Endeavour Silver Corp (EXK) 2020 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Third Quarter 2020 Financial Results Conference Call. (Operator Instructions)

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

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2020 Third Quarter 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; our Chief Operating Officer, Don Gray; and our President, Godfrey Walton.

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 2020 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 and mineralized zones. While 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, Brad Cooke.

Thank you very much, Galina. And again, welcome, everybody, to this conference call on our third quarter financial results. I think, first of all, I'd like to welcome Don Gray to the group. This is his first earnings call as our new COO. And then also especially like to recognize Godfrey Walton, who was with me when we went to Mexico in 2003 looking for an asset we can build a company around. This is Godfrey's last earnings call and so kudos, Godfrey. It was a great run.

Moving on to our press release this morning. I'd just like to open with comments on the quarter. It was our best quarter in 18 months. In fact, our best quarter in a long time when you consider the changes of revenue, cash flow and earnings, all sharply higher this year compared to the same quarter last year.

Our cash costs and all-in sustaining costs were significantly lower year-on-year, and this improved operating performance combined with the higher precious metal prices generated a significant return to profitability, again, for the first time in 6 quarters. As a result, our cash and working capital positions also increased substantially during the third quarter.

So let's now drill down a little bit into the numbers. Our revenues were up 29% to just shy of $36 million in the quarter. And our cash flow jumped almost 400% to $10.3 million year-on-year. Net income or earnings came in at a positive $0.5 million compared to almost $7 million loss a year ago. And I should point out that we did carry a significant increased metal inventory through the quarter end, largely because of the summer run-up in metal prices and then the significant correction at the end of September. So we chose not to sell a significant amount of silver and gold at the end of the quarter. We carried it in inventory. The cost of that inventory is about $6 million, but the mark-to-market of that inventory at the end of September was in the order of $15 million. What that implies is that if we had sold that, then all our earnings would actually be in the $10 million range, not the $0.5 billion range.

Production on the quarter was just shy of 1 million ounces of silver and 10,000 ounces of gold for 1.8 million ounces of silver equivalents. And I mentioned already, our balance sheet cash was up 47% to just shy of $45 million and working cap was up in the $54 million range, up 21% year-on-year.

Moving to the operations. Guanacevi continued to outperform with both silver and gold grades well above plan. We were affected by significant rainfall in the rain season in Q3 and as a result, throughput was only 911 tonnes per day in the quarter with a 1,200 tonne plant that implies that as we bounce back here, exiting the rain season in Q4, there's actually more production at lower costs in our future at Guanacevi.

I should point out, however, that the improved grades are accompanied by higher royalty payments. We're mining a property at Guanacevi where there are very significant royalties paid. So our costs will slowly rise as the metal price rises just due to the royalties.

Bolañitos continue to improve. It's not quite on plan yet, but we achieved 1,075 tonnes per day into a 1,200 tonne plant. Again, implying that there's still room for improvement on throughputs. Gold grades were on plan, silver grades remain below plan, but costs were fine. And all 3 assets generated free cash flow in the quarter.

Last but not least, El Compas is pretty much on plan. Throughput study, gold grades on plan. Silver grade is below plan, but we're doing fine there and making a little bit of money. It's our smallest mine. Guanacevi, our largest mine, has by far the biggest impact on our financial performance.

So I think on that note, operator, let's wrap up my comments and open it up for Q&A.

(Operator Instructions) Our first question is from Heiko Ihle with H.C. Wainwright.

Congratulations on a very, very good quarter here. Just going through the financials here, I'm looking at the -- your deferred income tax asset has gone from $7.14 million at the beginning of the year to $5.3 million today. Going through that segment disclosures chart on Page 15 of your financials, it looks like the improvement was almost exclusively related to Bolañitos. Should we expect further improvements for the company there? I mean because that's -- I don't want to say, free money, but it's certainly good cash flow, if it actually -- if you get paid back.

Yes. Heiko, Dan Dickson here. You did touch on -- our deferred tax actually went from $7 million to $5 million. Basically, that's -- we're actually using up that deferred tax asset, which is a noncash item. And what's happening, we've made significant profits in Bolañitos this year. But we've been offsetting those profits against previous year's losses. So we have loss carryforwards being used. And ultimately, that reduces the value of that deferred income tax asset. So -- and we are benefiting. We will see more profits in Q4 likely from Bolañitos and Guanacevi. Guanacevi, we also have loss carryforwards there. So I don't expect to have an income tax -- a current income tax expense in Q4 other than for special mining duty, but we'll see us grind away from that asset and have an expense on a noncash basis.

Got it. Perfect. And then a completely different question. Can you just sort of walk us through how your plants in Mexico have changed since you restarted operations with safety related to COVID? Has there been meaningful changes? Are people adhering to the safety precautions properly? I mean it seems like your safety record there is pretty good. So just if you could provide some more color, that would be great.

Well, let me -- thanks, Heiko. Let me give you a very high-level comment, then I'll turn it over to Godfrey and Don. We -- quite fortunately, we're able to move very quickly to put our COVID precautions in place, both our prevention plan and our emergency response plan.

And then by and large, it served us very well stopping COVID at the gates of the operations. Our actual workforce, that is mine and plant that had minimal impacts from COVID. We've had some office workers impacted by COVID, all eventually return to work. But maybe I'll ask Godfrey and Don to give you a little more color on our plants since the first and second quarters.

Heiko, this is Godfrey. Yes, we actually have a pretty intense protocol -- protocols to make sure that we do stop the COVID of the gate, as Brad mentioned. We make sure that every worker as they come in is -- their temperatures checked, they're sprayed down. Everybody is wearing a mask 100% of the time. And you're sprayed down body wise, not for front and back and your vehicles are sprayed down as you come in. So it's pretty intense. And unless you're actually there, Don and I went through -- over the last month or so, we've been in and out of different operations. And it's, to me, very, very good. I was very impressed with how far we're being. Yes, we've had a few cases. But typically, we've got about 11 to 15 active cases at any 1 time. And nobody seriously infected. But it has been -- they -- that has been done very effectively, I think. Don, do you have anything else to add to that?

I think I'd just add that the screening is pretty comprehensive with temperature checks and checking symptoms and that sort of thing. So when there is somebody detected that could be coming in, we do send them right out for testing. And the testing at our operations, we can turn that around very quickly. So if we do identify somebody that does test positive, we take the profit precautions for corn tuning and then also our medical response has been quite good. And so we have really good response, probably -- the response is just better as you get just about anywhere in the world. It actually is really good. So I think from that perspective, we're taking out proper precautions and measures to take care of our people as well as make sure that the operation can maintain continuity.

Very informative.

Sorry, I just had 1 thing, Heiko, is we've actually -- we have doctors at all our operations, and we've increased the number of doctors just to help out with the screening and evaluation of people. So I would say, we probably tripled the number of doctors we have on staff now, just during this COVID. Just because it does take up quite a bit of time for them when shift changes on. So if you got a couple of hundred people coming through the gate, it takes quite a bit to get them all checked out and evaluated.

Very good. It's nice to hear the whole team chime in on an answer to a similar question. It's actually really cool how you guys play off of one another.

The next question is from Craig Hutchison with TD Bank.

I was wondering if you could give me some more clarity in terms of grades as how we should think about sort of Q4 here. In particular, at Guanacevi, should we assume similar grades to Q3, which are obviously very high?

Again, high-level short answer, yes. Godfrey?

Craig, this is Godfrey. Yes, I think you're going to see [good ore] continue at Guanacevi. A lot of the grades that we're getting is coming from a property called Ocampo that we do pay a high royalty on. So the grade needs to be good. But it's also coming from third party ore that we're buying, which is part of our sort of social license to continue operating at Guanacevi. So I think the grades you're seeing Guanacevi, El Compas and at Bolañitos are going to be similar in Q4 as they were in Q3.

Okay. And then just in terms of accounting question, depreciation was fairly high in the quarter. Should we expect similar levels in Q4 as well?

Yes, Craig, Dan here. I mean ultimately, our depreciation is hard -- high. We're very conservative in that standpoint. We depreciate on proven and probable. So I would expect very similar depletion and depreciation into Q4.

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

So I guess, first thing, Terronera, what -- any update there on timeline to making a construction decision?

Well, of course, it's subject to the feasibility study, which is underway and expected next summer. But Don, do you want to comment?

Yes. We just -- we just, as you know, awarded the feasibility study work to Wood Consultants and they're starting out. So we'll be working up the feasibility reporting sometime -- being completed sometime mid next year. And then we'll be able to go to the Board with the recommendation as to when to start construction. So right now, the timeline, it's what we have in the PFS, but subject to any additional work we do in the FS, in the feasibility study.

And the current pre-feasible construction schedule once we break ground is, I believe, 18 months to the start of the commercial production. So we've got lots of work to do, but we're finally into the final feasibility process.

Okay. Fair enough. And then thinking about next year, I know it's a little early to provide guidance probably, but from a modeling standpoint, should we be thinking about the Guanacevi and Bolañitos kind of returning to normal operating rates near their planned capacity? Or should we be thinking about a certain percentage of plant capacity in the -- for the next 12 months?

Yes. I think -- well, I don't think we're going to average 1,200 tonnes per day at either operation next year. We're certainly going to be bumping up against it on a regular basis. The reason why I'm cautious about talking about operating at full capacity is simply rain seasons are a bit unpredictable. And COVID is still out there. So -- but yes, it will be in our plan to operate close to capacity.

The next question is from Lucas Pipes with B. Riley Securities.

I wanted to ask a question on the direct production costs per tonne. And there's been a lot of noise in that metric between COVID and then some other challenges year-to-date. And kind of looking at the third quarter, very nice performance kind of across the board, but it's still $110 -- over $110 per tonne. And so do you think we can get below kind of $100 per tonne figure, maybe back into the $80 to $90 range? We really appreciate your thoughts and the various puts and takes here on that.

Yes, Lucas. Thanks for the question. Dan here again. It's a very good question, and it's hard to speak to it just on a consolidated basis and getting below 100 on a consolidated basis for Q4 probably will be difficult only because a significant driver to all this is Guanacevi and Godfrey touched on it. We've been buying a lot of gold ore out of Guanacevi. It was almost 11% of our production in Q3. And ultimately, when that ore comes to us at these high prices, we take it. It keeps ounces in the ground for us for another day. And ultimately, it's high-grade ore. So we pay a significant portion for it. We roughly make about 30% to 35% profit off that ore on a cash basis, and we expect that to continue because those prices go up more as gold ore comes available. And it's got a lot of benefits to us. A, we get to go find out where that ore is coming from and gives us a little bit of exploration opportunity or -- and like I said, ultimately keeps it in the ground. The other aspect is the El Curso concessions that we lease from Ocampo. We pay a $12 processing fee per tonne on that material. And then we also pay a royalty cost on that material. So we picked up the El Curso concessions effectively at no cost, but we do pay a very high royalty on it. In over $20 we paid a 3% NSR on it. So effectively, in Q3, we paid about on across all our tonne, we paid almost $28 of royalty per tonne in there. So that's really driving up our cost per tonne, Guanacevi. And the reason why Guanacevi sat at $146 for Q3, when ultimately, we operated around $100 per tonne on just basic mining processing and indirect costs.

Bolañitos, we're right in line with our cost per tonne in line with budget, in line with historicals at $68. If we hit this throughput tonnage, we should be around that, if not a little bit lower if we can get to 1,200 tonnes per day.

And at Compas, it's just a high variability because of the size of the operation. So it's only 250 tonnes per day. And ultimately, we spent almost $1 million, a little bit more than $1 million this quarter than what we had planned. But because it's such a low amount of throughput and scope of that operation, it really hits the cost per tonne. It doesn't have a huge impact consolidated. But obviously, on an operations level, we get big variability there. We do expect to come down. We put in a lot of training, safety, real safety program's been there, trying to increase our level of safety commitment at Compas. We hope it's going to come down in Q4. We're monitoring it and we want to make sure that those costs come down and improve the free cash flow there. But I don't see it coming under $100 consolidated. I hope we get in full $100 to $105 for Q4.

That's very helpful. I appreciate that color. And then as a second question. Just checking in on Chile. Can you update us on where you're spending your time there? And what are some of the milestones that investors should be looking forward to over the coming, call it, next to 2 to 3 quarters?

Who wants to take that one? Godfrey?

Sure. I can take that one here. In Chile, we are currently drilling at the Paloma property. And we're sort of following up on some intercepts -- intersection and intersection that we got last year in a first hole. So we've completed a couple of holes now. We have not got any assays at this point. But we expect to continue drilling until Christmas, and then the season will pretty much close down because we're up at about 5,000 meters. Once we have our results early next year, we'll be able to put those out. And so we're encouraged with what we see in the core. But we don't have any numbers yet, and we won't until Q1 next year. It's going to be the time for that.

On into the rest of the year. Because Chile is sort of in the Southern Hemisphere, most of the activity is happening now or in the fall. So we're busy right now looking at other properties and evaluating what's happening up at Cerro Marquez and talking to a variety of people about that property. And then it will go quiet during our summer and could become active again in the fall and through Christmas.

And just if I could chip in for the rest of our estimates. The context of our portfolio in Chile is that these are all high-impact world-class targets. For instance, Paloma, we consider to be able to be a multi-million ounce gold target. And we're just getting into the drilling now. So we're going to be patient. It's a big area to drill. But like Godfrey said, we're seeing all of the things that we want to see in the core: (inaudible) silica, high different [low preference] sulfides and other related geological factors that indicate the presence of gold, but we don't have the assays yet.

(Operator Instructions) Our next question is from Joseph Reagor with ROTH Capital Partners.

I just had 1 more. At El Cubo, any update there? I mean with higher prices, is there some, let's call it, mineralized material that was outside the resource that might come in? Or have you been able to get any further in talks for neighboring projects? Just any color you can give us.

Well, the good news is that these ore prices, we're getting a lot of inbound and inquiries about possible sale. The bad news is that it doesn't really change. The higher prices don't really change the amount of ounces in the ground. And our decision to close is because we exhausted reserves and the remaining resources we felt were just too small for us to restart a 1,500 tonne plant. We have been, as you know, actively scouring the district for opportunities and continue to do so. But there's no decisions been made whether to buy something and restart or just sell the whole thing yet.

The next question is from Chris Thompson with PI Financial.

Brad, I think this is probably a question for you. It's a little bit, maybe just broad. Obviously, with higher margins we're experiencing right now on the back of good metal prices and obviously, you reduced costs, that speaks to higher cash flow. I wonder if you could just give us a sense of how you would apportion this cash flow by way of preparation for Terronera, obviously, what's happening with Parral and maybe the need for mine life expansion through drilling and discovery at your operating assets.

Good point and good question, Chris. Obviously, with a rising cash balance, and we've really only had 1 quarter of that, it gives us a lot more flexibility in what to do. We've always historically balanced our capital spending from our cash flow model each year. And we spend at least for the 3 mines only out of our cash flow. Not only we've got lots of free cash flow, it opens up other possibilities. So for instance, we took 2 years off from drilling Terronera while we focused on our economic studies. As of September, we've resumed drilling on a number of very interesting undrilled veins of Terronera to try and continue boosting the resources there. Same thing at Parral. We took a 1-year break from drilling Parral, which is intended to follow Terronera in our development pipeline. But I think it's safe to assume that there will be aggressive drilling programs on both Terronera and Parral next year.

So in terms of allocating some of our free cash flow, there's 2 projects. We'll continue with our brownfield exploration around Guanacevi and Bolañitos. And they're not going to grow. Those programs aren't going to grow or shrink. They're just steady on.

Chile, we're drilling Paloma now, and we hope to be drilling Aida next year as well. So there's a kind of discretionary exploration expense that we'll consider. And then, of course, just building up our cash for the equity component of the $100 million CapEx to build Terronera.

So those are our considerations. No decisions made yet. We typically do year-end planning, but just to give you an idea of what we would do.

Great. I'm listen to ask another quick question, I'll sneak 1 in. Obviously, higher metal prices, both for gold and silver. Can you speak to the effect that this might have on resource space at, I guess, Guanacevi and Bolañitos, if any?

Because the veins have clean walls and these are not disseminated bodies of low-grade halos, I don't think there's much change in our approach. We're going to mine the veins. The cutoff grades can drop a bit, but we're mining such high grade at both operation outlets, certainly at Guanacevi, that had 0 impact.

At Bolañitos, we'll look at whether or not we can bring some of the lower-grade resources into the mine plan. But that's probably the only impact.

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

Well, thank you all for tuning in for our third quarter call on our financial results. It's been a great quarter. We expect bigger and better as we go forward. And we've got, I think, 1 of the best outlooks in the sector with leverage to cash flow, not only from higher metal prices, but falling costs, leverage to production growth through our own organic growth profile with not 1 but 2 projects awaiting development: Terronera, which is largely permitted, and Parral, which even though it's an advanced exploration project is -- looks like it has the potential to be a new mine down the road. And last but not least, leverage to new discoveries, potentially world-class with 3 drill-ready targets in Chile.

So very exciting times for us. So we're a catalyst-rich time for the company, and we've come through that transition phase where we undertook in the last 6 quarters operational turnarounds to try and get out of the doldrums during the bear market, and we've succeeded. So lots of catalysts to drive value for the shareholders over the next year. Thank you very much.

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