Endeavour Silver Corp (EXK) 2010 Q4 法說會逐字稿

Hello. This is the Chorus Call conference operator. Welcome to the Endeavour Silver reports fourth-quarter and year-end 2010 financial results.

As a reminder all, participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

At this time I would like to turn the conference over to Bradford Cooke, Chairman and CEO. Please go ahead.

Thank you very much, operator, and welcome, everybody, to today's conference call. Our format today is that rather than reiterating the news release, I am just going to focus on a few of the highlights from the fourth quarter and from the full year 2010 and touch on our guidance for 2011. Then I will let Dan Dickson, our CFO, who is also with me here today, add a little bit of color on the financial results and Godfrey Walton, our COO, will add a little color on the operating results.

So clearly, last year was a great year for the Company; our first full year of net earnings, $7 million, which worked out to $0.11 per share. Another highlight I would like to just mention is our cash operating costs which once again fell, this time by 5% to the $5.70 mark. Obviously we were helped along by the byproduct gold credits but also through the economies of scale at both operations.

A good chunk of the credit for our production boost last year and obviously a boost of revenues and cash flows came from the expansion of our Guanacevi mines and plant. At the plant we took it up to a steady-state 1,000 tonnes per day through a complete overhaul and installation of the crushing circuit. And so it is producing 1,000 tonnes per day steady-state since November.

There is still room for not only expansion but also proven in the plant, principally in the grinding circuit now. We, as you know, two years ago did the backend, that is the leeching and Merrill Crowe and refinery. Last year we focused on the front end, the crushing circuit, so really the only bottleneck remaining in the plant if we want to go higher is the grinding circuit.

We don't yet have the resources to justify another plant expansion. But clearly with our budgets this year, both on mine development and exploration, there is a big push on to not only get the reserves up, but also to convert a bunch of resources into reserves so that we can, in fact, evaluate a final step of plant expansion at Guanacevi.

Last but not least, we give you the silver and equivalence production. We do all of our planning and reporting in silver and report gold as a byproduct credit. The equivalents are really there just for convenience for comparison to other peers who use equivalents. I should point out though that equivalents have been crashing in terms of their relative value compared to silver, so they are, literally, just a snapshot in time.

Moving to the highlights of the fourth quarter, again our best quarter ever. One disappointment was in the realized silver price. Our sales were a bit lumpy in the fourth quarter and so we underperformed relative to the average spot price. I can say that those sales have been smoothed out and we are actually now -- in the first quarter we are fully expecting to beat the average spot price in Q1.

As you see, cash operating costs in Q4 were down at the $4.70 level. They are going to come back up in Q1/Q2 during this year's build out of the Guanajuato operation. As we have done in three previous years, we are predicting relatively flat costs and flat production in Q1/Q2.

Once Guanajuato has been built out to 1,000 tonnes per day, which is this year's expansion program, then we obviously are expecting to see a jump in production, a jump of revenues and cash flow, earnings, and a concomitant reduction in our cash costs.

Targeting for the year our guidance 2011 3.7 million ounces of silver production, 19,000 ounces of gold production. On a 50-to-1 basis that is about 4.7 million ounces of equivalents.

And cash costs will be lower than last year, probably a similar reduction to 2010. Capital is around $36 million, exploration around $9 million, and obviously you can do the math on revenue forecasts.

We are highly geared to the price of silver. I think we are one of the most leveraged junior producers to the price of silver and that -- fortunately in Q4 and particularly as we get into these high-price environments of Q1/Q2 that will show up in our cash flow and our earnings as well.

So that is pretty much it for me on the overview. What I would like to do now is just turn the call over to Dan Dickson maybe for a little bit of color.

Thanks, Brad. There is not a lot to add from the financials. I think our fourth quarter was in line with a lot of people's expectations with where the silver price went. Obviously we don't provide guidance within our revenues because it's dictated by where the silver and gold price goes.

One of the things that probably is a little higher than expected would be our depreciation and depletion for the quarter. We brought on a lot more of our mine development in Q1, Q2, and Q3. Guanajuato came in line and we started depleting that in Q4, so we saw that cost increase for the fourth quarter higher than what we had seen in the previous quarters. Then obviously what has come off in the fourth quarter is our accretion for convertible debentures that were extinguished in the third quarter and obviously the redemption gain related to that convertible debentures as well.

So again $0.09 a share in the fourth quarter, which is a reflection of the share price and everything that we said we are going to do in the year, that we expect our Q4 production to increase and all of our earnings to come in the fourth quarter.

Godfrey, do you want to add anything on operations?

I think you have actually covered most things. I would maybe just want to emphasize that last year we performed much as we expected with steady-state first two quarters and then gradually ramping up through the Q3/Q4 and we are expecting to do the same for this year as well. So it's a normal progression through the operations.

So we actually have lots of exciting new developments going on in the exploration area as well and working hard on M&A, but we will leave that. Perhaps maybe we can address it after the questions.

Let's turn this over now to the audience for Q&A.

(Operator Instructions) Andy Schopick, Nutmeg Securities.

Thank you. I would simply like to ask how the silver ore grades mined at your various properties in 2010 compared with your expectation and whether you can give us any general comment in terms of expectations for ore grades in the coming year.

The grades that we mine -- this is Godfrey, by the way -- the grades that we mined last year were much in line with what we had expected, above 300 range. And we are expecting similar grades for Guanacevi, around 313, 314 and at Guanajuato about 180 grams silver.

So no major change in the year ahead?

No, we --.

Okay. Brad, you touched upon M&A without really commenting on it. Clearly, I have the impression that this is something that is a focus of the Company and something that you would like to continue to pursue in order to further build up your overall reserves. Any general comments about the kinds of properties or geography is that you might be most active in now?

Well, like we do every year, we do a bunch of small deals in the two existing mining districts to continue consolidating our land base at Guanacevi and Guanajuato, so you will see some more of that this year. That is why we are able to go out and continue expanding the resources in both of these and with a particular push on Guanacevi this year.

With regard to earlier stage opportunities, as you saw, we made an offer for Cream in the (multiple speakers) quarter last year and ultimately pulled the plug on it. That company has obviously done very well with the run-up in the metal prices, and with our bid they are now fully financed and doing their own work. So we are continuing to look for earlier stage opportunities like that and don't be surprised if we come with something outside of Mexico soon.

In terms of more advanced opportunities and looking at, for instance, possible mergers or acquisitions amongst our peer group, that has been an ongoing process now for two years. The only thing that is different is that for the better part of two years we were trying to be the most acquisitive of the group, but there is really not a whole lot of dance partners. For instance, we like maybe three out of the group and nobody wanted to dance, but that has changed in the last three months.

I take it your focus would still be on primarily pure silver mining operations?

We still prefer silver as a primary metal, but we have no allergies whatsoever to byproduct credits.

Okay. With cash flows being as strong as they are and anticipated to remain strong, are you able to focus on perhaps somewhat bigger potential deals?

Certainly. Certainly with our cash position and our stock price we have two currencies that we can put to work here on larger acquisitions. Again, it's always a two-way street if you are doing something with another company. So we do have irons in the fire but there is not much more we can say on that yet.

Okay. Thank you so much.

Haytham Hodaly, RBC Capital Markets.

Good morning, gentlemen. Just more of a strategy question here going forward. You have obviously looked at expansions at Guanacevi and Guanajuato. At what point -- or I guess maybe if you could just go through each one and say we could potentially get this one to 1,500 tonnes a day, but our plan is to do this, etc. I am just curious what the potential throughput expansion rates are and what the limiting factors are. Is it basically a number of working faces for you, etc.?

As you know, these high-grade underground vein mines do have natural limits, and the number of working faces is the critical one. For us, though, because we still grow our land base and our resources every year, we haven't found the natural limits of either mine yet. I am going to guess they are between 1,000 and 2,000 tonnes per day.

It's still very early days at Guanajuato, as you saw from our drilling last year where we came with several new vein discoveries south of Bolanitos and a couple with very good signs, Lucero and Daniela. We are still drilling out Karina, Fernanda, Daniela, and we have got numerous targets yet to drill in Guanajuato just on our existing lands, never mind any new lands.

So what is the natural limit of that particular mine? Well, it's going to 1,000 tonnes per day this year and we have left the door open for an additional plant expansion subject to a resource boost and a reserve boost. It wouldn't take a whole lot actually to take the plant up north of 1,000 tonnes per day.

The crusher -- why don't you address this, Godfrey? Where would be the next bottleneck in Guanajuato?

At Guanajuato, yes, this year we will hit 1,000. We set it up so that it's an easy move out to 1,500 tonnes a day with very little expenditure, so that is really the next big push. Beyond that it would be a lot more expensive for us to expand it, so 1,500 tonnes a day would be a max item at this point.

And we are okay on crushing and milling?

Yes.

So where would the --?

So what we would do and what we have discussed right now is actually taking out the crushing circuit and replacing it with a sag mill, and that is what will allow us to go up to the 1,500 tonnes a day.

At Guanacevi we have again set that up so that everything we have changed and adjusted could go to 1,500 tonnes a day. The only item there is the mill, and the milling is reducing the number of mills we have got and putting in a larger mill. That, again, could take us up to 1,500 tonnes a day.

So I don't know if that answered your question, but for this year we just need to once again focus on boosting the reserves and resources at each district. Then as we get into the third and fourth quarters we get a better picture of what is doable for next year.

That is good. It sounds like either mine can get up to as much as 1,500 tonnes a day with little CapEx expenditures.

Correct.

Okay, that is perfect. Thank you, gentlemen.

(Operator Instructions) [William Mueller], stockholder.

Good afternoon. I got a question; as far as your policy on production, would you consider hedging any of it? And if you do, put it in a news release or put your policy that you don't hedge on your website?

That is an interesting question. We have not ever hedged, we have no plans to hedge, and we most certainly would be required to report any hedges we put on in our quarterly financials. So the answer to your questions would be yes across the board.

Thank you and congratulations on your progress.

Thank you.

Benjamin Asuncion, Haywood Securities.

Good morning, guys. I just wanted to touch up on -- sort of following up on some stuff here on Guanajuato. Just looking I guess at the results, seeing some of the costs on a per tonne basis here creep up as well as recoveries, can you comment -- sorry, as well as recoveries going down. Can you comment on any of that and what we would -- I guess what we should be looking at going forward? Is this a new level, or is this something that was unexpected or unusual for the quarter?

Hi, Ben. This is Godfrey. On the recoveries, yes, you are right; the recoveries have gone down a little bit. The met testing that we have done lately with regard to expanding the plant there suggests that what we need to get our grind down a little finer. So the recoveries have gone down because we have been pushing tonnes through the operation.

With the new plant expansion it has been set up to grind at the right level and so you should see the recoveries come back up once that expansion is complete.

As far as the cost factors, Q4 did creep up but it was kind of one-time charges that went through there. Some of it was processing costs from one operation to the other. As you know, Guanajuato ships it concentrate up from Guanajuato to Guanacevi so we passed through some charges there, and that was about $100,000 or $200,000 in the fourth quarter.

It was just from the mining costs itself were up from prior quarters and we don't expect that to continue going forward. We had accrued year-end bonuses for mining staff at Guanajuato and they are a little bit higher because they exceeded some expectations this year. So I would say the fourth quarter cost per tonne would be an anomaly, and we would expect it to come back down and even a little bit more for 2011 with the increased tonnage throughout the whole year.

I should point out, though, that we, as well as everybody else, are still seeing cost pressures at site. Costs of chemicals in the plant, costs of labor in the mine and the plant is obviously going to be an annual issue, but as we look at our cash operating costs they continue to decline. Well, the reason for that, obviously, is partly the gold credit and also partly the economies of scale.

So I think that, as Ben pointed out, the dump at Guanajuato for costs of Q4 were partly a one-time issue but partly not.

Okay. Dan, if you were to take an estimate here at what they would be normalized then I guess if we were to strip out those additional costs that were passed through plus some of the usual bonuses, can you sort of give me a range in where it would have fallen?

Yes, it would have been in the -- for Q4, if we had stripped out some of those costs, probably in the high $60s, so $67 to $68, $69. But then still going forward our annual cost per tonne of I think $66 or $67 per year is a pretty fair number going forward.

For Guanajuato.

For Guanajuato.

Okay. And then just to follow-up, right now you were looking at about 80% of the ore coming from Lucero. With the development of I guess the Fernanda, Daniela, and Karina veins, when do you see that coming into a mine plan?

Well, Karina is actually in the mine plan for this year. We are just -- we have actually hit the top of it with a cross cut from the surface ramp and as we ramp down we will access other levels. So Karina will be in; Daniela and Fernando probably next year.

Okay. And in terms of sort of a contribution amount are we talking about sort of a 10% of the ore sourced, or is it going to be something more significant than that?

For the year it will be 10% to 15%.

Thank you.

A little bit more as we go through the year. The average will be 15%.

Andy Schopick, Nutmeg Securities.

Brad, I would like to ask you about your thoughts about silver as a monetary asset in general. As you know, investment demand for silver is very high. The mints around the world simply cannot keep up with demand. Anyone who has seen some of these products, such as your silver may believe -- they are beautiful coins.

And of course, in Mexico, Hugo Salinas Price has been a very strong advocate of trying to bring silver back in monetary form. Do you have any particular thoughts or comments about the reintroduction of silver as a monetary metal?

No, I am just going to look at the facts. The fact is that off take, physical off take for coins and bullion bars has gone to the roof in the last year and there is really no way to predict where the peak of that demand is going to be.

Will it culminate in new coinage, new monetary metal, silver? I don't know. All I know is that there is significant concern about the Western currencies and it's reflected in this retail off take. I think that retail off take is reasonable to assume it's going to continue for some time.

One other matter. First Majestic, for example, does have a small retail operation where they do sell some of their product in a bouillon-type form. Would you consider doing anything like that for investors, shareholders?

We have kicked that around off and on for years, and it's a money-losing proposition. We did interview Pan American who had the first company-lead coin sales program. They have been doing it for many years now. But they themselves told us it's a loss leader; it's really just a way to popularize the metal and give something back to the shareholders if they want to buy the metal from the Company.

We don't have a policy to do that at this time, but we continue to revisit it.

Okay, thank you.

[Vladimir Herdag], private investor.

My question is about your anticipation of silver price in the next six to 12 months and how this would impact the distribution of spending on exploration versus production. Thanks.

We are clearly going to revisit our budgets midyear because we think that the year's highs will be in the fourth quarter, not the first quarter. So I think you haven't seen the top of this year's market yet.

However, given how robust and long and strong the move in gold and silver has been since September with barely a hiccup, I am going to have to say that I think there is going to be a consolidation period -- nothing goes straight up forever -- and that consolidation may not be very far away. So I am calling for the typical summer doldrums and then a very strong fourth quarter with new highs.

Sounds good. Thank you.

Benjamin Asuncion, Haywood Securities.

Just to follow-up here on the exploration program, $9.2 million and about 47,000 meters and from what I see here it's about 10,000 at Guanacevi, about 14,500 at Guanajuato, and about 6,500 at San Sebastian. Can you provide some clarity on whether you have -- I guess it's the remaining 16,000 meters, where those are going to be directed?

I guess you will have to wait a couple weeks for that.

Okay.

We have budgeted something that we haven't announced yet.

Perfect.

(Operator Instructions) Rob Hales, CIBC.

I just wanted to follow up on the cost per tonne question earlier. What is your go-forward expectation of cost per tonne at Guanacevi?

Godfrey or Dan?

I can take that. Our 2011 -- we don't provide a lot of guidance, but it's pretty fair to assume similar costs per tonne. With the cost pressures, as Brad alluded to before, we are going to have some economies of scale for the whole year. So Q4 is -- I expect it to come up a little bit from Q4 going forward, but at the same time using 2010's costs per tonne on a go-forward basis it's probably a fair assumption to make.

Like I say, with the economies of scales that we are going to get for a full year's production using the plant expansion, the cost pressures should offset that gain.

If you are looking at high $60s at Guanajuato, you are probably looking at high $80s in Guanacevi. Our own internal target for the year is to make sure that we are below $80 a tonne.

Okay, great. The exploration budget, is any of that capitalized?

No.

$2 million of it is actually -- is capital. Step out and filled. $9.2 million is a total budget; $7.2 million will hit the income statement and $2 million will hit the balance sheet.

Okay, great. Thank you.

[Bruce Burnett], private investor.

Great quarter, guys. Might have missed this; you may have already answered the question and I apologize for it. I just got on the call. Did you guys anticipate hedging your silver production on a going-forward basis this year at all?

No.

Great, thank you.

Andy Schopick, Nutmeg Securities.

Any general comment about how foreign currency exchange rates have impacted results this year between either the Canadian dollar, the peso, the US dollar? Not sure to what extent you have any material exposure.

That is a very fair question. Obviously the Canadian dollar is performing very well. We did a raise in December in Canadian funds and we kept those funds in the Canadian dollar. And it was reflected in we had a foreign exchange gain in December specifically in 2010. We continue to hold those funds in Canadian dollars so it has been a robust Q1 for the Canadian dollar.

As far as the peso is concerned, it's about -- labor is a big portion of our costs and obviously all our labor at the mines are incurred in pesos. We have seen an appreciation of the peso. Essentially last year it averaged to 12.5 -- yes, 12.5 to 1 to the US dollar. We are seeing that hovering just above 12.

So as far as costs, I always analyze what the peso is doing to our costs and it was a cost pressure of about 6% last year. But again, providing guidance of where the peso is going is something I don't get in the business of doing, and we internally use a peso/US dollar rate of between 12 and 12.5 for the year. So if we get appreciation in the peso, our costs will go up. If we get depreciation in the peso, our costs will go down. Simple as that.

So you don't really hedge that too much either?

We don't hedge our peso, no.

Okay, thanks.

There are no further questions at this time.

Okay, well then, I would just like to thank everybody for attending and stay tuned for Q1.

Ladies and gentlemen, this conference is now concluded. Thank you for joining and have a pleasant day. You may now disconnect your telephones.