That's great. As long as it's on the greater picture screen. Thank you.

Thanks, Ralph.

Thank you. The next question comes from [John Resing] from Milestone Capital. Please go ahead.

Hi, guys.

Hi, John.

The March presentation that is on your website is decidedly silent about production goals for the years 2009, 2010. Can you give some kind of a general idea, Brad, of what you think is achievable in that kind of time frame?

Sure. I should just point out that in March we hadn't yet published our forecast for 2008 so actually that presentation date should be replaced. As a result of of our growth last year, we decided to redo our three year mine plan and we hope to have that finished by the end of June so the short answer to your question is no, we haven't published anything for next three years. Yes, management is updating everything internally and we should be in a position to talk about it in the third quarter. So I expect that production will continue to grow on the two operations. We still expect to get to capacity over the next two years.

And John, that number, at capacity is 5 million ounces and as a comparison last year, our production was 2.1 million ounces so we still have that growth profile at around 250% available just from what we have now.

Right. So would you anticipate that to finance over this 30 month period we're looking at in front of us or so that you will have to do additional equity offerings to finance any capital expenditures or anything or do you think this can all be organic?

Well, that's a good question and it also bears on our capital programs. We have fielded questions in the last six months about when we are going to slowdown the spending and increase the earning and I can say that we expect this to be the peak year for our capital expenditures and that the capital should significantly be reduced in future years for both Guanajuato and Guanacevi. That is with the proviso that if we are as successful as we hope to be on exploration then hopefully in the next two years we'll be in a position to assess possible expansions of those operations based on growing resources but we're not there yet. So we do expect the capital spending this year to be the peak and for it to be significantly less in future years for those two projects. Therefore, we shouldn't really have to go to the market for the projects and operating mines that we have today. In fact, if you look at our cash flows from the mines, we are covering a portion of our capital both last year and this year from cash flow.

Yes, I did see that.

Actually this year, and I would like to think that in future years, we'll start talking about earnings and once we finish the revised three year mine plan, we can be a little bit more specific about that.

And I certainly heard your prior answer about consolidation in the junior companies to create a significant intermediate and I like the sound of that exploration that you're doing. What about acquiring additional properties though? In your news release, you said you anticipate reporting on substantial progress in exploration and acquisition programs over the next two quarters. Are you getting close to acquiring some additional district properties?

So we have three initiatives in our acquisitions program. The first is increasing our property positions in each of the three main project areas, Guanacevi, Guanajuato and Parral with a view to drilling those new properties in existing districts and building up our resource base in each district. That's obvious, that's what any mining company would do and that's where we expect to have the most immediate announcements. So there's a number of pending property deals this year, two or three. I would like to consummate over the next two quarters just to get more critical mass and consolidate our land positions in Guanacevi, Guanajuato and Parral.

The second initiative was to see if we could duplicate or replicate our success at buying privately owned mines in Mexico. I don't have anything pending. We are always looking every quarter at new opportunities in Mexico, but the barrel is getting relatively empty. There's obviously been an increase in competition for those types of projects and many of the projects that were available three years ago are now in other public companies. And then the third acquisition initiative is analyzing and initiating discussions with our peer group, and we're just getting back on that now.

Are you looking outside of Mexico or is it kind of the strategy that we should think of Endeavor as a Mexican--?

Endeavor has been solely Mexican. That doesn't mean that we'll remain Mexican but we still see the best opportunities in Mexico and every time I'm shown an opportunity outside of Mexico, it just doesn't stack up. I have an open mind.

Even though the barrel doesn't have very much in the bottom left?

Well, privately but the projects that have now been gobble d up by public companies in our peer group, some of them were of interest to us when they were still private.

Yes, okay. Well, I think that's my set of questions.

Thank you. The next question comes from [Bob McCleary], a Private Investor.

Great. My only question is you had mentioned some difficulty in obtaining personnel. Are there other areas, equipment, so forth that seem to be a choke point consideration kind of hard to get per se?

Well, Mexico actually has quite a large and well trained workforce for the mining industry, and the problem of course is that it's a very competitive environment with not only lots of mines operating but new mines coming into production. So I think we still have a reputation for being one of the best Companies to work for in Mexico. Because of that, I think we've got a small competitive advantage in terms of attracting good personnel to the Company, and we don't consider the workforce to be one of the main issues for us. We just deal, we have a Human Resources department who interview and hire almost monthly, so that's just part of a live growing Company.

I think the main issues for us, the barriers to growth, if you will, are more, have more to do with equipment deliveries, fuel costs, all of the things that the big boys are fighting. We're also obviously having to deal with but none of them are insurmountable. Obviously, we feel that we have the right business plan and the right management group to grow the Company first and foremost on the back of our two operations and secondly, on what we can do in exploration and acquisitions.

Thank you.

Thank you. The next question comes from [Tim Puccli], a Private Investor. Please go ahead.

Good morning. My question, and I have heard some of the other folks, it's really, what do you perceive as the catalyst that will get the stock price moving? We just recently touched 52 week lows and just wondering where you see the stock and what is going to turn it around? You typically have pretty low volumes and you said that you probably won't see much dilution which is a good thing but what will get the stock moving in your opinion?

Well, Tim, I think first and foremost, we have to recognize that Endeavor as a junior silver producer with ambitions to become a mid tier producer is part of a sector that had a huge run a year ago and so the stock enjoyed a run up just like every other silver company a year ago. I think our stock peaked at about $6.25 per share and then of course starting in August, the junior resource sector as a whole had a huge run down, and we're just not immune to that, so that explains the last 12 months action in the stock is price. Neither the peak nor the trough can be attributed to anything that management has done.

So I think the first ingredient in moving the stock forward is to see this near historic gap between precious metal prices and precious metal stock prices, we need to see that gap close and in the past, obviously, similar gaps have always come to a close and I'm going to speculate now that we're very close to the bottom if we haven't already put the bottom in not only in terms of the pressure metal price correction but in terms of the precious metal stock correction and I think the precious metal stocks have bottomed and they're simply looking for an opportunity to go up.

What will be the catalyst of that? First and foremost, the silver price needs to consolidate its recent gains and start moving higher again and that should happen this year. I would normally look for a robust fourth quarter in both the metal prices and the stock prices if only because it happens every year, that's by the way the peak of physical offtake for precious metals each year. That fourth quarter and first quarter run up in precious metal prices and stock prices is seasonal for a reason. That's the peak of physical demand for the Christmas, Ramadan, Valentine's and Easter seasons for jewelry. So that's number one.

Number two, obviously we feel that by delivering on our forecast of aggressive Q3 and Q4 growth of production and commented growth of resources with a little bit of success in drilling, that we can out perform our peer group and so regardless of the silver price, I think there is some potential to deliver value into the shares over the next two, three quarters. Does that help?

Yes. Thank you.

Thank you. There are no further questions registered at this time. I will turn the meeting back over to Mr. Cooke. Please go ahead.

Well, on that note, I want to thank everybody for attending and for your questions. As always, Hugh and I are available for comment if you wish to contact us, and we'll reconvene in three months for our Q2 teleconference. Thank you very much. Meeting adjourned.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.