Coeur Mining, Inc. (CDE) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Suzanne and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year-End 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Ms. Bridget Freas. You may begin your conference.

Good morning, welcome to our fourth quarter and full-year 2014 earnings conference call. There are slides available on our website to accompany today’s remarks. Please review the cautionary statements and the risk factors in our latest 10-K and 10-Qs for risks and uncertainties that could cause actual results to differ from any forward-looking statements made today. Mitch, please go ahead.

Thanks Bridget. Good morning, everyone. I know it's a busy reporting day. So thanks for making the time to dial-in. I'll take the first 10 minutes or so to hit a few highlights and then we can open it up for any questions you may have for the team or for me. There's no question that 2014 was a tough year for stockholders and for the sector. Silver was down another 19% after being down 36% in 2013, and overall sentiment towards precious metals remained negative for the most part. That said, we did a lot of things during the year to move the company forward in a positive direction and to position the company for near-team growth in production and cash flow. We looked at it as a year of opportunity to make some tough decisions that we think will benefit stockholders over the next several years. It was the first full-year where we had all of the organizational improvements in place, which was the main reason we were able to make the progress we made. There were several key questions and concerns that were facing the company entering 2014 that I think we did a really good job addressing during the year. You may recall Rochester had a disappointing end to 2013, which called into question our ability to deliver on the kind of production and cost performance in 2014 and beyond that we have been talking about. A lot of people question the viability of Palmarejo entering 2014 with low reserves and onerous royalty stream, and a lack of long-term visibility. At Kensington we started to show signs of stability there in 2013, but it was still considered to fairly marginal high-cost gold mine. And we also we acquired Orko Silver in early 2013 in a much higher price environment and there were questions whether we would complete a feasibility study mid-year, last year and keep moving right on into construction in order to grow our production and prioritize production growth over returns. And if you fast forward one-year now to where we are today, and you look back at 2014, Rochester’s silver equivalent production last year rose almost 50% and mining costs per ton dropped about 30% during the year. And as we look here at 2015, we expect to deliver double-digit percentage production growth at even lower costs again this year. Looking beyond 2015, we expect to still see a very solid profile there at Rochester. The technical report we filed yesterday shows annual production of 5 to 6 million silver ounces and more than 60,000 gold ounces for the next several years. That's a big jump from where the mine was just a year ago, with production about a half of those levels in 2013 of 2.8 million ounces of silver and 30,000 ounces of gold. So with that kind of production together with the improved cost structure we are now seeing there, we should see significant cash flow out of Rochester looking ahead. At Palmarejo, we worked very hard during 2014 to address the questions there and to get the operations future squared away. During the year, the team developed a more efficient high-return and low-capital plan to develop the nearby Guadalupe deposit which produced its first ounces in December. We anticipate Guadalupe will become the main source of higher grade silver and gold production at Palmarejo for many years to come. One of the tough decisions we made last year was the strategic decision to commit to a transition of Palmarejo to an all underground operation that prioritizes quality ounces rather than quantity of ounces, and that is capable of generating higher margins and healthy free cash flow over a long mine life. That means 2015, is a year with a lot of moving pieces, the end of open pit mining mid-year, the likely end of the old Palmarejo underground by year-end, and a ramp up in underground production that we are already seeing at Guadalupe. Last year we also at Palmarejo successfully renegotiated the royalty stream held by Franco-Nevada, which is expected to significantly boost the mine's free cash flow going forward and provides us with $22 million of funding this year for Guadalupe’s ongoing development and ramp up. And then in December, we announced the acquisition of Paramount Gold and Silver, the next door neighbor to Palmarejo, to add nearby high- grade ore that we anticipate developing quickly and for very little capital. Paramount's main deposit is expected to become a second source of high-margin silver and gold to supplement the growing production from the Guadalupe deposit that's located only 800 meters away. Although this was strategically an easy decision to make, it was made more difficult given the weaker price environment last year and the lower equity valuations we saw during 2014. But after the closing of the Paramount transaction here in the first half of the year, and once it's up and producing alongside Guadalupe, we think Palmarejo will be capable of producing high-margin cash flow from an annual production profile for the next eight years of about 6 million-ounces of silver and about a 110,000-ounces of gold, with still a lot of drilling to do and additional higher grade silver and gold ounces to hopefully add to the mine plan. And then at Kensington we brought down our costs a lot there in 2014. Our cost per ounce during the first two quarters of the year were around $1,000 an ounce. We brought that down over 15% by the fourth quarter to $845 ounce. We also last year identified and drilled out an initial resource on one of a series of high-grade veins that are collectively called Jew Allen and are only about 100 meters away from the current mining areas there, we expect the Jew Allen discovery to grow more, with more drilling and we anticipate getting it into production sometime in 2017, with grades over three times higher than our current reserve grade, sourcing about 25% of our production from Jew Allen should materially lower Kensington's unit costs. Regarding the La Preciosa product, we completed the feasibility study that scheduled mid-year last year and decided to defer the project for now. Although the project had a positive return, the decision presented a good opportunity for us to show investors that we mean what we say when we talk about capital discipline and how we allocate capital. Basically we felt we could generate higher rates of return for our equity holders else where in the current climate and we turned out to be right. Last month we announced the acquisition of the Wharf Gold mine from Goldcorp for $105 million. We expect this transaction to close tomorrow, which is about six weeks sooner than we originally targeted. Wharf is a U.S. based producing mine that will give us an immediate boost to cash flow and should help reduce our overall costs with an estimated mid-to-high teens rate of return at current price, I think we made the right decision for our stockholders. We accomplished all of this during 2014 well been very mindful of our balance sheet and not overextending ourselves. We ended the year with approximately $271 million in cash and equivalents and have a flexible debt structure that doesn’t mature for another six years. At current prices we expect to consume cash this year and next to fund the initiatives necessary to complete the repositioning that is now well underway. And the company we expect to emerge from all this looks pretty exciting. Three other things I want to quickly mention before, we open it up to Q&A. The first is to start reserves. Yesterday we announced our year-end reserves and resources which assumed a silver price that was 20% lower than 2013 for both reserves and resources and our gold price assumptions declined significantly as well. Our reserve prices are inline with long-term consensus prices at $19 for silver and $12.75 for gold. All together our silver equivalent reserves increased slightly year-over-year and our silver equivalent resources decreased 45%, but each now contain higher quality ounces than they did a year ago. The big changes worth flagging are the increase in reserve grades at Palmarejo and Kensington, the reduction in reserves at San Bartolome reflecting the lower prices we use and the inclusion of resources at La Preciosa into reserves. Although we're not planning to build La Preciosa at this time, there is a sizable amount of economic material at our price of $19 silver, just not economic enough to justify moving ahead right now for us. You've heard us talk a lot about our strategy to maximize grade margin over production ounces. Our current reserves and mine plans now better reflect these decisions we're making, and this strategy, and we continue to add higher quality resources particularly at the independent deposit at Palmarejo and the Jew Allen deposit at Kensington that I already mentioned, which are two key areas of focus in our 2015 drilling plans. The second thing I wanted to mention quickly is just the write down included in our financial results. Our 2014 results included $1 billion after-tax impairment charge, which is obviously a big number. This was obviously a function of lower prices that we’ve used particularly our reserve and resource price assumptions. The majority of the impairment charge was related to mineral interest, not PP&E that the company has been carrying from prior acquisitions and development activities that took place during peak metals prices. When looking at our balance sheet, our stockholders equity was about $1.7 billion last year, and our equity market value has recently been around $700 million. So an adjustment in our carrying values was necessary to better align our balance sheet with the market value of our equity. And when you look at our amortization relative to our sales, it’s been running a lot higher than our peers and didn't really reflect the reality of our business, especially in this phase of the precious metals price cycle. Although it’s never an easy decision to take a big impairment charge, it was an opportunity I think to clean things up looking forward. By using lower metals prices, our mine plans balance sheet and income statement should now be a better reflection of our underlying business going forward. The third thing I want to quickly highlight is just I want to run down the numbers from last year to emphasize the progress we made in delivering against expectations as a company and in reducing our costs. Our costs applicable to sales for the full-year ended being 8% lower than our guidance at the beginning of the year. Even though our production of $32.2 million silver equivalent ounces was at the high-end of our guidance range. Our CapEx of $64 million declined 36% from 2013 and was below our guidance. G&A of $41 million declined 26% compared to 2013 and was below our initial guidance. Our total exploration spend of $31 million declined 10% compared to 2013 and was in line with guidance. We achieved lower unit costs almost across the board, which as you all well know, is the name of the game in our industry. The slide deck on our website includes per-ton cost detail by quarter for each of our mines. We expect to carry this cost momentum into 2015. Our 2015 all-in sustaining cost guidance is $17.50 to $18.50, which would be about a 7% decline over 2014 levels. So as we sit here today in February of 2015, our view, and the view I hear from more and more of our stockholders is that we have a sound strategy in place. That we have a credible team and an organization capable of executing the strategy that our existing operations are on paths leading to strong cash flow starting in 2017 that we plan to further strengthen the company with two solid acquisitions set to close here early this year that we're using our balance sheet to fund high-return opportunities that improve the business and drive down costs and that we're now better positioned to offer stockholders high-quality near-term lower cost growth. Although last year was definitely a tough one for stockholders, I feel we've positioned the company and our investors for a good run over the next several years. So with that, we would be happy to take any questions.

[Operator Instructions] Your first question comes from the line of Brett Levy from Jefferies. Your line is open.

Hey, guys, you said you’re going to be cash flow negative 2015 and 2016. Can we venture I guess that you're probably out of the M&A market at this point sort of having made these strategic moves? And then also, based on your assumptions talk about CapEx, in 2015 and CapEx in 2016 and maybe what kind of negative cash flow those drive?

Yes, sure. Hi, it's Mitch. Yes, on the M&A - yes, I think for us right now the priority is on integrating and executing each of those deals, both Paramount and Wharf do different things for the company and fit in nicely. In the case of Paramount it's kind of a continuation of what we're already doing there at Guadalupe, as far as a lot of underground development work and that's already underway there to get that material into production hopefully by the end of the year. And then of course at Wharf, that's a bit of a different animal with that being an existing operating company or asset. So that's much more of a real time integration activity and so our focus will be on bringing those both into the fold and executing the plans that I've kind of outlined in our existing assets as we look forward at least in the near-term. As far as CapEx goes, I think we’ve put out 2015 guidance today. I think about two-thirds of that guidance range is sustaining, the rest would be development. As you look into 2016, a similar range, but a little bit higher because we anticipate building a new leach pad at Rochester in 2016. So that would be kind of the last big chunk of CapEx to complete some of these initiatives that we’ve been talking about and really lengthens the runway there at Rochester in terms of leach pad capacity. So that's kind of the range as we think about 2015 and 2016 CapEx. Does that help?

Yes. Can you talk about any initiatives to increase liquidity at this point or?

Peter.

Yes, certainly around Wharf, we're in discussions at this point as we talked about in our press release, to access a revolver secured loan for about a half of the capital cost of Wharf which will certainly mitigate liquidity and obviously we'll be thinking about takeouts at that, but it will immediately bolster our cash flow as well in 2015.

And then last question. Is there anything as you go through these periods of negative cash flow in 2015 and 2016? Is there anything in any debt covenant bond or bank or anything like that - you are concerned about in terms of a breach?

No, we have no maintenance covenants in our high-yield in denture and that's really the only operative, covenants package that we're operating under. As Mitch alluded to, that's our sort of single tranche of debt. It was six years in front of us. We intentionally put that in place to handle periods like we're going through of building in the company, and depressed metal prices as well.

All right. Thanks very much guys.

Thanks.

Your next question comes from the line of Adam Graf of Cowen. Your line is open.

Thanks guys.

Hi, Adam

A question about the write-down, I know about a billion bucks. Could you say how much of that is Preciosa?

Yes, I think in the slides I don’t have the slides right in front of me, but there is a breakout – let me get to the slide number Adam, if doesn’t - Slide 9 breaks it out by asset. And I can just give you the number Preciosa after tax 245.

Okay, I’ll check that breakout. My question as potentially it applies to Mexican taxes with this write-down, as far as your tax is at Palmarejo this write-down allow you to push off paying that higher 30% tax rate for the longer and at current prices when do you expect to be paying that higher tax rate at Palmarejo.

I think the short answer to the question Adam is, this is a write-down for accounting purposes that has no implications from a tax perspective for Palmarejo.

Oh, it doesn’t create any kind of a net operating loss that you would be able to take advantage of in Mexico?

Yes.

Great. Thank you very much.

Sure, Adam, see you.

Your next question comes from the line of [indiscernible]. Your line is open.

Thank you so much, actually the question I was going to ask about the write-downs was just answered. So thank you.

Good. Okay, no problem.

[Operator Instructions] Your next question comes from the line of Jorge Beristain of Deutsche Bank. Your line is open.

Hey guys, Jorge with the Deutsche Bank here.

Hi, Jorge.

Hi, Mitch, just following up on those write-down questions, what is the remaining carrying value of La Preciosa on your books right now?

$40 million.

Thank you and I was just wondering if you could comment about the general conservativeness of still using a $19 silver assumption, I know you did flag a few and we have already seen some of your competitors in that range, but silver the metal is much closer to $16 an ounce and if we just compare what the gold industry has done generally taking their average reserve price to spot gold around $1200 right now. Why you feel that silver should still trade at a higher premium as it relates to reserves relative to spot. If you could just talk about the general conservatism there and if that’s something that your accounts decided or how you come to that application of the $19 per ounce?

Yes. Obviously there's a bit of subjectivity there, and with silver's volatility relative to gold, it makes it even a little more imprecise. Obviously we start with three year trailing average as kind of guided by the SEC, which those prices are well above where we are today and so that kind of puts you off into a bit of a different path as far as trying to estimate what you think a good long-term price is to calculate reserves. And we look at the analyst consensus, which is exactly spot-on with the prices that we've assumed. I hear you on the gap between $19 on silver that we're using, versus less than that today, but silver's volatility is such that what was it last week it was or two weeks ago $17.50 and then that makes $19 look not all that far away. It seems like that could be made up or lost in the span of a day or two with silver. Also, we set those prices back in kind of the fall, early fall. So that adds another level of complexity as far as setting something that you hope will still be relevant at year-end So and you know, with gold become more-and-more of a part of our business, over 50% of our revenue, I think, as we look at 2015, I think the fact that we're using a gold price of $12.75, which is a lot closer to spot kind of helps maybe offset what looks like a bigger gap as we see here today on the silver side. I don’t know if that gives you any color or insights, Jorge, but those are some of my thoughts.

Sure that makes sense and what I’m actually trying to get at though is just sort of if we continue to languish in a very depressed silver market environment, are we going to be revisiting this write down situation 12-months from now where you guys have to do another mark-to-market and say go to $16 as your reserve price? And what I'm trying to get at is, what are the remaining sensitivities to your book value, because with this write-down of a change of $6 in your pricing assumption, you wrote-off a billion. Most of that was land value as we said, but there was also some PP&E, which I also wanted to maybe get Mitchell's opinion on that. And the rest was land, but I'm just really trying to get at if we were to go mark-to-market at $16, where does book value go from this point?

Yes, I mean a year from now if we've seen a year of $16 silver prices we’ll probably - it's likely we would use a much lower price then to calculate our reserves. Although, that is not a linear decline as you know, you can't look at where we were last year at $20 - I think $25 silver and today at $19 and extrapolate down to, say $16. The mine plans will be modified to incorporate the material that's still economic at those prices. And as far as whether that would spill over then into impairments hard to say, although I’d say at this point we've taken a pretty good whack out of our carrying value. So I don’t think there's nearly as big of a target there as there was as we entered the end of 2014 and we ran our reserves and mine plans. So lot of moving parts between now and then, but I don't think there's a risk of us seen a linear decline in book value, for example, next year even at a current silver price.

Okay, got it. Sorry, Peter, yes.

I was just going to say in terms of allocation between mineral properties and depreciable property, it’s a pro rata allocation once we actually derive the impairment charge. So those numbers actually get derived, and Mitch really gave that commentary from a perspective in terms of your question hopefully.

Got it. Yes, I was really trying to figure out why the PP&E went down so much as well given that the values of plants don't change overnight like that either. But just to drive on the final point here. In terms of the reserves that you're now counting for La Preciosa. Is there mine plan associated with those, because I’m not understanding how you could bring that project back into reserves if it’s basically suspended. And I think in July you guys had written down the reserves and now you're writing them back up. So could you just talk a little bit about why you would have any carrying value for that asset at this point, and if there is a mine plan associated with those ounces or those at risk ounces as well of our further write-off?

Yes, I’ll start and then Joe, you can chime in. We never did have any reserves at La Preciosa until now, we had resources a year ago on our books. But until now, at year-end we've never had reserves at La Preciosa. Joe, as far as carrying a reserve there at $19, do you want to talk a little more about that.

Yes, it’s Joe Phillips, One interesting point to note in La Preciosa, so we did the feasibility study at $22. And so redoing the reserves at $19 is much less of a drop than going from $25 to $19 as we did for the rest of the company. Secondly, we haven't been standing idle since we published that. We have been doing a considerable amount of optimization of the mine plan. We have actually found some interesting ways to improve the project. So it is cash positive at $19. And I think the proper definition of reserves I think it’s a correct step to include this at $19 price.

Okay, thank you.

Your next question comes from the line Adam Graf, Cowen. Your line is open.

Thanks, just a quick follow-up question guys. Just as far as the year going forward here, what can we expect for new mine plans in 43-101 reports?

Yes, you kind of stole my thunder as far as my wrap-up comments, Adam. But I'll go ahead and I'll flag those things now. So Wharf will have an initial 43-101, with an updated mine plan and reserves some time here in the first half of 2015. The paramount, once that deal closes, which is hopefully, say, April, on the heels of that then we'll have an updated technical report that will incorporate the combination of Palmarejo and paramount, and will establish an initial reserve then at Don Ese plus Independencia as well as a consolidated mine plan for the overall mining complex you might say. And then the other one is Kensington, although we won’t be doing that and we don’t expect to be doing that through a 43-101. We will putout a rescoped kind of PEA type mine plan for Kensington, probably in early April that I think we've mentioned this before. It will reflect kind of what the impact of this higher grade material from Jew Allen can have on that mine plan as we look forward and that will be, I think I mentioned already, early April sometime. So those are the - am I missing any of them. And then you probably say we filed updated TRs for all the properties I think yesterday.

Great. So at Kensington you will just even though that won’t be 43-101. Will that just be something that - some sort of a press release really or something?

Yes, it will be kind of similar to what we did last June or July when we put out an updated Guadalupe mine plan. Yes.

Perfect, perfect. Great. Thanks a lot guys.

No problem. Take care. End of Q&A

There are no further questions in the queue. At this time I would like to turn the call over to Mr. Mitch Krebs for his closing remarks.

Okay. Well hey thanks everybody. We appreciate your interest and time and questions. If you think of anything else, you know how to get a hold of us and have a good rest of the day. Thanks.

This concludes today’s conference call. You may now disconnect.