Coeur Mining, Inc. (CDE) Q3 2016 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Coeur Mining Third Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over Courtney Lynn, Vice President, and Investor Relations and Treasury. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining’s third quarter earnings conference call. Our results were released after yesterday’s market close, and a copy of the press release and slides for today’s call are available on our website. Before we get started, I’d like to remind everyone that our press release and some of our comments on the call include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentation as well as the risk factors described in our latest 10-K and 10-Q. I’ll now turn it over to Mitch Krebs, President and Chief Executive Officer.

Thanks, Courtney, and good morning, everybody from World Series crazy Chicago. Thank you for joining our third quarter earnings call. With the support of higher silver and gold prices and a great quarter from our Wharf mine, our third quarter net income increased almost four times quarter-over-quarter to $70 million. Our adjusted net income was in doubled to $39 million and our free cash flow grew by 20% to nearly $15 million. As we expected, our third quarter overall production levels were lower than the first two quarters of the year due to three main factors, one that was anticipated, and two that were unanticipated. First, Palmarejo production was impacted by scheduled enhancements to both Merrill-Crowe circuits. That work begin on July 1st and was completed on September 30th. It required the mine to reduce flow rate to these plants while the improvements were made. The plants were fully commissioned in the first week of October and we expect to see 1% to 2% improvements in future silver and gold recovery rates from this $2.5 million project. At Kensington, we lost about 11 days at the end of September due to a plugged pipeline that takes tailings from the mill down to the tailings facility. This line was repaired and operations returned to normal on October 3rd. And finally in Bolivia, civil unrest in the country between the federal government and the cooperative groups led to road blockades that prevented some high-grade third-party ore purchases from getting to San Bartolomé during the quarter. Despite those onetime events, our operations are on track to achieve our full year production guidance, which we revised slightly upward earlier this month when we announced our third quarter production results. In yesterday’s release, we lowered our full year cost guidance at Palmarejo, Wharf and Kensington, and our Companywide cost guidance. Although overall quarterly production was down, the Wharf operation continues to be an outperformer. As you may recall, we acquired Wharf in February of last year for $99 million. During the third quarter, Wharf provided over $20 million of free cash flow, its strongest quarter since we’ve owned it, which brings its year-to-date total free cash flow to nearly $44 million. Since the acquisition, we’ve harvested over $72 million of free cash flow now from Wharf. During the third quarter, we made great progress on our efforts to reposition our balance sheet. Our objective is to achieve and maintain a balance sheet that is among the strongest in the industry and is flexible and capable of supporting the business’s future growth initiatives. Total debt has declined by over 25% over the past 12 months to about $400 million. At the same time, our LTM adjusted EBITDA has more than doubled to over $200 million. And cash and cash equivalents stood at over $220 million as of September 30th and continues to grow. One of the large [ph] initiatives underway to achieve our balance sheet objective is the completion of $200 million at-the-market equity financing. Through yesterday, we’ve completed just over $90 million of the $200 million program. We intend to use these proceeds to further reduce the remaining balance of our 7.875% senior unsecured notes due 2021. Assuming we’re successful with these initiatives, our remaining debt at year-end should be below $200 million and our total debt to LTM adjusted EBITDA ratio would be less than one-times and we’d actually have a net cash position at year-end. It would also mean a significant drop in our annual interest expense going forward. Just to give you a sense of how significant, entering 2016 our budgeted interest expense was $42 million and now entering 2017 and assuming we successfully complete the ATM program and subsequent debt reductions, our interest expense next year would be around $15 million. These incremental cash savings will allow us to allocate more funds to value creating opportunities such as near-mine exploration. In fact, our exploration investments are already generating encouraging results, which we summarized in an exploration update we published earlier this month. Near-mine exploration focused on higher grade targets remains a priority and we believe is a differentiator for us. We have several unique opportunities to add higher grade ounces at some of our deposits, especially considering how under-drilled our ore bodies have been historically, particularly at Palmarejo, Kensington, and Rochester. It remains a key component of our strategy given its higher likelihood of success, low relative risk, proximity to existing infrastructure, and near-term payback. I’m going to have Hans Rasmussen, our Head of Exploration, briefly walk through the exploration slides that are contained in the presentation materials, and flag some of the key highlights for you. Hans?

Mitch thanks. Good morning everyone. I’ll refer to starting with slide 14 in my discussion, if that’s helpful. Our most active exploration efforts have been at Palmarejo where we have now eight drill rigs, four on the surface and four underground. Our drill program at Independencia, which has encountered some particularly encouraging results, has focused on definition drilling to aid in the mine planning and has been clearly our most aggressive part of the drilling program, as we continue to ramp up production at the deposit there. At Guadalupe, we continue to conduct infill drilling focused on upgrading existing high grade inferred resources. And lastly, our surface drilling campaign in the corridor zone which is located between Independencia and Guadalupe has focused on resource definition and growth of the Los Bancos and Nación-Dana veins and on the gaps between these two structures. We are now moving to drilling new targets in the district and we’re moving to the La Bavisa vein which is located northeast of Independencia. It was previously drilled by Paramount Gold & Silver. We can drill this from both underground and from surface. So, we can reach it by underground from Independencia and from surface where we have permitted drill sites. To offer sense of our incremental exploration efforts at Palmarejo this year, we drilled a total of almost 100,000 feet or 30,000 meters, in the six months from March through the end of August. That’s almost double the amount of drilling that we did in the full year of 2015. Okay. I’ll turn now to slide 15, Kensington project, Kensington mine. Our drill program at Kensington also continues to be quite active with four core rigs active, both on surface and underground. Underground drilling at the Kensington Main was focused on infill and expansion of Zone 12, which is just south of the main mining activity, in Block M, which is the deepest zone so far and in the Gap zone, which is located between zones 40 and 41 in Kensington Main, then the lower portions of Block 40 which is uppermost Kensington Main. Kensington remains open at depth beyond Block M and open to the south beyond Zone 12 that we’re currently drilling. Drilling from underground is also taking place in the nearby Raven deposit where about 10% of our production ounces are being sourced. And we are drilling in the high grade Jualin deposit from underground. We’ve also mapped several new veins this summer that we plan to drill test in 2017 once the snow melts and we have access. At Rochester, where we don’t have a slide for Rochester, but at Rochester, we have an exploration program that’s focused on both infill and expansion of the higher grade East Rochester deposit and on infill drilling in the existing pit, primarily focused in the West Rochester area. Our goal there is to upgrade the large amount of resources into the reserves at year-end this year. Our fourth quarter drilling will focus on the expansion and conversion drilling in the South Pit portion of the Rochester deposit. In 2017, we expect to be drill testing a number of new targets that were generated through our new surface geologic mapping program this summer. These will begin in 2017. We also plan to conduct infill and expansion drilling in the areas expected to be permitted as part of the next planned expansion at Rochester called POA 11. Lastly, we’re excited about our expanded investments in early stage exploration. Over the past two to three years when the early stage funding was largely unavailable, we entered into agreements, both in the US and in Mexico. And we continue to do more deals as we see good opportunities arise. In the U.S., we have four projects in Nevada, all four will be drill tested in the next months. And just earlier this week, we signed an agreement for an earn-in arrangement at the new project in Wyoming called Mineral Hill, it’s located 15 miles west of the Wharf mine. We expect to begin drilling and trenching in late 2017 at the Mineral Hill project. In Mexico, we planned to drill the Todos Los Santos project next month and a newly signed up project called [indiscernible]. We have to do target generation and drilling sometime in mid to late 2017. Both projects are located in the state of Chihuahua and their infrastructure are coincidentally near our exploration offices. Locking forward, we will continue to evaluate new opportunities -- number of other opportunities in Mexico, U.S. and Canada, all three jurisdictions in which we’re comfortable and exploring and operating. Mitch?

As we consider the Company’s longer term growth strategy, it’s important we have a balanced and robust pipeline of high-quality future sources of production and cash flow. Then everything Hans just talked about this an important part of that pipeline. Our La Preciosa silver-gold project in Mexico is also an important part of that pipeline. As we have mentioned before, we have had team go back and take a fresh look at this project that we acquired in 2013. We completed a feasibility study on the La Preciosa, assuming a large scale open pit scenario in mid 2014 and we concluded the economics were not attractive enough to proceed at that time. Since then, we have gone back and re-logged all the old drill core and have developed a new geologic model that is more in-depth than the one that formed the basis of that feasibility study. We plan to conduct infill drilling early in 2017 to upgrade resources and to validate this new geologic interpretation. Subject to these results, we have planned to complete a new preliminary economic assessment next year focusing on a more selective mine of higher grade material, involving less capital and fewer tons, but higher overall margins and profitability. And finally, looking ahead to yearend 2016 and into 2017, slide 20 in the presentation materials summarizes several of the key priorities to watch for as we wrap up 2016 and head into next year. These priorities include the balance sheet initiatives I mentioned, accelerating the mining rates at the Independencia mine at Palmarejo, and developing those higher grade ore sources at Kensington including Jualin and several of the other areas as Hans mentioned. So in summary, third quarter earnings and cash flow were higher. We made great progress strengthening our balance sheet with further deleveraging expected in the fourth quarter. Our operations remain on track for a solid end to the year. And our key initiatives are all well-positioned to deliver a very strong 2017. So that’s the extent of our comments. Why don’t we go ahead and open it up for any questions.

Thank you. [Operator Instructions] And the first question here comes from Brett Levy from Loop Capital. Please go ahead.

Hey, guys. Strong quarter. Talk a little bit about what you see for the fourth quarter obviously there is some global dynamics that are going to challenge you a little bit. Can you talk about fourth quarter in the context?

Yes. I’d say from a macro -- yes, you’ve got some event, risk clearly that could impact precious metals prices between obviously the election here in the U.S., what the Fed may or may not do, we’ll kind of set those off to the side in the category of things we can’t control and focus on the things that we can, which really starts with that mining rate out of Independencia down to Palmarejo. Getting that up to end the year at a 1,000 tons a day sets us up really well for Palmarejo in 2017 with the mining from both Guadalupe and Independencia. The other big thing for the fourth quarter of this year is to see a little bit of catch up there at Kensington. Obviously with the mill down 11 days at the end of September that should have a spillover effect and make the fourth quarter even stronger. So, that’s a key thing to watch as well. And then as I mentioned, completing this -- hopefully completing this ATM program and delivering on that balance sheet work that we described and ending the year with what should be a really strong balance sheet and positioning us really well going forward. Those are the things that come to my mind as far as the fourth quarter of 2016 and what we’re sort of focused on.

Any sort of thoughts with respect to your near-term call dates or anything like that in terms of the bond? I think you’ve got [Multiple Speakers]

Brett, it’s Peter. I would say that is central to our thinking. But yes, working our way through the ATM is critically important to coming up to that, but we’re very cognizant of the call date and any strategy that we have around the bonds is going to be predicated on that February call or that kind of sets a metric for us rather than to what we do with the bonds, but on that I don’t want to really go into a lot more detail.

Our next questioner today is Jessica Fung from BMO Capital Markets. Please go ahead.

Question about Kensington, can you give us an update on development at Jualin there, what it looks like in the quarter and whether you expect to be producing there still in the second half of next year?

Yes. I’ll answer your second question first and then I’ll have Frank answer your first question. We’re still on track for production out of Jualin second half of 2017, so that still remains the target. We’ll have an initial reserve on a portion of vein 4 of Jualin as part of our year end reserve process. And then, Frank, do you want to give a little color on the progress and development rates down at Jualin?

Sure. Hi, Jessica. We’ve achieved about 55% of the total lateral development to get down to the bottom of this ramp that we’re driving. It’s around 6,200 feet, so we’re about 55% of that today. We’ve just passed through second vein of the ones that Mitch mentioned, getting -- working our way down to the bottom so that we could begin our mining at vein 4.

Okay. So, last quarter, you guys were at 50%. So, can you give us some, maybe some insight as to -- is there any issues in terms of developments and if you expect that to continue over the next couple of quarters or you’ve got that sort of under control?

We have improved our performance here and it’s impressive you picked up on that. We’ve encountered water, we’ve been dealing with water and just recently have completed our collection system to deal with that water a lot more efficiently. And we’re currently moving towards very acceptable or better improved advance rates right now. So, we continue to steam ahead, but water’s been an issue.

Okay, perfect. And then on the exploration side, this might be a question for Hans. You guys are guiding to exploration expense of $14 million to $16 million for the year. I think you guys are about halfway there as of the end of this quarter. So, you guys have -- it seems like you guys have added a lot of drill rigs. Can you give us some color as to how many drill rigs you guys have added in the last couple of months, and whether or not you think you’ll meet that that $14 million to $16 million budget?

Yes. We have 14 rigs active now. And so, I don’t know what metric I would compare but we continue to add at Palmarejo where we’ve got eight, just added two new surface rigs recently. But at the same time, we dropped one at Wharf because of the seasonality of drilling at Wharf. So, I do expect that we will hit our expense number . We are also spending money on our early stage program, we just finished earlier a project called Quito and moving now to a project called Klondyke in Southern Nevada. So, we started sort of late in the year I would say, we started in late March with the actual drilling of both expensed and capitalized and we have ramped up dramatically to where we were up the 14 rigs or 15 at one point but 14 now in August and September. So, I would say yes, to answer your question, yes, we are going to hit that number and it is a late year activity that will make it happen.

Okay, fantastic. Thank you so much guys. That’s it from me.

Our next questioner today is Chris Thompson from Raymond James. Please go ahead.

Congratulations on a good quarter. Just a couple of quick questions, I will start off with Palmarejo. Can you give me a sense of -- I think you mentioned that you want to be at a 1,000 ton a day from Independencia, maybe said that right, by the end of the year. Is that still on track?

Still on track, yes.

Can you give us a sense of the mine plan and how many tons on a ton per day basis you’re anticipating from this zone through next year?

Frank, I’ll start, you can fill into what I miss. What we’ll see is -- first, at Guadalupe that I think was at around 2,300 tons a day in the prior quarter, the target there is to end next year closer to 2,600 tons per day, so a gradual increase throughout 2017 at Guadalupe. And then at Independencia starting at that 1,000 ton a day rate at the beginning of the year and ending the year in the 1,400 to 1,500 ton a day range to get to that sort of 4,000 ton a day total mining and milling rate at Palmarejo. That’s the plan. From there on, I think we will hopefully see a little bit more of an increase out of Independencia beyond 2017. As you know, we are developing that south portal at Guadalupe, which opens up things from another direction and gives us a little more operational flexibility and exploration flexibility going forward on that deposit. Frank, did I miss anything?

No, I think you captured it. But Chris, access, we are continuing to seek one more incremental ramp up at Guadalupe through the south portal that Mitch mentioned and that work has begun. Today we’ve been busy with establishing surface infrastructure and we’ve got the portal designed, is now built, and we are starting to advancing inside. To connect that south end of the trend with the north end where all the active mining is taking place, we are trying to expose mining faces further to the south on Guadalupe trend at that incremental increase of production there. And Mitch described Independencia very well.

Can we just touch on grades quickly, what sort of grades are you pulling from the deposit at the moment, and can you comment on grade reconciliation?

Yes, Guadalupe, we are still -- we have pretty stable grades, I have seen materials coming out about 200 grams silver to a range between 1.5 grams to 2.5 grams gold more or less on average. The reconsolidations have been acceptable. We are still working on improving our methodology for that but not unhappy with what I am seeing right now. Independencia, it’s early days to comment on reconciliation but exciting, the same types of grades but little bit better gold coming out of the Independencia, looking forward.

Just quickly moving onto Rochester, can you give us a sense -- what I am looking for here is I guess operating costs that’s obviously mining, processing and G&A on a per ton basis. Give us a sense of where you were I guess in the Q3 on that and how do you see those operating costs sort of for 2017? Any cost relief coming?

Chris, in the third quarter at Rochester, cost of mining and processing G&A totaled up to $5.26 a ton. That’s a bit of an increase over the -- I am sorry that’s third quarter 2015; $4.73 in the third quarter, which is a improvement over the year ago which was $5.26. We did little bit better than that in the second quarter but we placed a tremendous number of tons by design, by plan in the second quarter, driving those costs down to $3.47 a ton. I am still thinking looking ahead that $5 a ton is a good number and the G&A component is now starting to stabilize around $0.50 a ton. We may see some slight increases up and down quarter-over-quarter but $0.50, $0.60 a ton, it looks like where we’re going to be settling.

Excellent. So, that’s $5 including mining processing and G&A. Is that right?

That is correct, yes.

And then just basically on Kensington, I know that Jessica touched on it well. And what sort of advanced rates -- do you want to pick the advance up at, what are you anticipating to meet the goal there?

We’re targeting between 14 and 15 feet per day advance rate.

And then, finally, very quickly on Wharf, I mean Golden Reward, where do we see the science of the mine plan there? I mean, is there anything else coming out of the Golden Reward at the moment, what’s your sense of that, whether we’re going to add small mine life there next year?

We’re just wrapping up at Golden Reward as we get closer to the ski season. We’ll resume there, we have one more benched mine there next year and I believe the mine planning is indicating we have over 300,000 tons to come to complete that next year.

Our next questioner today is Cosmos Chiu from CIBC. Please go ahead.

Hi. Thanks Mitch and team, but first off Mitch, I must say I’m cheering for your Chicago cups. As you would imagine in Toronto, we don’t like the Indians too much. So, hopefully you have tickets to go watch the game.

Kind of secretly helping for Toronto Chicago [multiple speakers].

I guess Mitch switching gears a little bit, maybe first off on the Palmarejo. Looking at the royalty payment to Franco-Nevada and given that I guess it switched over to a more favorable number and structure for Coeur earlier in July 2016, the $7.6 million still seem kind of high to me, if I were to try to work out that calculation based on a $800 an ounce based on the production in Q3. What am I missing here, and what it looks like on a go-forward basis?

It’s Peter, Cosmos. You have to remember that -- the switch did not happen until really mid quarter. So, there’s a lot of noise in the quarterly numbers. So that number is a little bit higher than we would see under a pure, yes. And a lot of it -- there’s a lag involved as well where we’re actually paying amounts as well.

So, how should -- so Q4, would it be a lot of cleaner, Peter; would it be as simple as production half of that at $800 an ounce and kind of take the difference spot in Q4, and $800 an ounce to kind of come to that number?

Exactly, that’s the approach to take, and just acknowledge Q3 had a lot of noise in it.

And then maybe a question for Mitch. Mitch, you talked about La Preciosa and you talked about doing some work on site. And certainly this could become important part of the Company’s future. What kind of hurdle rate would you be looking at in terms of building out this asset here, could you maybe touch on that?

We typically have a hurdle rate of about 15% that we use when evaluating investment decisions, which represent a few percentage points above our cost of capital. I think in order for La Preciosa decision to be a positive one in the future, you need to see that start with the two.

Great, and that maybe -- sorry, going back to Peter I think here. I saw that there was a big tax benefit in Q3, mostly a non-cash tax benefit here. Could you maybe go into a bit more detail? I guess more importantly, are you paying any cash taxes, are you expecting to pay any, much cash taxes looking at a few quarters out and what should we be modeling in terms of the tax rate?

Last question first. Our taxes tend to be pretty volatile. Right now, in terms of cash taxes, it’s pretty minimal in terms of what we’re paying. Remember, in the U.S., we have over $300 million of net operating loss carry-forward. So, we’ve got a pretty significant field. But moving forward. we are modeling being taxable in Mexico, likely next year but we do have some taxes, receivable et cetera that we’ll be able to offset a substantial amount at that whip. And I guess lastly, the significant deferred tax credit in the third quarter. We merged Coeur Mexican, our entity that owns Palmarejo with the Paramount acquisition. And as a result of that we are able to eliminate a $40 million, a little over a $40 million valuation allowance that existed for the Paramount tax asset. So, that basically flowed straight into our P&L. So, that’s the basis for that $40 million credit, really just kind of falls under the bucket of simplifying our legal structure and both domestically and foreign. And this was a good opportunity for us to simplify unlike the United States, in Mexico similar to Canada, you have to prepare individual income tax returns, you can’t consolidate corporate groups. So, this just administratively makes a lot of sense for us as well.

Okay, great. And maybe one last question from me. On the exploration section, you talked about certainly updating reserves and resources for year-end. If I look at the gold and silver prices functions that you used last year, you used 17.50 an ounce for silver, 12.50 an ounce for gold. Mitch, I don’t know how much you can tell me but have you given some thought in terms of what prices you anticipate using for the you know upcoming update in terms of reserve resources? Certainly those numbers that you used last year look pretty good compared to where spot is today.

Yes, that’s kind of our thinking as well and the plan is to stick with those for year end this year, 17.50 and 12.50.

Great, that’s all I have. Thanks a lot.

[Operator Instructions] Next questioner is Joseph Reagor from Roth Capital Partners. Please go ahead.

So, a lot of what I was going to ask already been touched on but a few extra items. First one, I guess -- two questions there. One it seems like CapEx was little higher during the quarter, was that for anything in particular or just kind of a timing thing?

I think it was timing relating to some tailings dam work that -- I don’t know Frank, was there anything in there that stood out to you?

That was it. I mean, it’s a timing thing and finishing up our work on the minimal tailings raised at the mine. We are forecasting well and it should show better capital profile there this year overall.

And then on the political unrest there and how that impacted Q3, do you expect any carryover into Q4 on that?

No. In fact, I think what we’ll see is a pickup in these third-party ore purchases and that will obviously have the benefit of some higher grade and higher cash flow, lower costs. I say that under the assumption that there won’t be any blockades or anything like that. But that seems to have been sort of isolated in the third quarter and things seem to be calm and we are operating normally in third party purchases. So, far as this fourth quarter has gone back up to a more normal level like we were seeing in quarters prior to the third quarter.

And then, finally, on the ATM, I can’t get too much info on it but based on how much you guys have done thus far versus average trading volume, it teams like at the beginning of October when the price fell for gold and share price fell as well, you guys seem to be taking your foot off the gas little bit. From an investor standpoint, is there anything, any color you can give as far as how you guys think about using it over the remainder of this year or maybe into early next year? Is it simply you need to get to prove it and try to best time it as much as you can or is there kind of an internal threshold where you wouldn’t use it below a certain price on the stock.

I don’t want to get as specific as talking about our price on the stock but I can tell you that sort of our kind of overriding approach is to it representing a pretty minimal percentage of daily trading volume. And during the time, since as you alluded to Joe where the market is weak and stocks are volatile, to use your phrase, we absolutely take our foot off the gas. And while Mitch talked about our balance sheet initiative, it’s something that we would like to accomplish by yearend. Obviously, it is subject to accomplishing the ATM. And while we have a call date in February on the bonds which is frankly good news for us, I think from a certainty standpoint, the bonds do not mature until 2021. So we have got plenty of time to execute the ATM to deleveraging step or just going after it. I know a relatively aggressive plan right now but everything is subject to change and by no means is it ever our intention. I think the big part of the attractiveness of the ATM is that we can execute that within reasonable parameters around stock price rather than with the deal experiencing a big immediate drop in the stock price and significantly higher commission rate as well. So, that’s kind of our approach.

We don’t have bent our head. We can be opportunistic; we can be patient, there’s not a pressing need to hammer down on anything just for the sake of getting through it.

This will conclude our question-and-answer session. I would now like to turn the conference back over to Mitch Krebs for any closing remarks.

Okay. Well, thanks. We appreciate everybody’s time this morning. And I do want to thank everybody at the Company for their continued commitment and hard work. We look forward to speaking with you all again in February to discuss our fourth quarter and 2016 full year results. So, thanks and have a good day.

The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines.