Endeavour Silver Corp (EXK) 2012 Q2 法說會逐字稿

Welcome to the Endeavour Silver Second-Quarter 2012 Financial Results Conference Call. 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 Dan Dickson. Please go ahead, Mr. Dickson.

Thanks, operator. I'd like to thank everybody for coming and listening to our Q2 financial results call. Currently, we are a little lighter on staff in the office today than in past calls. We've got Bradford Cooke sitting down in the United States calling in through Skype, and myself and our Manager of IR, Lana McCray. Godfrey Walton is focused on getting our El Cubo operation up and performing to its capabilities down in Mexico. The plan for the call is just for me to hit some highlights. I'm going to turn over to Brad to highlight our acquisitions, two exploration acquisitions, and the El Cubo acquisition. Then we're going to open it up for questions, and have management answer everything that comes our way.

Without further ado, our net earnings decreased to $7.5 million for the quarter compared to Q2 2011. That's $0.09 a share. We'd like to highlight that our operating earnings were consistent quarter-over-quarter. The increased production offset the lower metal prices. Our realized silver price was 22% lower in Q2 2012 compared to last year.

From an adjusted earnings standpoint, which removes the derivative liability mark-to-market, we came in at $0.06 per share compared to $0.12 last year. Again, it's primarily because of a foreign exchange loss of $3 million, and a one-time gain in 2011 of $2.5 million related to collars that we entered into when silver price went up to $48.

Cash flow from operations before working capital changes was just under $17 million; a small change from last year of under 10%. Mine operating cash flow was $24.1 million; 2% higher than prior year. We still hold our inventory of just under 900,000 ounces of silver, and 6,000 ounces of gold. Revenues for the quarter jumped 11% year-over-year, again, because of the increased production up to $40.4 million. (inaudible - technical difficulty) costs in Q2 were able to drive back down to $5.46, and that was a function of our increased tonnage through the plants, and lower peso costs on labor.

The other highlight, which actually happened after quarter-end, was securing the credit facility with Scotia Bank. We secured a $75 million revolver, bearing interest of 2.75% to 4.25% based off our interest service coverage ratio. Currently, that would sit us at 2.75% plus LIBOR going forward, but we don't intend to use that unless we foresee some further acquisitions, or require capital expenditures significantly upfront on El Cubo.

With that, I'll pass it over to Brad to talk about our recent acquisitions and our plans going forward.

Great. Thank you, Dan. Again, welcome, everybody, to this Q2 conference call. I'd actually like to just put a fine end point on some of Dan's comments with regard to our operating and financial performance. Comparing the first half of this year to the first half of last year, we've had quite a remarkable increase in plant throughput, and that's very much related to our capital expansion programs in the last couple of years. We have significantly expanded plant capacity. We continue to look for ways to expand both the mines and the plants across the board. 42% plant throughput increase, [42%] up in the first half of the year.

Of course, silver grade's a bit lower. Two reasons for that, that we have the metal prices even below $30. We have the metal prices to take lower grade ores, so that's partly a function of that. Recovered ounces are up significantly as a result of the increased throughput, and notwithstanding the slightly lower silver grades. Recoveries are plus or minus about the same, but a very significant reduction in both our cash costs per ounce and our direct costs per ton. Again, I just wanted to point out, that is very much due to the economies of scale and our increasing gold credit as we expand our operations.

One last comment on operations -- Dan mentioned the metal held in inventory, and I just wanted to reiterate that our strategy is a short-term strategy. We carry these inventories until such time as we see an improvement in metal prices and the Company can take profits from those inventories, and we do expect that to happen sometime in this next couple of quarters.

Moving on now to our acquisition strategies, you've seen in recent weeks, in the last two months, we've been on a bit of a binge in terms of acquisitions. I just wanted to focus on what it is that we're trying to do. We feel that while the markets are down, the metal prices are down, and the stock prices are down, this is exactly the time when companies who are financially in good shape should be more aggressive on M&A. As you know, we've made a major acquisition in the last month with the El Cubo mine in Mexico. We've also put in place a $75 million revolving bank line of credit with Scotia Bank, specifically to give us access to capital to continue pursuing appropriate acquisitions. It's safe to say that if something appropriate comes along, we're in a position to pounce.

The more recent acquisitions are exploration acquisitions, and I wouldn't mind actually highlighting some of those acquisitions. For instance, this morning we announced the acquisition of a very exciting new silver-gold exploration property in northern Chile called El Inca. It's an option to earn up to a 75% interest, and then form a joint venture with SQM of Chile. SQM is the second-largest mining company in Chile. It's their iodide and sulfate and phosphate and nitrate producer. They don't have any operations in gold or silver, and that's why they are making this property available. The property itself stands out like a sore thumb. On a satellite image, it's a very large and obvious color anomaly, big (inaudible) alteration covering about 1.5 by 2.5 square kilometers.

Historically, there were high-grade veins contained within that big alteration zone, four separate veins, actually. Outboard of that, there's two other properties, not contiguous but nearby, covering similar alterations and similar high-grade veins. Our main interest here is not the high-grade veins. Our main interest is the apparent low-grade envelopes surrounding the veins (inaudible) the drills. We have received, so far, very encouraging surface sample results confirming the presence of economic gold and silver grades within those envelopes. But until they're drilled, we won't know whether or not they have either the tonnage potential or grade potential to make a mine. But that's the main focus.

And the fall-back position would be that if the low-grade envelopes, which are up to 100 meters wide around each vein, don't actually make it in terms of economics, then there's still the high-grade veins to pursue out at El Penon. We're very excited to add El Inca to our exploration portfolio, and Barry Devlin, our Vice President of Exploration, has already drawn up an exploration program mapping sample of drilling in the fourth quarter.

A week ago, we had also announced in Mexico, another, I think, fairly special and very large exploration property acquisition. It's combined two properties -- the Panuco and Laberinto properties. Both of them are options to earn interests followed by joint ventures. In the case of Panuco, it's an option to earn a 70% interest. In the case of Laberinto, a 75% interest. Laberinto is a smaller property, internal to the Panuco property, which spans almost 14,000 hectares.

This property, Panuco, is basically a very attractively located chunk of real estate tied onto the La Preciosa property of Orko to the south and to the Oremex property to the north. It's an area that is higher in elevation than either of those other two properties. It has a classic horst block exposed in the central part of the property, with flanking normal faults dipping to the west on the west side, and to the east on the east side. It's those regional faults that are the focus of our interest at Panuco and Laberinto.

We have, through our partners at Panuco and at Avino, identified eight major [through-boring] mineralized structures exposed at a fairly high level in these epithermal systems. Even though we are getting good grade numbers in multiple surface samples, once again it's the book tonnage potential that intrigues us. These structures are exposed on the property up in the younger tertiary rhyolite rocks, typical of the epithermal districts in Mexico. There are windows of the lower andesite rocks and of course, it's those rocks that typically host the Preciosa veins.

We are not looking for more La Preciosa veins. That's not the style of mineralization we see at Panuco. What we're seeing is more of the classic high-level [stock rick] alteration zones up in the rhyolites, and maybe the root zones of those would be the more classic high-grade vein systems. Panuco and Laberinto, again, a very attractive addition to our exploration portfolio, and we have already initiated both geological and geochemical sampling work, as well as geophysical surveys, in order to get to drill stage in Q4.

That's just a quick overview of our acquisition strategy, and highlighting some of the recent acquisitions. Operator, I think at this time, let's open it up for Q&A.

(Operator Instructions)

Heiko Ihle, Euro Pacific Capital.

Congratulations on the quarter and also congratulations on El Inca and that leads to my first question. Should I see more moves from you guys outside of Mexico going forward?

Good morning, Heiko, it's Brad here and thanks for you question. Yes, although we have chosen Chile to build a footprint there and we did have two exploration projects last year in Chile that we drilled and killed, so El Inca is basically a fresh start. Our VP, Barry Devlin, has actually opened an office in Chile. He's retained an exploration manager and we are actively now researching all of the historic silver districts in Chile so that yes, you can expect us to build a portfolio of exploration projects in Chile.

Building on that question, should I be shocked to see you guys buy something producing down there, A? And B, should I be shocked to see you guys going in South American countries ex-Chile?

I think Mexico and Chile are our full plate for now and there's a not a whole lot of other South American countries, to be honest, that appeal to us at this time. No, you shouldn't be shocked at whatever we do in Chile. We're obviously very inquisitive at this time and looking for opportunities.

I love to hear you guys being inquisitive just to be very clear. On acquisitions, with the revolving credit facility you guys opened, it's $75 million. You could potentially issue some more shares. With El Cubo under wraps, what size acquisitions -- assuming the right thing comes along, up to what size acquisitions are you looking into?

In terms of minimum size and quality, anything we buy in terms of operations or even development projects do have to compete with the existing assets. Within the next 18 months, all three of our current mines, Guanacevi, Bolanitos, and El Cubo will be all be approximately the same size in terms of metal output, silver equivalent output. Let's call it 3 million ounces of silver equivalents per year from each mine would be an appropriate target for the next 18 months. Anything we buy has to complete that. We'd like to think bigger. We'd like to think that maybe there larger opportunities in our future. We certainly have the financial and operational capability of taking on larger projects, but also straight development projects, not just operating mines.

Fair enough. I shouldn't be shocked to see you guys buy something for say $120 million, take $60 million out of the credit facility and issue another $60 million worth of shares?

We can't, of course, delve into specifics, but the whole purpose of the line of credit was to give us flexibility and access to cash.

That answer is very fair. Thank you so much.

Terence Ortslan, TSO and Associates.

It always fascinates me the way the banks or the financial agencies calculate their credit lines. This $75 million from Scotia, is that something that you circled on? Or is it based upon certain, I saw covenants, but not all of them. What was the criteria on the $75 million that's the limit?

Yes, Terence, the $75 million got three essential financial covenants; interest, service ratio, a leverage ratio, and a tangible net worth ratio. The one that really would never come into play is the interest service coverage. That defines where we fit on the grid and the grid goes anywhere from 2.75% plus LIBOR to one, two, three, six-month LIBOR, our choice, all the way up to 4.25%. We don't see us falling, ever, below level II. But that grid point's there and that's fine.

So, there was a comfort zone that you circled the $75 million for, but you could have done more than that?

Yes, we could have done more. We could have clubbed it with other banks as well, but we didn't want to carry anything with more than $75 million. Rather than have it sit there and pay our commitment fees on a higher balance, we can always go back to the bank if needed and increase that limit. But at this point, we figured $75 million was sufficient for us going forward.

Okay. How much of an appetite is there to use some more of your shares as a proxy or for acquisition at these prices? Or you want to go in to just pay for cash?

This is Brad. Basically, every acquisition and every evaluation of how to pay for it comes down to a cost of capital. In the case of the El Cubo acquisition, we'd already fixed an equity price in case we wanted to use our equity. Given the stock market was significantly below that price, it certainly made good sense for us to use equity on that deal. Going forward, we'll see how strong the stock market is as to whether we want to use equity or cash.

Okay. How much of product or the candidates are you seeing now which are more amenable to the deals than let's say a year ago? Are the values along with the prices are coming down?

Thanks for your question. We've been trying to be inquisitive now for more than three years. Ever since 2008, it was very difficult actually to get anything done. We have knocked on a lot of doors and kissed a lot of frogs. It's only with the most recent sell-off of metal prices and stock prices in the last year that opportunities have come out of the woodwork. I think our recent deals are evidence of that and we're not the only ones. There's other companies out there doing deals, finally. There's a consolidation in the silver space.

In terms of types of deals, El Cubo was in our sweet spot in terms of a historic district, significant reserves, and significant level of production, but a significant underperformer. How is it similar to our other two mines? We basically bought something that was [solely built permanent] with staff, but struggling. That perfectly describes Guanacevi and Bolanitos. Yet, there was a huge head start at El Cubo. We never had any reserves or resources or even any real production at Guanacevi and Bolanitos, whereas at El Cubo, it's a growing concern.

Are there more opportunities like that in our future? I suspect not. I think that was probably the last of that business model that's available. We're turning our attention to other forms of M&A.

Okay. Brad, you didn't mention Peru. Is that something, obviously, the geology (inaudible) is great and so are the opportunities. Is something bothering you with respect to Peru in terms of the politics and the social politics?

I think in Peru there are certainly far more social concerns and maybe even government concerns compared to Mexico. I think it's very selective. It's specific to each province. We can't really talk about Peru, the country. We would pick and choose between different provinces as to whether we're interested or not.

Okay. That's fair enough. Thank you very much.

Benjamin Asuncion, Haywood Securities

If you could maybe could you give us a little bit of light. I know you've had the El Cubo asset now in your folds for just under a month. Could you elaborate on how things are progressing in terms of operationally? If you can provide any insight as to some rough figures of what it is going to cost to build your own facility and the timelines for that?

Dan, do you want to lead?

Yes, I think the first, we've had it now for three weeks, Ben, and it's coming along as expected. We're trying to implement some underground controls related to grade. There's a lot of work to be done and it's not just implementing the controls, it's the culture that goes along with that. Changing the attitude of the workforce, what we expect it to take 12 to 18 months and we're definitely seeing that. The first week we saw some of the controls operating effectively and then a slide back to really having the cuts be 5.5 meters on 1.5 meter veins. That's normal course stuff. We're going to see an ebb and flow of how it goes and it's just for management to stay on top of it over the next 6 months to 12 months to make sure that we're mining these veins effectively.

It started off slow and that is not unexpected by management. But at the same time, we hope to turn it around soon. That's why Godfrey and Dave are going to be quite focused on El Cubo going forward. As far as costs, we had planned on coming out with our cost structure for the refurbishment of the plant. Our engineers are through it. Management last week asked the engineers to go back and look and refine some numbers. We do expect to come up with costs on the plant in the entire project.

It's also mine development that's required at El Cubo. Some new equipment, some smaller equipment to be able to mine smaller widths. We expect that to come out, let's say late Q3 here, so September. It is a little bit later than expected, maybe by two or three weeks. But we want to go out with the market with firm numbers and something that we can hang our hat on and insure that we're going to hit those budget targets going forward. As far as the plant, we have given go-ahead to the engineers to source equipment.

We are refurbishing the El Tajo plant. Right now, costs are looking like they could come inwards around $40 million to $50 million, but again, we don't want to put a firm number on it until we've gotten the engineers refined their numbers down to detail. I hope that answers your question, Ben.

Yes. Just the last thing, because obviously there is a bit of a time constraint there with an additional option payment if you renew with Fresnillo. We're still comfortable with, say, having everything up and running by sometime between next May and June, I think is the deadline?

Yes, May of next year is our deadline and the engineers and we are very mindful of that deadline. Everything's working towards meeting that May 2013 deadline and we think we can do it.

Okay.

Ben, this is Brad here. I thought I could just chip in on that as well. Clearly, we've taken a decision already to upgrade and expand the El Tajo plant located at El Cubo. We've also taken the decision not to do any long-term extension of the lease on the Las Torres flotation plant. Like Dan said, we're very mindful that we've got, now, just around a year or just under a year to get all of this done.

Some people might shake their heads that's just not enough time, but when you look at what we did in the Bolanitos plant last year, it's very doable and we have the same mexican-based construction firms available to us and we have similar EPCM American and Canadian engineering consultants furiously working up the detailed engineering. The main issue why we haven't announced anything yet, to be honest, Ben, is that we've had a number of choices and we wanted to make absolutely certain specific to not only the location of the newly expanded plants and tailings facility, but also all of the issues surrounding that so that it's synergistic with the current operations.

Okay. Just in terms if you're going to come out with a final number in late Q3, then we'd expect the majority of the spend there over the coming six months thereafter, so fourth quarter and certainly into the first quarter of 2013. Is that a safe assumption?

We've already started spending, but you'll see the details here in the next few weeks. Actually coming back to operational turnaround, what we can say specifically is that on the daily reports we have seen already, a significant increase in grades. We just want to make sure that trend continues and that should show up, then, at our quarter end.

Okay, but the throughput, you're still able to maintain that 1,000 to 1,200 ton per day benchmark with those stated improvements in grade?

Yes. Yesterday, for instance, 1,118 tons.

Okay, perfect. Thank you very much.

(Operator Instructions) Andy Schopick, Private Investor.

Dan, I suspect this is one you may want to answer. Concerning the inventories of the silver ounces that are held. It's been over 900,000, around 900,000 ounces over the past year. Are there any conditions under which you would start becoming uncomfortable, let's say if silver were to remain under $30 an ounce for the rest of this year going into next year? Would you want to draw that down? What's your overall strategy and plan there if silver prices remain about where they are or go lower?

If silver sits where we are now at $28, the key for us, the one thing that it is coming is cash spend at El Cubo with the refurbishment and expansion of the El Tajo plant. We see us liquidate some of that stuff to help pay for things here in Q3 and Q4. Should prices start falling, we keep a very close eye on the prices and we've seen it consolidate here at $27, so there's a pretty good base forming at $27 an ounce. If we see that rate, we would probably unload it pretty quickly. Because I think next support level would be $23 and I could turn it over to Brad and get his thoughts on that as well. He pays quite more attention to it even than I do. It's one of his hobbies, so to speak.

Is it in the form of concentrate or dore?

It's in the form of dore.

Okay.

Actually, it's a combination of dore and refined bullion. Andy, as I mentioned earlier, this is very much a short-term strategy. We simply feel that we can do better than $30 silver and $1,600 gold this year and we're willing to wait it out. Although, it is metal and if we do need money, we can always sell it. It's not like a firm and fast policy that we're just going to sit on this metal forever. It's very much about making money.

Understood. Depends on prices.

Indeed.

Thanks.

George Dahl, Newport Coast Securities.

Congratulations on your quarter. With everything going so well for you, I was surprised the stock was down at the level that it's at. Do you guys worry about someone trying to step in and acquire you?

That is a possibility, but not a concern. I think that Endeavour's still very much a work in progress. If we were thinking, for instance, that the largest silver companies having an interest in Endeavour, I would hope they will at some future date. But we've got a lot of work to do to remove risk and deliver growth before the value is obvious.

I would add that with George, if you look across the whole silver sector, every company's looking at 52-week loads right now. It's not just us. In fact, we've probably held on as strong as anybody in the sector over the last year.

All right, thank you very much. That answers my question. Thank you.

[Bruce Forer, EF Capital].

Another good quarter production wise. I think I asked you this, we spoke about it about a year ago. With the synergy that you guys have with Great Panther, is Great Panther a thought for acquisition?

Thanks very much for your question, but we can't really comment on specifics. We've had many shareholders point out the obvious geographic synergies with Great Panther, but let's just leave it at that.

Okay. The previous question was answered for me. So thank you guys.

There are no more questions at this time. I will now hand the call back over to Dan Dickson for closing comments.

Thanks, Operator. I want to thank everybody for attending and for all the questions that we received. We hope everybody looks forward to our future news releases. We've got drill results expected here in the second half of the year and, of course, the update on our El Cubo late in Q3. Thanks a lot and have a good day.

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