Endeavour Silver Corp (EXK) 2012 Q1 法說會逐字稿

Hello, this is the conference operator. Welcome to the Endeavour Silver first-quarter 2012 financial results conference call. 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 Hugh Clarke, Vice President, Corporate Communications. Please go ahead, Mr. Clarke.

Thank you, Joe. And welcome, everybody, to our first-quarter financial results and teleconference. As it happens, we are all down in Guanajuato, Mexico, today. We have our quarterly manager's meeting, and also, we are also reviewing the El Cubo acquisition. We did a tour there yesterday.

Present today is our CEO, Bradford Cooke; our President, Godfrey Walton; our VP of Operations, David Howe; our VP of Exploration, Barry Devlin; our CFO, Dan Dickson; our Mexican legal representative, Miguel Ordaz; and the Head of the Accounting Department down here, Fernando Murillo. So, we are well-armed. If you have any questions, I'm sure we can answer them.

Brad is going to lead off with a very brief opening statement, and then we will open it up for questions. Bradford, go ahead.

Thanks, Hugh. And again, welcome to this teleconference call on our Q1 financial performance. As usual, I'm just going to go through the highlights, and maybe touch on a couple of themes for the second quarter. And then, you basically have the entire Management group here to answer any questions. So, without further ado, we did enjoy yet another record quarter in Q1 from a financial point of view, with adjusted earnings up 35% to almost $20 million. Net earnings also almost $20 million; our cash flow was up almost 100%, to $28.8 million; mine operating cash flow was up 30% to $32 million. Revenues were up almost 40% to $49 million, and working CapEx improved 30% to $158 million.

It was a near record quarter, not quite as good as Q4 from an operating point of view, with silver production of just over 1 million ounces, 1.000072 million ounces; gold production of 6,300 ounces; and equivalent production was up to 1.39 million ounces. And the realized price for silver sales was $33.10, just a [tich] lower than last year. Gold price was up 20%, actually, on realized sales from last year, at $16.86. Cash costs did jump to $6.26 per ounce, more of a reflection of our -- the launching of our capital programs for the year. Our cash costs typically do that, and production usually slows down a bit for the first two to three quarters, as we complete our capital projects for the year. And then, we usually have a record fourth quarter to mark the new levels of production, thanks to the capital projects.

We did, as you know, at year-end, carry a significant metal inventory through the financial year-end, with a view to looking for a bounce in the metal prices, which we did capture in February. We once again took the view in March that metal prices had over corrected, and so, we have built a similar metal inventory carried through the end of Q1. And that is just a short-term cash management strategy, looking to capture better prices. We are in the privileged position, as a pure bullion producer, to sell or not sell, based on the market. And while we fully expect to sell our current metal inventory during this quarter, we are not going to be selling at the current prices.

By the way, that is a good segue into a brief comment on the current market for gold and silver. You know, in the last, well, eight years that we have been in operations, we have seen several incidences where the corrections in the gold and silver market are marked by a sharp final capitulation. And it typically takes two or three days -- if this, in fact, this week is a final capitulation, then this is day two. And there may be another day of this before we see a rebound in the metal prices. The stocks, however, interestingly enough, having already been depressed and drifting downwards for many months, have reacted very positively today. So, it's a good sign, I think, that we are looking for a bottom here.

In terms of themes for Q2 -- as you saw in Q1, both our tonnes and grades were down a bit from Q4, and we don't expect any big turnarounds on grades for the year. We are pulling more tonnes. The output at both mines has come up already in April. And so, that is where we are making our extra money, basically, is with the increased throughput at both plants. And I think that theme will continue through the year, albeit slowly -- a slow buildup of tonnage throughput, and grades relatively constant.

In terms of projects completed and planned, at Guanacevi we finally completed the connection with the 115 Kva power line, and that should really smooth our electrical draw to both the mine and the plant in Guanacevi. We had been suffering, for several years, actually, brownouts, thanks to the overloaded state power line in Guanacevi. And now that there is more power available, it should not only eliminate those brownouts, but rule out several significant costs that maybe aren't obvious. We are pumping a lot of water still at Guanacevi, and whenever you have a brownout, you tend to burn the pumps. So, that should be a cost savings, going forward.

We also just finished the dry stack project at Guanacevi, and so that is now in operation. Over at Guanajuato, we have initiated a number of projects. We have initiated an electrical substation project, very similar to Guanacevi. It will take all year or more to complete. And once again, it will help on the electrical supply here.

So, I think that is probably the sum total of my comments, to get started here. Why don't we just open it up, Operator, for questions?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Benjamin Asuncion, Haywood Securities.

Congratulations on the quarter.

Thanks, Ben.

With respect to Guanajuato, the recoveries -- we saw (inaudible) on 70% on silver and 74% on gold.

Ben, can you speak up? I don't think we can hear you very well.

With respect to recoveries at Guanajuato, we saw recoveries have dropped to 70% on silver and 74% on gold. Could you provide some color as to what that decline was from? And where we should be looking at -- is this something that is persistent, or is this an anomaly on the quarter?

We did see a drop in the recoveries there, and actually we had a drop in, I think, Q3 last year. It was a little bit lower than we saw in Q1 this year. It looks like it's a timing issue, on when material is coming out of the plant and when it's getting up to the plant at Guanacevi. So, we do expect recoveries to pop up again in Q2 this year, as they did in Q4 last year.

Okay. With respect to operating costs, can you give us a sense -- I know the outlook was for the second quarter to be relatively flat on a production and cost basis, as what we see in Q1. Will we see the cost improvements, in terms of a per tonne mill basis, start coming in the third quarter?

To answer that question, it's all going to be predicated on us getting our tonnes up. As our guidance has always indicated, Q3 -- typically, late Q3 is when we really start seeing those tonnes push up. And very much so in Q4. So, I expect we will be able to spread those costs across more tonnes later in the year, but Q2 is going to be somewhat similar. And you will see it jump at Guanacevi, of our cost per tonne, and that really related to depreciation of the peso, which is on 70% of our costs. And the peso is up about 7.5%, 8%, Q4 to Q1.

At the same time, we also gave labor increases there, and those labor increases also happened at Guanajuato, so there is a little increase there, from their tonnes went from $64 in Q4 to about $70 in Q1. So, that is the bulk of the story, is the appreciation of the peso, and then also, labor costs at each mine. And again, we expect those increases in labor costs to be dissipated over more tonnes later in the year.

Okay, perfect. The last question -- as mentioned, you were able to take a tour of the El Cubo mine. Can you give us an indication of -- when we are looking at this going forward, what your thoughts are? I noticed that, based on the fourth-quarter results, the milled head grades were significantly off of the reserve head grades. Generally speaking, where do you see this going in the future, when you are looking at -- based on your thoughts so far?

So, in general, we are in the kind of detailed planning period, with not only engineering potential capital projects at El Cubo, but really understanding in detail the challenges and opportunities and synergies of the fit of this operation with our other operations. So, I'm not going to say too much right now, but it's -- specific to your question about reserve grades in excess of production grades, that very much was a challenge for AuRico, and we believe it's very much an opportunity for us. And there are many ways to tackle mine dilution, and we are getting our hands around those issues now. So, right after we close, we will come with more complete discussion of the issues and opportunities and our proposed short- and long-term plan.

Okay. Just with respect to the transaction, you are sitting at about $130 million in cash and investments at the end of the first quarter. Can you give us an indication as to how you see the transaction unfolding? I know you have the ability to pay up to $100 million in shares. Are you looking at any debt arrangements, as well, to cover some of that?

Yes, Ben, we structured the deal to give us a choice, and it was really based on what the market does between now and closing. Closing is still expected late this quarter, and it's only waiting for the Mexican government standard competition antitrust review. So, depending on what the market does between now and the end of June, will very much determine whether we pay all cash, or some cash, some stock, or otherwise. Clearly, if our stock stayed at the $8 range, we would be preferring to pay stock; and if it takes a run, then we would be preferring to pay cash.

Okay. And with respect to the stock comment, what was the price that was agreed upon for the share price for the stock implement?

The strike price for the stock is $9.06 per share.

Thank you. All right. That is it for me. I will hop back in the queue if I have anything else. Thanks.

Okay. Thanks, Ben, and maybe just a related comment coming back to cash costs -- pretty clearly, the cash costs at El Cubo are higher than our cash costs. So, after closing, there will actually be a negative impact on our consolidated cash costs, simply because El Cubo is a high-cost operation. It is, however, our intent, and when we fully expect that quarter-on-quarter we will start seeing those costs come down again, not only as we get grades up, but ultimately because of the economies of scale, perhaps late next year, when we start seeing the real increase in throughput. And last, but not least, there is a very significant gold credit there, which would help big time.

Heiko Ihle, Euro Pacific Capital.

Congratulations on the quarter.

Thanks, Heiko.

You once again have a very substantial amount of silver and gold in your inventory, obviously. From a cash flow point of view, what prices are you looking at to -- in order to sell off that inventory? Is there an internal set amount? Do you have anything like that?

No, basically, we are -- we feel our way in the markets just like everybody else. But as you saw from our inventory at year-end, we captured an additional $3 per ounce, and that would be an appropriate starting point for this quarter.

Okay. And on that same note, is there an internal maximum amount of inventory you are willing to keep, from just a risk diversification point of view?

No, and it's not like we go full-on inventory or full-off inventory. It's very much an iterative process, where each week we take a look and see whether we want to sell or not to sell. So, it ebbs and flows; it just hasn't ebbed and flowed quite as much as it has in the last two quarters.

Understood. But is there a maximum either dollar or ounces amount that you are willing to keep that has been set, and after that, whatever gets produced is being sold?

Well, no. We are in a very strong cash position. Now, clearly, with the El Cubo transaction, we will be loading up on cash this quarter.

Okay. Fair enough. Speaking of El Cubo, should we think of this acquisition as a one-time event for this year, or even next year? Or do you think there should be any more substantial acquisitions, assuming you get the right price? And with El Cubo, it certainly seems like you did, you got a good price on it.

Well, thank you, we tend to agree. But it was a win/win deal; I think AuRico was a very happy seller, and we are a very happy buyer. It is going to take us most of this year to properly digest El Cubo; however, that doesn't mean that we are not looking for opportunities. We always are opportunistic, and we keep our ear to the ground.

Very well. Sizewise for those acquisitions that you are describing, probably none under $200 million, $250 million. But certainly, something in the $50 million to $100 million range would be doable, correct?

No. I think that strategically, we always go after assets that will compete with our current assets. So, we are not interested in taking on something a lot smaller than we already have. Now, we think we can do some good things with El Cubo, and make it perhaps even our biggest asset, after a significant capital investment period. We will see. But we clearly think that we can grow the -- both the reserve base and the production at El Cubo over time, and that will be the same strategy we apply to any other acquisitions.

Got you. Very well. Well, thank you so much. Congratulations again.

Thanks.

(Operator Instructions) Andy Schopick, Private Investor.

And I did want to come back to the question of inventorying silver and gold, and the impact that it's having on the Company's performance. Dan, if you are there -- as I recall, there was 925,000 ounces that were -- of metal inventories that were withheld at the end of December, which were sold in February. Was all of that inventory sold at the same time, and at one price?

We held 980,000 ounces of silver, and at the end of March we held 940,000 ounces of silver. And to answer your question directly, no, we would spread that out over time. So, in February, we were selling anywhere from $32 all the way up to $37. I think we averaged right about $34, $33 on that specific inventory that you are talking about.

And that is what I'm getting at. Because what I'm trying to do here is to understand what the revenue contribution was from the sale of the metals that were held in inventory at year-end and subsequently sold. And clearly, I can't just multiply a number by the average price that you realized for production in the current quarter. So, can you be a little bit more specific about what the revenues were from the sale of previously withheld inventory?

Yes. Obviously, and Brad had alluded to that -- we beat Q4's average, or what we would have sold in December, by about $3 on that inventory.

So, to be clear, the average spot price in December was $30 and change, and we netted on the inventory $33 and change.

And how many ounces were actually sold that were previously withheld?

Well, we sold in the quarter 1,100 ounces of silver, and it -- basically, Andy, it all goes into a pool, and you can attribute that 980,000 as part of that 1,100.

1,100?

Or 1.1 million.

All right. Would you just repeat that? You only sold 1,100 --

No, we sold 1.1 million ounces of silver.

Yes, okay. And how much of that was from inventory that was previously withheld?

Well, you could say -- we had 980,000 ounces that we held at December 31, was part of that 1.1 million ounces of silver.

Okay. Thank you.

Paul Renken, VSA Capital.

Those are good quarterly numbers. I thought that they came out here, after visiting with us here, just a few days ago, really. I had a question for you -- where, over here on our side of the pond, we are looking at the short-term bear market, both in commodities and in mining equities. I was wondering, if you say you look at the silver markets here pretty much weekly -- is there a particular price point that you are getting kind of concerned about, if the risk markets are really -- get out of hand here, due to the European debt crisis, that you would be either hedging your exposure on gold and silver or on the production side of the Business? And if so, which would you choose?

Well, in terms of what price of silver we get concerned at, the spike down in December was to around $26 per ounce, and that would certainly be an area of concern for us if it happens again in the next week or so. So, we would be much more conservative if it goes down and breaks $26 on the downside.

Okay.

We think the chance of that is low; obviously, we wouldn't have built up an inventory if we felt otherwise. And in terms of hedging, well, it's -- hedging is just not part of our strategy. We are obviously 100% levered to the gold and silver prices, and that is the way that we run the Company, because we are still in a bull market. We don't see any signs of a bear market.

This is -- one of the definitions of a bull market is how short and sharp the corrections are. And even though this one has been grinding away since silver peaked in April of last year and gold peaked in August, that is not a very long period of time for a correction. And as I said in my initial comments, typical of these corrections, they are marked by a final capitulation, and it certainly feels like that is what we are in right now. So, if we go lower from here, I will be surprised.

So, you are saying then that any kind of scenario like that, you would make adjustments on the production side?

Well, yes, if you -- if we do enter into a bear market, if this is the start of a bear market, then we will certainly be looking at how to contain our costs and maximize our profits, given the new price regime that you are talking about. And we have done that already in 2008. We were able to move very quickly in 2008 to contain our costs and make sure we got through that difficult period.

Thank you.

(Operator Instructions) There seems to be no more questions at this time. I will turn the call back over to Mr. Hugh Clarke.

Thank you, Joe, and thank you for everybody participating in today's call. Look for continued news out of Endeavour Silver, possible acquisitions, smaller ones perhaps, drilling results. And as Brad mentioned, after the deal with AuRico closes on El Cubo, we will have a lot of details for you regarding that transaction and what our plans are. Thanks again.

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