Endeavour Silver Corp (EXK) 2011 Q4 法說會逐字稿

Hello, this is the conference operator. Welcome to the Endeavour Silver fourth-quarter 2011 conference call and webcast. As a reminder, all participants are in 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 Hugh Clarke, Vice President, Corporate Communications. Please go ahead, Mr. Clarke.

Thank you, Laurie. Good morning, everyone, and welcome to Endeavour Silver's conference call and webcast. With us today is our Chairman and CEO, Bradford Cooke, our President and COO, Godfrey Walton, is live and in color from our Guanajuato, Mexico operation. Dan Dickson, our CFO, is here, along with my colleague, Lana McCray.

Before I turn this over to Bradford, I'm obliged to point out that yesterday's news release and today's conference call contain some forecasts and some projections prepared by the Company's management, and you should be guided accordingly. Bradford will give a brief commentary to accompany the slide show and the webcast, after which we'll open things up for questions and answers. So, here's Bradford Cooke, our Chairman and CEO.

Thanks, Hugh. And I'd just like to remind everybody that pursuant to our news release yesterday and another release on Monday regarding our reserves and resources, Endeavour Silver in 2011 did record yet another strong year of growth, not only across our exploration front, with reserves and resources growing aggressively last year, but of course our production as well, silver and gold production both up sharply, and the financial performance reflecting all of that. So in terms of highlights, the financial highlights for the year are led by our net earnings, which increased to $18.8 million, or $0.22 a share, compared to a significant loss in 2010. Just a reminder, the net earnings under IFRS reporting do include an embedded derivative liability in the options and warrants. In other words, if the stock performs well, it becomes a drag on the earnings because of the embedded value of the options and warrants. Notwithstanding that, if you adjust the earnings to take out that embedded derivative liability, we came in with a very strong year last year at $32.4 million, or $0.37 a share, compared to $1.7 million in 2010.

And again, a comment on adjusted earnings. We did elect as management to withhold a significant portion of our fourth-quarter silver and gold production from sale. We chose to inventory that production through the end of the year, largely as a cash-management exercise. We took the view that the sharp correction in the gold and silver prices in the fourth quarter was probably overdone and that it would be better for our stockholders to be a little bit patient. We did in fact enjoy a rebound in the precious metal prices in January and February and did sell most of that inventory at significantly higher prices in Q1 compared to what we were looking at in mid- to late December.

Moving on to operating cash flow, it jumped 103% to $63.9 million, and if you just reflect back to 2008, from 2004 to 2008, we did enjoy growing cash flow, but we did employ all of that cash flow to grow the business. And really only since 2009 have we had free and growing cash flow, growing by leaps and bounds. Mine operating cash flow, which is a reflection of how the actual mine sites are doing, rose 92% to $86.4 million. And actually if you go, again, look back five years, you'll see that there's a pretty steady and accelerating growth of mine operating cash flow. The mines are doing better and better every year. Revenues climbed 48% to $128 million. Again, just a reminder that if we'd actually sold all of that inventoried metal at year-end, our revenues, mine operating cash flow, operating cash flow, and earnings would have all been significantly higher. We do actually expect to capture that additional revenue cash flow and earnings in the first quarter through our recent sales of the metal inventories.

Speaking of which, at the end of the year, we held 980,000 ounces of silver in inventory and 5,400 ounces of gold, compared to 127,000 ounces of silver and 957 ounces of gold at the 2010 year-end. Realized price of silver, like most in our business, was up sharply last year. We captured $35.61 per ounce sold, and the gold price was up 27% to $1,570 per ounce sold. I think silver was slightly better than the average spot for the year. Cash costs also decreased last year, our fourth consecutive year of falling cash costs, thanks largely to two things. We do expand our operations every year, and as a result of that, we do capture some economies of scale. So part of the falling cash costs are a reflection of that, and because of our growing operations, our gold credit, gold production credit, increases every year. And of course, with the rising gold price it also has a very beneficial effect on cash operating costs. Costs last year came in at $5.08 an ounce net of the gold credits, beating our guidance for the year. That allowed our working capital to rise 39% last year to $142 million at year-end, and cash and short-term investments were about $110 million at year-end, and both are continuing to rise sharply in the first quarter of this year.

Moving to operations, silver production was up 14% to 3.7 million ounces, meeting our guidance for the year. Gold production was up 23% to almost 22,000 ounces, beating our guidance for the year. And silver equivalent production at a 45 to 1 weighted ratio for the year came in up 15% at 4.7 million ounces. We basically focused on optimizing the Guanacevi mine and plant output last year at 1,000 tonnes per day after the capital expansion of 2010. And our focus on new organic growth last year was largely in Guanajuato, where we not only expanded the mine from 600 to 1,000 tonnes per day, we expanded the plant from 600 tonnes to 1,600 tonnes per day, not only facilitating last year's mine expansion, but an additional 60% mine expansion this year, which is well under way. And on the exploration front, silver proven and probable reserves increased 25% to 17 million ounces. Silver measured and indicated resources were up 32% to 36 million ounces. Silver inferred resources were up 18% to 35 million ounces. So again, a very robust year in exploration.

I think rather than continuing with more highlights, what I'd like to do now is just reflect on what our plans are for this year, and then we'll open it up for questions and answers. And a reminder that my colleagues, Hugh Clarke, Dan Dickson, and Godfrey Walton are available as needed for questions. So in terms of our outlook for this year, the plans are basically to continue our organic growth at both operations. At Guanacevi, we're looking at a simple optimization of the mines and plant to reach an equilibrium of 1,200 tonnes per day at the operation. We were planning to get there by year-end, but Godfrey informs me that we could be there by the end of this quarter. We'll see if it's maintainable on a steady-state basis, but already significant gains at Guanacevi the first three months of this year. At Guanajuato, as I already mentioned, the plan is now to continue ramping up the mine production to fill the plant capacity to 1,600 tonnes per day by the end of the year, and it will be a step-wise growth, so incremental growth each quarter to get to that target.

On the exploration front, we're continuing to not only pursue obvious potential new vein discoveries, largely in Guanajuato, where La Joya is coming along. The Belen vein is continuing to emerge as a potential vein that will come into the mine plant, and several other targets within that whole Lucero-Bolanitos area that are awaiting drilling this year. In Guanacevi, our focus will be to continue drilling in the Milache discovery area from last year and to generate other opportunities for drilling in the camp. In terms of new properties, in each of those districts, we do have possible acquisitions in the hopper. They're all kind of small-scale, district-related -- small scale meaning size of the properties. But in terms of immediacy for the potential to add ounces, we like, obviously, each of the properties that we're trying to bring into the portfolio at this time. Moving on with that, property-related exploration acquisitions, we're still very much active on trying to get into new districts, and we're working on some things in Mexico, also in Chile. And last but not least, we continue to evaluate other opportunities to grow the business, either organically or through acquisitions. So that's my review, and what I'd like to do now, operator, is open up the phone lines for questions and answers.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Heiko Ihle, Euro Pacific Capital.

This is Heiko with Euro Pacific. How you guys doing?

Everything is good, Heiko. How are you?

Terrific. Thank you very much. Just a couple of quick ones. At what point in time do we see your Company making a meaningful acquisition? You've all been known to be very selective buyers out in the marketplace. And obviously, currently, transaction multiples have expanded. I assume that's what you're seeing as well. Should we see anything throughout 2012, and if so what would be the timeline?

In terms of timing, I can't comment. In terms of intent, clearly the Company has been very active on the M&A front for some time, and we continue to scour the silver world for opportunities. But it is impossible for us to comment on any potential transactions at this time.

Maybe I'll say it a little bit differently. Should we expect to see anything in Q1?

Again, I can't comment on that.

Okay. Fair enough. And then recovery rates in Q4 2011 were higher than for the fiscal 2011 across the board. Should we trend-line that more or less for 2012, especially considering that you found a bunch of high-grade veins in Q4?

Heiko, I'll ask Godfrey if he would like to answer that question.

Heiko, this is Godfrey. Can you just repeat it? I didn't quite catch it all.

No worries, yes. Recovery rates overall in Q4 2011 were higher across the board than they were in fiscal 2011. Should we trend-line the Q4 numbers, or should we use the 2011 numbers as a whole in the recovery rate?

For recoveries, I think you can start looking at the Q4 recovery averages for both operations. We are spending quite a bit of time focusing on improving our recoveries, and so I am expecting things to go higher than what we had for Q4. But if you use those recovery rates in Q4, I think that would be a reasonable approach for 2012.

Simple enough. Thank you very much. Then the last one, you got the estimated cash cost of $5.50 to $6.00 an ounce. Can you guys give a breakdown between Guanajuato and Guanacevi for those cash costs?

Yes, hello, Heiko. It's Dan. For Guanacevi, I would expect it to be relatively the same as prior year, so in the high $9s. And then Guanajuato, we'll see it come back a little bit. We're hoping with the economies of scale, it will push down but I'd use similar to last year's, the same breakdown as percentages.

And what was Guanajuato last year?

Guanajuato last year was negative -- I'd say negative $6.75 is what we ended up for the year, and Q4 was negative $7.77.

Excellent. Thank you very much. Congratulations.

Scott Gryba, BMO Capital Markets.

Hello, gentlemen. Thank you very much for the update. What are your plans in terms of your dividend policy?

We have discussed it at the Board level over the last year, and we are interested in instituting a policy at some point. However, as a group, we decided that our growing pile of cash would be better served with regard to acquisitions. So we're going to hold fire for the time being on a dividend policy and just see how we do in that sector.

Okay. Thank you.

Andy Schopick, private investor.

I have several questions I'd like to ask. The first is expectations regarding the average grade ore. It slipped a few percent, or it's been slipping a little bit. Any reason to expect that that would continue, given your production outlook for 2012, or should this more or less stabilize pretty much as it's been?

Godfrey?

Andy, this is Godfrey. Thanks for the question. The -- I think you can see the grade is maintaining what it is at right now. We have -- with higher prices obviously, we're able to mine a little bit lower-grade material, and this is one of the things that brings the grade down. So I think using the numbers that we had for Q4 should be reasonable.

Okay. I also want to pursue what has occurred here in terms of the decision -- as the year unfolded, because certainly this wasn't planned -- to inventory as much production as you did, not only over the course of the year, but certainly in the fourth quarter, where we see that literally, you sold about 400,000 ounces, but production was over 1.1 million ounces. So that was pretty significant. And what I'm trying to understand is what the financial impact is likely to be as a result of the decision to sell that inventory -- those inventoried ounces in the first quarter. As I recall, you do inventory those ounces at cost, so I would assume that those ounces had something in the area of $5 per-ounce cost basis. But I have no idea at what average price those ounces may have been sold and wonder whether you can give us any kind of indication, because of the impact it's going to have on 1Q, what the contribution is going to be from a revenue point of view?

Right, Andy, this is Dan Dickson. At year-end, we would have carried those ounces not just with the cash cost, but also the depreciation cost in it. So our total costs on all those ounces was $18.5 million. With using the December 31 spot prices, the fair market value of that was about $35 million. So it's safe to say Q1 -- I'm not going to give out our Q1 numbers yet -- but the Q1 silver prices averaged over $32. We have unloaded some of that silver; most of that silver. So there's obviously an uptick compared to what we had in December. But the quick answer with that would be taking the number of ounces times the Q1 average, and you know what the cost base was, $18.5 million. So that would be a direct hit to earnings.

In terms of the difference --

Right.

-- between what you sold it for and the cost that it was being carried.

Right.

Were all of the 980,000 ounces sold already in first quarter, or is there still anything that's been inventoried from prior deferrals?

Yes, so, Andy, because we're into a pretty bumpy market, and we're basically looking to try and capture a little extra value for our stockholders on what would be viewed as unusual events, so --

Your decision worked good this time but, you know, it's pretty volatile business.

It is a volatile business and we took the view that the correction was overdone, and we were correct on that. In short, we were looking at an average of about $30 spot price in December. It got as low as $26, $27, and so we inventoried that metal. We sold most of the 980,000 ounces. I don't have the actual number handy. We sold it largely in the latter half of February. And we averaged better than $33, so you could argue -- we could argue that we did $3 better per ounce for our shareholders by undertaking that strategy.

Sure. My only point is this adds a certain amount of volatility into the interim results. That's very unpredictable for us to know in terms of how these events may unfold going forward and does not necessarily reflect the ongoing production from the business. The only other question I would like to ask is the extent to which you have elected to make these sales of prior inventoried ounces, will it affect your production in the early part of the year? Since you won't need as much production, will you throttle back a little bit to normalize this?

No, Andy, it's full steam ahead on production, and we'll simply continue our normal business plan. And as the markets go along, if we see another exogenous event, we may or may not try and take advantage of it, but our normal course of business is to sell what we produce.

Okay. Well, clearly then, 2011 was an exception to that rule.

We've done it before on a much smaller scale, let's put it --.

Yes, I know. Thank you.

Andy, one other comment. It's Hugh. One other comment regarding the grades. If you look at the trend over last three years, it's gone from an average two combined operations from 268 grams silver to 260 grams. So it hasn't been that dramatic. And during that same time, the grade of gold has gone up from 1.33 grams up to 1.41 grams. So overall, the grades are --

Holding steady.

Yes, they're fairly static --

Yes, I noticed the silver was down a few percent, but that's --

Fairly stable in my view.

(Operator Instructions)

Benjamin Asuncion, Haywood Securities.

Congrats on the quarter here. I think most of my questions were answered. The one thing I want to touch on was essentially operations at Guanajuato for 2012. The first part here is based on the reserve grade that you've tabled, are you anticipating milled head grades pretty comparable to reserve grades?

Godfrey?

No, the grade at Guanajuato will be a little bit lower than the reserve grade, because we -- what's not in the reserve table is that we will be mining what they call [churros] or [asagas] from Asuncion, and that will pull our grade down a little bit, but obviously give us a lot more tonnes and overall, a lot more ounces.

Just for clarification, Ben, the Asuncion mine is an old [Pinolas] mine in the Bolanitos area where the old stopes are filled with old fill. And that old fill, which used to be waste rock, is considered to be ore-grade now. And because it's already broken, the cost of actually extracting that broken ore, which is called churros or asagas in Spanish, is very low. So we are looking at mining these Asuncion churros, even though they're not in reserves, and that does drag the production grade down compared to the reserve grade.

Okay. Could you either elaborate on what the range in the head grades would be based on that inclusion of that ore, or give us a sense of what that broken-up ore grade is at the moment?

The average grade for the Asuncion is about 140 grams silver and about 1 grams to 1.3 grams gold. So it will pull it down a little bit, and it just depends on how much material we are able to mine there. We're aiming for somewhere in the order of 200 tonnes a day --

Okay.

Coming out of Asuncion. So that's what will pull that down a bit.

Okay. And then the last question here to follow on, based on a successful ramp-up throughout the year here, just by looking at some of the numbers with the grades, do you see any potential for perhaps increasing guidance towards the middle of the year as the ramp-up progresses?

Well, there's always that potential, but we're not there yet.

Okay. All right.

There's lots of things that need to be done before we can adjust any kind of guidance here.

Okay. And the ramp-up here, it's going to be pretty steady quarter-over-quarter?

We're aiming to make it as steady as we can. Obviously, there's always potential issues, but yes, the idea is to be able to hit 1,600 tonnes in December of this year.

Okay.

And Ben, if I could also comment on that, you saw the robust fourth quarter in terms of production. Clearly, we're continuing that level of production into the first quarter, and if you do the math, that implies that we're actually already on target for this year's forecast. And that's largely before we've undertaken any additional expansions. So there are obviously risk factors in terms of delivering our expansion plan this year, but mid-year we'll be in a better position to comment on how we're doing.

Okay. Perfect. Yes, I saw the same thing here too, and based on where the grades are sitting and recoveries, I think you guys are in really good shape to hit that. Thanks a lot, guys, and I'll hop back in the queue if I have any other questions.

Richard Lloyd, private investor.

Good afternoon, and I'm just trying to understand what you're telling me. You sold 980,000 or thereabouts ounces of silver and 5,400 ounces of gold in the fourth quarter, but the expenses for that were in the fourth quarter, but the revenues, the income shows in the first quarter. So if I look at it, I'm seeing there's about $40 million that you held back on the income of the fourth quarter.

Yes, further to Dan's comment, we also inventoried the cost of that. Basically, that metal went into inventory, so both the cost and the market value were carried through year end, and both the costs and the sale value will show up in the first quarter.

But if I were to just say it was a held sale, I'm looking at maybe $0.35, $0.45 of income that was withheld, which would have taken your fourth quarter from $0.22 up to around $0.65.

Yes, you're neglecting to take the cost along with it. We didn't -- the cost didn't flow through the income statement in the fourth quarter. Those go onto our balance sheet, where it's $18 million. So you're right to say that there's about $17 million of profit using December 31 spot prices that are essentially sitting there waiting to be recognized, and that happens in Q1.

And that was based on the year-end market valuation. If you look at the actual sales in Q1, you might want to add an additional $3 million to that. So that's the difference that will show up in Q1, is about $20 million.

So it sounds like instead of reporting $0.22, which is legal, the net effect is you knocked it out of the park.

We absolutely did, Richard. Thank you for recognizing that.

The stock is taking a hit. I don't know how the analysts can avoid the fact that all this is going to normalize and come through the income statement eventually. I don't know why the stock went down to $9.02 yesterday and is sitting at $9.30 today.

You know what? We do track the price of silver, which has been slopping around, so I'm not too concerned about the day-to-day pricing of the stock. Obviously, there's going to be a small subset of investors who only read the fourth quarter's financials and didn't read further, and that's their problem, to be honest. I think that once our Q1 financials are out and it's obvious what the actual benefits of that strategy were, we'll play catch-up in the market.

But then you're also carrying significant amounts of cash, well in excess of $1 a share. So on just an operating basis, you're being priced at like $8.30 an ounce -- I mean a share. That seems to be punitive. I don't understand why the market has discounted it so heavily.

Yes, markets, they tend to do that. They may be efficient, but they're only efficient over time, and so the whole issue of buying opportunities and selling opportunities -- I personally think that given the results released this week, both the financial and exploration results, are extremely robust and justify an improvement in the market, but we'll see.

Thank you very much. You're doing far more for the shareholder and than has been reflected by the analysts.

Thanks for that, Richard.

Andy Schopick, private investor.

I enjoyed Richard's commentary and share most of his views. Unfortunately, the mining stocks as a group have been pretty dismal in terms of performance, and it hasn't really seemed to matter what the individual performance or outlook of some of these companies is, at least not at this time. So maybe things aren't so efficient. But in any event, I do want to understand clearly the financial impact, again, of the inventoried and deferred sales. In the inventory at December 31, 2011 of $34.2 million, am I correct in interpreting that $18.5 million of that is a reflection of the ounces that were held in inventory?

The $18.5 million is a reflection of ounces held in inventory.

And that includes the costs as well?

That includes all our cash operating costs, which we talk as cash costs, and also includes depreciation and depletion, which would be added to that cost of ounce. So our total production cost per ounce.

And that total is $18.5 million?

$18.5 million. It's in note 7 of our financial statements. $18.466 million.

Haven't got -- okay, I will get to that later. For purposes of financial reporting, Dan, just so that this is clear to investors at the time you do report Q1, will you separately explain or break out the impact of the inventoried ounces that were sold in terms of both revenue and impact on earnings, separate from the ongoing production of the business?

Yes, it's pretty inherent, and we've highlighted all through the MD&A. And in the financial statements, I'm allowed to state the fair market value of that inventory and the cost, but I can't state what the profit would be, because we haven't made that profit yet. It's up to the investor to do their own little work and the read the notes to the financial statements, and it's a pretty easy calculation to determine that, so I can't --

Sure, but --

I have all this profit that's not recognized yet.

But when you do report 1Q, you will be able to identify and specify this effect, will you not?

Oh, yes. Absolutely.

My question is will you, at least for financial reporting purposes, since the impact is going to be fairly significant in terms of the contribution, I'm only asking that you consider very clearly stating what that revenue and earnings impact was for the quarter, and just wondered whether that's what you intend to do?

Yes. That's easy to do, absolutely.

Okay. Great. Thanks.

Benjamin Asuncion, Haywood Securities.

Hey, Dan, just to follow up on that inventory note. Can you give us a sense what the non-cash component of that finished-good $18.5 million inventory value is?

Ben, I actually don't have that in front of me.

Okay.

But it typically runs about -- our cash cost is about $5. The cash component of that, it's probably 50% of that $18.4 million. It's about the same --

Okay.

-- standpoint, but I'll have to go double-check that, because I don't have that in front of me right now.

Okay. All right. I'll follow up with you later, then. Thank you.

(Operator Instructions)

There are no more questions at this time. I will now turn the call back over to Hugh Clarke for concluding comments.

Thank you, Laurie, and thank you all for participating in our year-end conference call. Look for continued improvements in this Company as we get bigger and better, and we hope we can talk with you all again after our Q1 results are published in May. Thanks very much.

Ladies and gentlemen, the conference is now concluded. Thank you for joining, and have a pleasant day.