Endeavour Silver Corp (EXK) 2020 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. 2020 Fourth Quarter and Year-End Financial Results Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Galina Meleger, Director, Investor Relations, for opening remarks. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2020 Fourth Quarter and Year-End Financial Results Conference Call. With me on the line today, we have the company's Chief Executive Officer, Bradford Cooke; our Chief Financial Officer, Dan Dickson; and our Chief Operating Officer, Don Gray.

Before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in '20 and '21 and future years, including revenue and cost figures, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines in mineralized zones. We do not intend to and do not assume any obligation to update such forward-looking information other than as required by applicable law.

On behalf of Endeavour Silver, I'd like to thank you again for joining our call. And I will now turn it over to our CEO, Bradford Cooke.

Thank you very much, Galina, and welcome, everybody, to this year-end financials call for Endeavour Silver. Maybe I'll just start with some highlights. 2020 turned into a very challenging year with COVID pandemic. But ultimately, it was one of our most satisfying years as our operational group really came through in the crunch. We drove our cost down and coupled with higher metal prices that drove significantly higher revenues, higher cash flow, higher earnings. We turned positive in terms of earnings for the first time in 3 years.

And notwithstanding the government-mandated 2-month suspension of mining operations throughout Mexico, we were not only able to meet our 2020 original production guidance, we delivered higher production and lower cost at each of the 3 operating mines. Perhaps last but not least, in terms of high-level comments, we obviously continue to focus on safety as our #1 priority. And for the second year in a row, Guanacevi, our largest mine, posted more than 1 million hours worked without a lost time accident. So kudos to, again, to our operations team.

Let me touch on some numbers in today's news release, and then we'll open it up for Q&A. So as I mentioned, a very good year in 2020, and we've certainly finished the year with a bang. Fourth quarter sales were $61 million, up 81% year-on-year. Cash flow was $22 million, up from negative $8 million a year ago. And net income was almost $20 million or $0.13 a share, up from a net loss of $18 million a year ago.

Moving to the full year highlights. We posted $140 million of revenue, up 15%. Cash flow of $29 million before working capital changes, up from negative $9 million. And net income of $1.2 million, up from a net loss of $48 million in 2019. Our production was solid at 6.5 million ounces of silver and equivalents, the only equivalent being gold. That was actually down 9% from the prior year due to the closure of now noncore operation, the El Cubo mine.

Cash cost at $5.55 per ounce of silver net of the gold credits was down 57%, so a significant reduction in cash operating costs. And the all-in sustaining costs were $17.59 per ounce, net of gold credit, down 17% year-on-year. We finished the year with a very strong balance sheet, $61 million cash, $70 million in working capital. And just a reminder that we started 2020 with $23 million cash. So it was a heck of a year for adding cash to the balance sheet.

So those are the financial highlights from today's news release. I think operator, why don't we open this up now for Q&A.

(Operator Instructions) The first question comes from Jake Sekelsky with Alliance Global Partners.

Congrats on the strong fourth quarter. Just 2 quick questions on Terronera. Can you just provide us some color around the timing of the feasibility. I guess, are you seeing any delays in the time line due to the pandemic? I know some of your peers have been seeing extended turnaround times on studies and whatnot. So I'm just curious how confident you are in the time line for that.

We're still reasonably confident. We had our quarterly management meetings last week. And the report from our Director of Project Development was that we're almost bang on 50% complete, the feasibility study. Wood is the engineering consultant conducting the study on our behalf. But our Director of Project Development is very active, obviously, in the whole process. We are targeting a mid-summer receipt of the full feasibility study, and that would allow us to go to the Board for a development decision thereafter.

That's good to hear. And then just switching gears to exploration. In the release, you touched on some greenfields exploration at the new concessions at Terronera. I'm just curious, what's the budget for that? And how much of a priority is that relative to exploration across the rest of the portfolio?

So our Terronera budget this year for drilling, mostly untested veins on this very large property is $2 million. And we're focusing in 2 main areas this year. The Southeast extension of the main reserve in the Terronera vein is still open to the Southeast, and we're testing an area about 1 kilometer further south along the same vein structure. It does splay into 2 or 3 different parallel veins at that point, and we've had some encouraging results so far.

The other one is on one of the newly acquired properties to the west of our original holdings at Terronera. And it's a big vein. It's called Los Cuates and so big as enough for 30 (inaudible), and we've traced it for 3 kilometers. And we just started testing various portions of that vein system. So early days yet, but we are hopeful that coming out of this year, we'll have not only a new discovery, but some new resources at Terronera.

The next question comes from Heiko Ihle with H.C. Wainwright.

Your firm recently exceeded $1 billion in market cap. Congratulations. Has this done anything to your investor base? And on that same note, have you seen people interested that are able to purchase shares that previously weren't allowed to do so, and have the whole thing feed on itself a little bit? Have you seen anything like that? Have you gotten phone calls from people you've never really heard of before, funds that have mandates like market cap minimum?

Absolutely, Heiko. I don't know if we're seeing it yet, but in the coming 12 days Endeavour is certainly under review to be added to not 1, but 2 indices. We're certainly qualify or appear to qualify for the GDX inclusion in the GDX index. We're currently on the GDXJ. But we're also in line and could possibly qualify for the S&P TSX 500 index, both indices that actually do their additions in, I think, the third week of March. So it's coming up here pretty quick. And we're hopeful that given our $1 billion market cap U.S. that we do qualify to meet these 2 new indices, which is not just indexed buying, but a number of investors, institutional investors, who only buy indexed stocks. So it could open the door for a more institutional involvement.

Very helpful. Shifting gears quite a bit. I was going through your $12.8 million in net deferred income taxes on Page 39 of the financial statements. The figure includes $18.4 million of tax loss carryforwards. Are there expiration time lines for these assets? And if so, what's the time line? And also, we're now in March, albeit March 1, have you managed to recover anything of this sum year-to-date?

Yes, Heiko, good question. Way to get into the depth of those financials, Note 26 or 36. In that note, we actually show the expiration dates of our loss carryforwards. We are recognizing an asset related to those temporary differences, I believe, $9 million at Guanacevi and $3 million at Bolanitos. The time line to actually chew through those loss carryforwards is about 16 months for Guanacevi and less for Bolanitos. It should be in 2021, so less than 12 months. Q1 has continued...

I am I understanding you correctly that some of these are expiring this year? You're looking at D on Page 40, correct?

I'm not looking at it, but I know it. I'm not familiar with the note. So ultimately, the expert -- typically a loss carryforward lasts for 10 years in Mexico. And I think some of them start running out in 2025 for us. But we'll use those loss carryforwards in 2021, Heiko, just based off the profitability. So in regards to your question for what are we eating some of that up now, it's similar. Like our production in Q3 and Q4 show that we're now making profit for tax purposes in Mexico. That's continuing here in Q1. We put out our guidance for 2021, and we expect to be profitable at these prices, hence, using up those loss carryforwards.

The next question comes from Joseph Reagor with ROTH Capital Partners.

So looking at kind of the results from the fourth quarter. Guanacevi, you had slightly higher direct cost there. It seems like part of that was related to the purchasing of ore. Was there any other factors driving higher costs there? And then what are your thoughts on purchasing ore going forward?

Yes, Joe, you're right. We did purchase more ore. Obviously, with higher prices, we're seeing more of the local miners bring third-party ore to our processing plant, which we're required to process, I believe, up to 10% of local ores just under the terms of when that plant was built. Other thing that's coming through our cost structure in Q4, and it's going to persist in 2021 is royalties and special mining duties. So as we're profitable in Mexico, we're paying more special mining duties that goes into our KPI metrics. And the royalties coming from El Curso, which is a property we acquired in 2019. We didn't have any upfront capital, but it does have a big royalty on it. Significant of our production is actually coming from El Curso, about 50% for 2021. So that's going to persist through our cost structure going forward.

Okay. And then on the tax front, I saw some commentary. I can't remember from which government person, but basically that the Mexican government expects less investment in Mexico in the coming years because their tax structure has become more cumbersome and more expensive and that they believe people are going to look to invest in South America instead. Do you think that there's any opportunities to see them kind of roll back some of the taxes they added kind of just after the last peak in the gold cycle? Or is that wishful thinking?

I think at this time, it's wishful thinking based off the current government regime that's there. You're hearing a lot of rhetoric out of Mexico with regards to how much Mexican mining companies and Canadian mining companies are paying in taxes. The special mining duty was introduced in 2013, plus the environmental duty, which is 0.5% on gross revenue for precious metal companies. I would guess that none of that's going to get rolled back during this regime. And quite frankly, it would be great if taxes got lower in all jurisdictions, but I would think that going forward there I would always be conservative and hope that it stays where we're at now, and we'll be comfortable with that.

And maybe I can give some more color to that. President AMLO did come out last week in a press conference in state. No new mining taxes. I guess we're supposed to take that as good news. And in the overall scheme of things, the total tax burden in Mexico is around 52%, 53%. So right up there with Canada and some other countries, not exactly the cheapest jurisdiction in the world. They would love to have more investment, but Mexico is caught in the middle of this COVID pandemic with a crash in employment, crash in tax incomes to the government, and no financial relief in Mexico for poor people like there is in Canada or the States. So I think it's steady as she goes in terms of taxes in Mexico.

Okay. Just continuing on that, maybe one other thing just real quick. Is that part of the reason the company has started to look at South American opportunities? And then, on that note, any update on what to expect from Parral this year?

So yes, we diversified in recent years our exploration projects. We have 3 active and world-class prospects in Northern Chile. We really like Chile as a country. And we're looking at other South American jurisdictions as well as North America. So not just exclusively Mexico.

And then Parral, after a 1-year hiatus in terms of exploration drilling, we resumed in January drilling our Parral project with a $2 million budget to try and grow the resource base there. We've basically got 2 more years to grow the resource base before Parral goes to economic studies, and Terronera is up and running. We'd love to have our project development team move straight from Terronera to Parral in 2024.

Next question comes from Craig Hutchison with TD Securities.

Just a question on reserves and resources, you still have a fairly substantial indicated resources at Bolanitos. What are the opportunities to have some of those resources sort of converted into reserves? And do you see the mine life at Bolanitos sort of extending well into next year at this point?

Yes. Bolan±itos is a bit different than Guanacevi because the main area where mining is underneath the village of La Luz, which really prevents us from being able to drill from surface. So almost all of our drilling in recent years of the La Luz vein system has been from underground. And of course, that then it's a cost reward exercise to see how far ahead we want to drill. Can we convert indicated resources to reserves? Certainly, to some degree, but we typically run a 1-year reserve envelope in an additional couple of years of resources. And I don't think that's going to change just because of the constraints of drilling ahead of the reserve envelope. Metal pricing could have some beneficial impact on conversion of resources to reserves as well.

Can you remind me, what's the budget for Bolanitos in terms of exploration this year?

It's $2,250,000 for brownfields exploration this year.

Next question comes from Lucas Pipes with B. Riley.

Well done on the quarter, congratulations there. Joe asked most of my questions earlier, but then I'll add some follow-up questions. First, on the purchased ore. Can you remind us how we should think about margins on that business?

Yes. From a margin standpoint, we look to -- we pay about 60% of the value of that ore. And ultimately, when it's all said and done, we share about 35% to 40% with the processing costs and royalties that get put in place. Ultimately, it's about 10 -- last year, we were closer to 11% total production, came from toll ore, which is the highest we've historically ever been. If you go back through the last 10 years, we've approximated about 6% of our throughputs through tolled ore. So at current prices, I would imagine we're going to be closer to 10% again this year. And generally follow the same formula from a purchase standpoint of shooting for that 40% profit margin from it.

Very helpful. Very helpful. I appreciate that detail. And then second follow-up question, just on Chile. Brad, you mentioned how you like being there. What's kind of the priority in terms of allocating capital towards that region? And very high level, kind of what are some of the catalysts we might be looking forward to when it comes to your Chile opportunities?

Thanks, Lucas. We've been in Chile for, I think, 8 years. We generally run $0.5 million to $1.5 million annual budgets. So we've actually done a pretty significant investment to acquire, explore and prepare for drilling our 3 projects. We're currently drilling 1 of them, the Paloma project in the far north of Chile, is arguably 5 million-ounce gold equivalent high sulfidation epithermal target. So open pit, potentially bleach. But early days yet. We just started drilling it last year, and we hope to have some results here in the next month or 2.

We're probably going to partner our copper rich project. Cerro Marquez is a copper-gold porphyry. Again, we've spent several years and several million dollars grooming it. It's drill ready. And we've had a lot of expressions of interest from copper majors. So we've signed some confidentiality agreements, and our preference is to bring on a partner at Cerro Marquez, which leaves our third project Aida. And Aida is our extension of the Bolivian silver belt down into northern most Chile.

And again, it's drill ready. It's a massive alteration zone with very strong indications of open pit silver. We don't have the drill permit yet. We expect it late this year. And it would lead to a drill program at Aida either this year or next year. So we really like down in Chile. We focused on world-class prospects when we acquired these things during the bear market. We're not done yet. We'll keep -- continue to try and grow that pipeline. And the whole goal of our Chilean exposure is to get into a discovery that has world-class potential. And ultimately to add it to the development pipeline.

(Operator Instructions) The next question comes from Henry [Westerngale], a private investor.

Well, gentlemen, you seem to have had a very, very good fourth quarter, and that strikes me that the future in 2021 and beyond could be very substantial. And without pushing the envelope too far, could you comment on 2021?

In terms of our public guidance, we've guided our production to be -- silver, it's slightly higher than last year. So I think 6.1 million to 7.1 million ounces of silver equivalent production forecasted this year. Obviously, the performance in Q4 with the lower costs and higher metal prices is a pretty good guide for how we're going to do financially this year. We don't provide financial guidance, but Q4 is certainly a good indicator.

You provided a little when you said that you're going to use up the tax loss carryforward in Mexico this year. Would you say you're going to use it up very, very safely? Just about use it up or is it dicey?

Using up those loss carryforwards. It's just a function of production and what we've used historically from a cost standpoint. So we have multiple entities in Mexico, and at Guanacevi, from 2016 to 2019, we had challenges financially. And we accumulated those loss carryforwards, and hopefully, over, like, say, the next 16 months, we eat through those loss carryforwards.

The next question comes from (inaudible) with Arcadia Economics.

Congratulations on a great quarter 4. My question has to do around -- has to do with the developments that arose during quarter 4 and mostly quarter 1, specifically with the silver squeeze and the manipulation of the price of silver on the COMEX. My question is, does Endeavour have any strategic plan to deal with this, to combat the manipulation? An idea I've heard is withholding 5% of production. I just have -- I just want to hear your answers around that and the future concerning that.

Well, thank you for your question. I guess I've got 2 different answers because there's really 2 different issues here. With regard to our sales strategy and whether we withhold or accelerate silver sales, that's typically a short-term decision based on our short-term view on the direction of the silver price. And we have in the past, for instance, when we felt that the silver price was rising, held back our sales. For instance, most recently, last September, we built up a finished goods inventory because of the crash in the silver price late September in the presumption that silver would bounce back in Q4, which it did with a bang. And we were able to sell that accumulated inventory and make extra profit on it. So we do this from time to time. It's a sales strategy.

With regard to the infamous silver short squeeze, I have a lot to say on it, and I actually posted and asked the CEO comment on our website a few weeks ago. So you're welcome to go and read that. But my view on this is perhaps a bit different than most. I don't think it was a silver squeeze. I think it was a classic pump and dump by some knowledgeable investors who did purchase $35 call options on silver before posting on Reddit. Those options on the Tuesday before the Reddit posting were $0.35 -- $0.30 to $0.35. On the following Monday after promoting it for 3 days, those options were worth $1.65. So I think some smart investors made a lot of money on that very short-term pump and dump. I don't think it was a squeeze at all.

Secondly, it's very difficult to squeeze silver because banks are generally agnostic to the silver price. What I mean by that is that they're generally neither long nor short, or more accurately, they're long physical sitting in vaults and they're short paper. And banks using fractional banking do lend out their assets. If you run down to the local branch, your cash is being lent out at several times. And that is probably the case in silver, but it's not manipulation. It's simply a function of what banks do.

And to be honest, if investors were to try and squeeze silver and buy physical, buy the ETF, buy the call options, what's the bank going to do? They're sitting on physical. So they're the ones who are actually going to make money at higher prices. And they can roll out of -- like they're typically hedging their silver, right? And it doesn't cost them anything to roll out of the short position and set it higher and roll out of it and set it higher, and they could do that all the way up to $1,000 silver. So I don't think there is a mother of all squeezes to be had in silver. I think it's a function. By the way, this is my last comment on this.

Silver amongst all the metals traded in the options and futures market is different. Why is it different? Because of all the common metals, it's the only one that is a byproduct of other mines. It's a byproduct of copper mines, lead/zinc mines, gold mines. And those big diversified global producers of copper, lead, zinc and gold typically sell forward their silver, lock in the revenue stream for their byproduct. So they are unhedged on their primary products. What that means is that silver, amongst all the metals, has a massively higher derivative book compared to the other metals and compared to physical.

And that's because diversified miners sell forward their silver. Who buys it? The banks enter into those forward contracts. So now they have not only physical, they have a commitment to buy more physical. And because they're agnostic, they balance that long commitment with a derivative short. And that's the structure of the silver market. So I think it's very, very challenging to try and squeeze something like silver because the main beneficiaries of higher silver prices would be the bankers and the miners.

Okay. So kind of going off that, this is my last question. What is your projection for silver in 2021?

Crystal ball. Well, I'm not shy when it comes to forecasting internally, but I rarely do it externally. We obviously think that there's a silver bull market well underway, precious metal market well underway. It's probably got years to run. I say that for 2 reasons. In the case of precious metals, primarily gold, there's a whole backdrop of record low interest rates, massive government intervention. No change in the Fed view for at least 2 more years, maybe 3.

So the fundamentals underlying a higher gold price, and therefore, a higher silver price are very strong. But silver, again, is not just a precious metal. It's an industrial metal. And the industrial side of silver is really taking off. Silver is a green metal. You can't have an electronics industry without silver. You can't have solar photovoltaic car without silver. You can't have electric vehicles without silver. You can't have 5G technology, telephonics without silver. And I think there's an emerging appreciation finally amongst generalist investors that silver is a go-to metal in a green economy.

This concludes the question-and-answer session. I would like to turn the conference back over to Bradford Cooke, the CEO, for any closing remarks.

Well, thank you, operator, and thanks all for listening in today. Obviously, this is a great year. 2020 was a great year for us, very satisfying after some challenging years. Q4 was greatly the finish of the year. And I think it's a good guide to how we expect to do in 2021. Thanks again. Stay tuned.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.