Endeavour Silver Corp (EXK) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome do the Endeavour Silver Corp. third quarter financial statement review conference call.

I would now like to turn the meeting over to Mr. Hugh Clarke, Vice President of Corporation Communications. Please go ahead.

Good day, everybody, and thanks for phoning in to our third quarter conference call. I'm going to speak very briefly here and then turn the meeting over to our Chairman and CFO. We've had an outstanding third quarter and we're pleased that you took the time to listen to our conference call. And I certainly encourage you to ask any questions after a very brief formal overview from Bradford Cooke, our Chairman of the Board and CEO. Bradford.

Thanks, Hugh. I think rather that reiterating the details of the news release, what we'll do is a four part overview. Operations, financial, exploration and acquisitions. And really just try and pick up some main themes and elaborate on each. And then open it up for Q&A.

So without further adieu, I'll lead off with an overview of our operating performance in Q3. Silver production, as you know, was up 6%, and we are expecting another jump of production in Q4, thanks to the completion of our many capital projects Targeting in the 800,000 ounce to 850,000 ounce range in Q4 and that should give you an idea of what we'll come with for a target next year. Gold production was a main theme for most of this year and especially Q3, up 46% year on year, and that's thanks to a couple things, actually. Not only the achievement of close to capacity throughput at our Guanajuato plant but also the discovery and development of new and higher grade gold silver ore bodies at Guanajuato in the last year. We are targeting about 4,000 ounces of gold in Q4 plus or minus and that will also form the basis for our outlook for next year on a quarterly basis.

Moving to the individual mines, Guanacevi, let's go through the mines that are in production or development. Porvenir Norte Is the deeper more northwesterly extension of the Porvenir ore body. The ramp got into the top of that thicker, higher grade pod in Q3 and it will become one of the backbones of our operation now for the next several years as that ramp moves further Northwest and down into the guts of that Porvenir Norte pod.

Santa Cruz, the ramp was actually suspended in Q3 to allow for the construction of a pump station, sump, piping, et cetera. That development work will restart this quarter and we should actually be in ore in Q1, so that we are expecting ore production from Santa Cruz next year. We haven't yet come with our forecast on a per mine basis but that's being organized this quarter announcement this quarter for announcements early next year.

Porvenir Dos, the ramp was already in ore in Q3 and it is delivering production daily to the plant. It should be in full production by the end of this quarter. We've now got one solid sill fully developed and mining and second sill level in development.

Alex Breccia, development was actually suspended in Q3 due principally to the lower grades and higher dilution than we had modeled and the outperformance of Porvenir Dos simply pushed Alex Breccia down in our list of priorities of things to do.

Porvenir Cuatro Is perhaps the most exciting new development in that, even though it's still in exploration, we do expect a resource and a mine plan this quarter, and we're already commencing permitting on that mine plan so that work can commence on a development ramp at Porvenir Cuatro in Q1, and be in ore by around Q3 of next year.

So in summary, at Guanacevi, we have been a one mine operation for the last several years. Now we're a two mine operation in the last quarter thanks to Porvenir Dos and we should actually be a three mine operation with Santa Cruz in the first couple of quarters and a four mine operation in the last couple of quarters with the Porvenir Cuatro coming on.

Moving over to Guanajuato, Lucero is now making up about 50% of our production there, Bolanitos about 30%, Cebada about 20%. What's new and exciting, we were just down there last week, just as we found and developed very quickly a new high thick grade pod of ore at Lucero last year, it looks like we're coming into a similar sized high grade pod in the Bolanitos vein system, effectively sub parallel to and near by the Lucero so that it takes advantage of similar development. And so the production at Bolanitos is now growing. Over at Cebada, which is about 20% of our production, it's pretty much steady state and the 37-85 discovery off to the Northwest, the drift is currently being cleaned up this quarter, for ore access, in Q1 or Q2 next year.

So that's really my overview of operations and the two themes of growing silver production and growing gold production. Why don't I turn this over to Dan Dickson, our CFO, for financial highlights.

Thanks, Brad. Currently right now Endeavor is probably the strongest financial position we've been in quite some time. At that time end of Q3 we had $3 million of cash and working capital of $12 million. After our prospectus offering and our private placement we now have $24 million of cash and working capital greater than $32 million. Going forward, we expect gold and silver prices to continue their upward trend through Q1 of 2010. So at that point we're going to continue our strategy of putting out sales orders above the market price which drives our revenue for Q4 of which we expect to see a substantial increase in our revenue for Q4. Currently we're sitting on 385,000 ounces of finished goods and 2,800 ounces of gold. We're going to assess our strategy at the end of the year and determine whether if we like the prices, to put those out into the market, so we could see a double of our revenue for Q4 compared to Q3's revenue of $9.8 million.

The other side of that is cash costs in Q3, we saw a significant drop, 46% year-over-year and 25% quarter-over-quarter. That drop was related to increased production, improved gold prices and obviously improved gold production. We also stockpiled 15,000 tons of material in Q3 that will allow us to reach our production goals for Q4. So with all that increased production, what we expect to see in Q4 is another drop to allow us to push our annual cash costs to $6. So what we're looking for from a cash cost standpoint in Q4 is equivalent to the $5.20 that we had this quarter, if not a little bit better. Which brings us to our cash flow for the year and for the quarter. We're expecting, with the increased revenue and decreased cash costs in Q4, to have the highest we've seen of cash flow for the Company in its history. Capital expenditures of $4 million and continued exploration of $2 million, and $1 million of G&A costs which should give us about $8 million of profitable cash flow, free cash flow in the fourth quarter. That cash flow will reverse our earnings per share loss of $0.10 for the year. We should be able to post a $0.10 earnings per share for the fourth quarter.

So in summary, I'd like to point out that we are in a great financial position and we expect a strong fourth quarter from a financial statement standpoint. Back to you, Brad.

Thanks, Dan. With regard to exploration, I'll start with Guanacevi. During the third quarter we announced a new high grade discovery at Porvenir Cuatro. It's basically the next prospective ore zone along strike to the northwest from our Porvenir Dos mine currently under development. Porvenir Cuatro should actually be drilled out this month into a resource estimate, mine planning and mine permitting in December so that we can commence the ramp in Q1 and be in ore by Q3. And there's still obviously some room to grow Porvenir Cuatro vis-a-vis exploration drilling, but we put two drills on it since September so we hope to have it fully drilled out on a 50-meter spacing very shortly.

Other drilling underway, during Q3 and into Q4, we've had some success actually underground trying to extend the ore body Porvenir Norte ore body northwest towards Porvenir Dos. We don't know yet and we still don't think that the two ore bodies join up but in fact we've had some success extending the Porvenir Norte ore body to the northwest. We're also trying to establish continuity up in the northwest part of the entire district, an area called San Pedro, where we already have previous high grade mantle and vein intercepts in two areas that are beside each other, Noche Buena and Buena Fe. We don't have enough drilling yet to establish a resource but with renewed drilling this quarter, we hope to do our first resource estimates up in the Noche Buena, Buena Fe area by year end. And lots of tar targets up there for next year.

Moving to Guanajuato, we're currently drilling for southern extensions of the Lucero, San Jose, Bolanitos vein system and that drilling commenced at the end of Q3 and will go all through this quarter and into next year. We've also had some drilling underground drilling over at Cebada below the 515 level. So there is additional development there, below the lowest mine level. And last but not least, we do expect to drill this quarter and into next year a significant new target called Cebada Norte up to the northwest of the Cebada mine and actually the northern parts of the Bolanitos vein system which have basically never been drilled. We've developed some nice targets there for Q4, Q1.

So that's some of the exploration highlights. I'll wrap up our overview with just a discussion on acquisitions. For the past almost year and-a-half we've focused on acquiring another producing mine or company but without success. What we found is that there are very few silver dominant mines that are of high enough quantity or quality for us to go after. So we are in this quarter broadening our acquisition strategy to include resource projects ready for development and also exploration projects ready for drilling. We really want to establish a pipeline of projects at various stages of exploration and development in order to move the entire Company forward. Our first priority in this has always been and still is consolidating our land positions in each of the the three mining districts that we are active in, namely Guanacevi, Guanajuato and Parral, and this is probably the area that will see the first announcements of new acquisitions in this quarter. We do have several other exploration and resource opportunities that we're pursuing. They're in various stages of due diligence at this time and we're still looking for that one M&A transaction to boost our production and move Endeavour into the mid-tier of the silver space.

So that's a general overview of some of the main themes the Company's pursuing at this time. And operator, I'd like to turn this meeting over to questions and answers.

Thank you. (Operator Instructions) The first question is from Chris Thompson of Haywood Securities. Please go ahead.

Yes, hi, guys, congratulations on a good quarter. I know when we last spoke you were still waiting for metallurgical testing I think from Porvenir Dos. What's the recoveries look like there? How is that going to fit in with actually getting that ore through the mill?

Thanks for your question, Chris. As you probably know, the first sill level in Porvenir Dos hit a fairly high manganese area and our initial recoveries were down below 60%. We have optimized those recoveries now and the development bucket going into the plan is currently doing better than 70% recoveries. And once we get out of the first sill level and into the second sill level those Porvenir Dos recoveries will actually rise to the 75%, 80% level similar to the rest of our Guanacevi operation.

Great. Also, can you comment, I know we also spoke and obviously you guys are waiting for your exploration permits for Guanajuato. What's the budget? How many meters do you guys plan on drilling from surface to test the (inaudible) event?

We increased the budget by about 45% so the Company-wide annual budget's now $2.65 million of which $1.15 million had been spent by the end of Q3. That means a pretty aggressive drill program through Q4. With regard to how many meters at Lucero, I can't actually recall the breakout of the Lucero and Bolanitos and San Jose South targets but it's probably going to be into the 2,000 plus meter range. There's a significant chunk of footage also assigned to Porvenir Cuatro this quarter also in the 2,000 to 3,000-meter range.

Great, guys. Congratulations again.

Thank you. The next question is from of Haytham Hodaly of Salman Partners. Please go ahead.

Good morning, everyone. First of all, looks like you were making some great strides in improving production levels. Congratulations on that. Maybe just touch up on your guidance for the fourth quarter, 800,000 to 850,000 ounces, what would be the general break down between the two mines, being Guanajuato and Guanacevi?

Guanajuato is on track to do about 70,000 to 75,000 ounces per month, and the balance would come from Guanacevi. As an example, in October we did I think 72,000 ounces?

76,000 in Guanajuato in October and 196,000 Guanacevi.

We did 272,000 on the month and that gives you a good idea of what we can do this quarter.

Sorry, it was 196,000 at Guanacevi in October?

Yes.

And what's allowing you to get to these levels? Is it higher grades? Is it better through-put? What are we looking at?

At Guanajuato clearly it was the discovery and development of Lucero and now Bolanitos. At Guanacevi, it's simply getting that Porvenir Norte ramp out and down into the top of that Porvenir Norte pod. Because prior to Q3, I won't say that we were living off of bits and pieces but we had several stopes, small stopes, in production and development in Q3 at Porvenir while we were waiting for that ramp to get into Porvenir Norte. And now the ramp's there, the bulk of our production from Porvenir going forward for several years actually will be that Porvenir Norte pod. So really it was a question of bridging from several small stopes to getting into the bigger stope at Porvenir Norte that allowed us to boost throughput. Part of that was the capital projects, getting the pump station at Porvenir Norte up and running, the sump, all the piping. It was a pretty significant capital project for us because it's going to have at least a five year mine life.

What's Lucero look like in terms of mine life right now?

Lucero, I'm probably not the guy to ask but in general terms we're expecting about two years out of it and we commenced production early this year. It's still open. If you go and look at the historic stopes in the whole Bolanitos vein system, they're typically 200-meter by 200-meter by 3 to 4-meter pods. So typically 200,000 to 300,000-ton pods. Since the production rate at Guanajuato is currently around 15,000 tons per month, and 60% of that's actually coming from Lucero at this time, you can see that we're drawing a good chunk of our ore from Lucero, so it'll move fairly quickly.

You were saying, maybe Dan mentioned, that exploration for Q4 was at $2 million, is that right?

Yes.

Will that all be expensed, Dan?

Included in that $2 million, I believe there's a share payment on an option that we owe so that won't be. I'd have to go back and look and see of that $2 million what the dollar value is for that $2 million or that share payment.

Is this quarter's number a reasonable number to assume going forward?

For exploration?

Yes, just for exploration.

Probably about 1.2.

Fair enough. And just some housekeeping issues. Your realized gold price in the third quarter and realized silver price, I didn't see them anywhere.

I believe they're in the press release but year-to-date our realized gold price was $942 and I think for the quarter it was $969.

Sorry, $969 you said for the quarter. Okay.

And $14.83 on silver and year-to-date $13.83.

Okay. And then with regards to gold sales, I know you report gold production or payable gold but actually how much was sold. In order for us to be able to derive a price based on -- you do provide your byproduct gold sales revenues but in order for us to be able to derive a realized price on those sales it would be helpful to have the actual gold sales in the quarter. For example if I was to look at Guanajuato and see the byproduct gold sales was $1.2 million but you only produced 2,495 ounces and the realized price would be about $490 an ounce which is obviously low.

Yes, right now in our financial results in the press release, we broke out gold and silver. So we sold 525,000 ounces of silver at $14.34 and then 2,334 ounces of gold at $969. Are you asking for the breakout between Guanajuato and Guanacevi?

I'm sorry, I didn't see it. You said it was in the press release, the 2,334 gold?

Yes.

I'll look for that.

No worries. Under financial results.

I'll definitely look for that. Could you repeat the inventory number you said, as well. You said 300,000 ounces of finished good and 28,000 ounces of gold?

Yes, 384,000 ounces of silver and 2,782 ounces of gold.

Have those already been sold so far in this quarter?

We have sold essentially those ounces this quarter but then we've still got finished goods right now of that. Like I said, come year end, come December 31st, we're going to assess where the gold and silver price is and determine whether we're going to clean out our cupboards or not.

The sale of these inventories that in theory will give you this banner quarter, not to mention the fact that you're having a good quarter already.

From a revenue standpoint, absolutely. I'd like to point out, with all those finished goods out at September 30th, that's $9.1 million of market value with spot prices with the cost of sales essentially at $5 million bucks. $4 million of profit right there which is $0.08 a share.

Which is great. Okay. Perfect. Last question. Do you have depreciation level breakdown for Guanacevi and Guanajuato handy for the third quarter?

Third quarter? I do, actually. Guanajuato, $300,000, just for the quarter. Remember there is some depreciation that is allocated to finished goods. Depreciation for Guanacevi for the quarter is $1.8 million.

Okay. And then one last question. Is Godfrey around?

He's not on the call. He's actually in Mexico on the field.

I'll test you guys to see if you know the answer to this one. Do you have any idea what the mining, mill and G&A costs on a per ton basis were this last quarter for Guanacevi and Guanajuato?

I do have and I have that somewhere in front of me.

Do you want to send that to me afterward, Dan?

Maybe I could give you some additional color on our finished goods. Right through first quarter this year we had been selling all our dore to the Penoles refinery in Torreon. So there was really no delay in the metal sales and revenues. But we went to a refining contract and conducting our sales through Oramet in Q2. Because of our positive view, at least short-term, on gold and silver prices, we took the view that we didn't need instant cash flow and we should put all of our metal offers out above market. That obviously optimizes revenue but it also delays revenue. That's how we ended up with accumulating these finished goods. I think it is likely that we'll consider clearing the finished goods out for our year end but resume that strategy in Q1. Beyond Q1, though, we're not clear on where gold and silver are going so it might change at that time.

Okay. That makes sense.

To back up there, Haytham, do you want the breakdowns between mining, milling and administration?

That's right, on a per ton basis for Guanacevi and Guanajuato.

For Guanajuato I've got $58 million.

Is that combined?

For Guanacevi, I've got $73 million.

Do you have an actual breakdown for mining, milling and G&A separately?

For Guanajuato, $26 million, $19 million and $12 million. $34 million, $28 million and $11million.

Perfect. That's good. You passed the test, Dan. One last question probably for Brad and then I will pass it over to somebody else. Do you have any idea what your CapEx breakdown could look like next year in terms of what you would like to do in terms of development programs?

Yes. The top priorities for us are the next and hopefully final phase of refurbishment at expansion at the Guanacevi plant. We haven't actually settled the CapEx so I'm not going to give out any numbers but an order of magnitude would be probably less than $10 million to double the size of the crushing and add another mill. Hopefully significantly less than $10 million. We're obviously considering that now. And then just normal mine development comparable to this year's mine development at Guanacevi.

At Guanajuato, we don't yet have the resources to justify another plant expansion so that's not on for next year yet. But with the aggressive drilling that's going on, we are hopeful that we can pick up the opportunity to consider a planned expansion to 800 tons plus at Guanajuato. So those are on the plant side.

On the mining side, again, I think Guanajuato development numbers will look very comparable to this year's.

Perfect. Thank you, gentlemen.

(Operator Instructions) The next question is from Robert McCleary, a private investor. Please go ahead.

Congratulations and thank you very much for a great quarter.

Thank you, Robert. Thanks for phoning in.

I must say that my question was answered previously. Just keep up the good work.

Thanks for calling in, Robert.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Clarke.

Thanks, Alyssa and thanks for people that listened in today. As you can see, we had a splendid third quarter and look for bigger and better results in the fourth quarter. One thing on the exploration program, we have seven drills turning right now which hopefully will generate some more good drilling results. As Dan and Bradford said, look for better production numbers and cash flow numbers in the fourth quarter and that should set the stage for a very good 2010 for us. And that's it from Endeavour Silver for the third quarter and again thanks for phoning in everybody.

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