Coeur Mining, Inc. (CDE) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Coeur Mining Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. I would now like to turn the conference over to Courtney Lynn. Please go ahead.

Thank you and good morning. Welcome to Coeur Mining second 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 would like to remind everyone that our press release and some of our comments on the call includes 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 10-Q and latest 10-K. I'll now turn it over to Mitch Krebs, President and Chief Executive Officer.

Thanks, Courtney and good morning, everybody. Thank you for joining our second quarter earnings call. We put ourselves in a good position for a record year by achieving several important priorities during the second quarter. Overall, production levels were down and cost per ounce were up during the second quarter. However, that doesn't tell the full story. We invested wisely in our assets through near-mine exploration and high return capital expenditures and we revamped our balance sheet during the quarter. And although these initiatives and investments temporarily impacted quarterly earnings, cash flow and per ounce cost, they set us up for stronger cash flow and higher margins during the second half of 2017 and in the coming years. Capital expenditures were $37.5 million in the second quarter and that's up about 60% over last quarter and the year-ago quarter. The graph on the right side of Slide 9 in the materials provides a breakout of our sustaining and development CapEx over the past few years and expectations for the second half of 2017. The same trends we saw with CapEx during the quarter also apply to our investment in exploration. We spent nearly $11 million in total exploration during the quarter and over $18 million during the first 6 months of the year. This is over double the level of exploration expense during the same periods last year. Slide 11 provides a good summary of those exploration activities. Before I open it up for questions, I'll offer some quick highlights on each of our mines, the principal areas of focus at each operation and the expected impact from achieving these priorities. Just last week, we commissioned the Stage IV leach pad expansion project at Rochester on schedule and have begun placing ore on the newly expanded pad. The completion of this project along with some major component replacements that we made in the second half rather than doing them in the third quarter and then with some higher gold grades we expect to mine this year after higher pre-stripping during the second quarter are all reasons we anticipate higher production, lower unit costs and positive free cash flow at Rochester in the second half of the year. And these trends of higher production levels, lower costs, less CapEx and strong free cash flow are expected to carry over into 2018 at Rochester. At Palmarejo in Mexico, mining rates remain on track to hit a combined 4,500 tons per day by year-end despite a decline during the second quarter while we address some poor ground conditions in certain areas of the Independencia deposit. This forced us to temporarily shift our mining activities to some lower grade areas for a good part of the second quarter. Mining rates at Independencia are now on the rise as planned and have averaged just over 1,400 tons per day in July. Meanwhile, mining from the Guadalupe deposit remained steady at about 2,500 tons per day. With these higher mining rates and by getting back in to higher grade areas at Independencia, production at Palmarejo is expected to increase in the second half of the year and unit costs are anticipated to decline. We remain on track to deliver over 80% production growth this year at Palmarejo compared to 2016 and establish a new steady state going forward. At Kensington, mining from the high-grade Jualin deposit is set to begin later this year as planned. We also expensed a fair amount of underground development in the Kensington main deposit during the quarter to gain access to some higher grade areas we anticipate mining in the second half of the year. Mining from Jualin and Kensington Main along with the Raven zone should lead to overall higher grades and production levels and lower unit costs during the remainder of the year. Once again, Wharf generated strong free cash flow during the quarter. Second quarter free cash flow of $7.3 million brings the total since we acquired the mine to over $101 million, surpassing the $99 million we paid for Wharf a little over 2 years ago. Wharf second quarter production was flat compared to the prior quarter and was down 23% compared to last year's second quarter due mostly to grade. As you may recall, a significant amount of our production a year ago came from the higher-grade Golden Reward deposit. As we've said, mining rates from Golden Reward have declined in 2017 and we expect to mine the remainder of that deposit in the third quarter. However, we've added haul trucks and have made some enhancement to the processing plant which should allow us to produce more gold there during the second half of the year. In fact, we have increased our full-year gold production guidance range by 5,000 ounces to 90,000 to 95,000 ounces and decreased our full-year cost guidance range by $75 an ounce to $700 to $750 per ounce. And finally at San Bartolome, we generated $4.8 million of free cash flow in the second quarter, bringing year-to-date free cash flow to $15.7 million despite lower than budgeted production levels. Production is down and costs are up there for 2 main reasons, the lack of water in the Potosi region of Bolivia which is limiting our ability to operate our processing facility and fewer third party ore purchases. While we're working to increase ore purchases in the second half of the year, we went ahead and reduced our full-year production guidance there by 0.5 million ounces to 5 million to 5.4 million ounces of silver and are increasing our cost guidance range by $1.75 an ounce to $15.75 to $16.25 an ounce. As I mentioned earlier, we dramatically stepped up our exploration efforts during the second quarter, especially at Palmarejo and Kensington and plan to sustain these higher levels of investment given the attractive economics of adding high-grade ounces near existing infrastructure. We consider both operations to be significantly under drilled and we're making the necessary investments to add new resources, convert resources into reserves and further extend mine lives. In total, we drilled nearly 200,000 feet during the second quarter, over 40% more than we drilled in the first quarter. Nearly half of these feet were drilled at Palmarejo where the results from several different areas have been positive. Another 20% of our second quarter drilling was at Kensington where higher grade targets at Jualin and at Kensington Main are yielding positive results. Our efforts to delever and strengthen the balance sheet have now been largely accomplished as you can see on Slide 10. We refinanced our 7 7/8% senior unsecured notes that were set to mature in 2021 with $250 million of 5 7/8% senior unsecured notes that don't mature until 2024. The refinancing resulted in a 200 basis point coupon reduction, an extended debt maturity, improved credit ratings and additional cash proceeds to our balance sheet. Quarterly interest expense was down 66% and we ended the quarter with $250 million of cash and equivalents. Net debt-to-LTM adjusted EBITDA stood at just 0.2x through June 30th which puts us among the lowest in the industry. During the quarter, we also took steps to further streamline and upgrade our portfolio of assets. We entered into an agreement to sell our remaining significant non-core assets including the Endeavor silver stream for $13 million. That brings our total consideration from non-core asset divestitures to $64 million over the past 18 months. In addition, we have invested approximately $12 million year-to-date in 6 companies with silver and gold assets at various stages that are in low risk jurisdictions and have the potential to become future sources of high margin production and cash flow. The last thing I want to address before the Q&A is a well-deserved shout-out to our team for some recent safety awards. Earlier this month, we received certification under the core safety system from the National Mining Association which reflects the strength of our safety programs and dedication to continuous improvement in our safety performance. Also, our Rochester mine and several Rochester employees received awards from the Nevada Mining Association during the quarter for their dedication to safety. Since this team was put together about 4 years ago, our incident frequency rates have dropped by over 70% which reflects the devotion and commitment our leadership and our employees have to ensuring everyone goes home safely at the end of every shift. With that, let's go ahead and open it up for questions.

[Operator Instructions]. Today's first question comes from Mark Mihaljevic of RBC.

Couple of questions for me. So first off, you mentioned that you're planning to put out an updated technical report at Rochester. Can you just give a bit of the goals of that given that we already got 1 only a few months ago? So just where you are looking to optimize and adjust with the update?

Yes. We've been doing -- we've been very busy at Rochester and so we're excited to have a new 43-101 coming out early next year. Frank, you want to talk a little bit about the work that we've been doing and what we expect to have reflected in that?

Sure. Mark, you'll recall that when we published that last year the main headline was that we had increased the life of mine. But where last year ended, we didn't have sufficient time to optimize grades and address all the engineering that's related in our life of mine plan for the capital costs over the next 4 to 5 years ahead. So a lot of that's going to be completed. We're continuing to have a good cut-off grade performance at this site. We'll evaluate all the resources this year that with better knowledge on capital and better knowledge about the types of crushing equipment that we plan to put in and how that may help our pad performance. It's going to be a good time to reevaluate things and publish.

So will we get any of the exploration results put in there or will this just be a bit of a resource conversion given solid cost performance?

It will be underpinned by our -- this year's completion of the resource estimate cycle. Yes, that will be in there.

I think last year it was more driven by mine life extension. I think this TR will reflect more of the operational enhancements that we were pursuing earlier this year. Just they weren't ready yet to be incorporated into a new 43-101. And now through all the hard work that's been going on this year those are the things that will probably be the key drivers to what should be an improved and enhanced technical report for Rochester, both in terms of that capital that Frank mentioned, if you recall there is that big amount out there, I think in 2021, we've been working hard on that and then like Frank mentioned some other operational and process improvements. And reflecting in this TR, the potential impact of those modifications to the economics there.

Then moving on, I guess we've seen a big move in the Mexican peso from north of MXN 20 to now sub MXN 18. If I'm not mistaken your full-year guidance was based off of an 18:1 ratio. Just wondering if you -- what your thoughts were on looking to hedge that and try to lock these levels in or are you comfortable letting it float?

Yes, it's Peter, Mark and our philosophy around currency has been letting it float. At this point about 40% of our costs are peso denominated and yes, that minor sort of fluctuation we went from a very weak peso obviously at the beginning of the year to a stronger peso, as you pointed out. So I think on average our sort of general guidance should hold relatively true.

Mark, it's Mitch. Just one thing to add to that. You put out a good note in the last couple of weeks on FX impacts. For the last few years obviously a lot of companies have been benefiting from FX exposure. With the majority of our business U.S. based that wasn't necessarily a tailwind that we enjoyed along with many of the companies in our sector. Now we're starting to see the other side of that play out. With the dollar starting to roll over a little bit we're fairly insulated as your note pointed out given the extent to which our businesses is U.S. based. So I thought that was an interesting note.

And then I guess one more question for me. Obviously this year at Palmarejo you are mining quite a bit ahead of the reserve grade. I was just wondering as we start to look towards 2018, 2019 if you had a sense of how we should expect that to evolve and whether -- over what time frame we should expect it to revert towards reserve levels.

Frank, go ahead.

Sure. Yes, you'll see things like you're observing in the short term, but I think over time it will all come back to very close to the reserve grades that we cycle through and report on each year. We'll take advantage of near term opportunities to build high-grade ore into our mine plans and take it to increase our margins. So, you just happened to be seeing a bit of that right now. But over time it should all come back to what the reserve grades have been.

And our next question today comes from Chris Thompson of Raymond James.

I've got a couple of questions here. Just I guess digging into Palmarejo quickly. Just trying to unpack, I guess, the grades that you were mining from Guadalupe and Independencia for the quarter, can you give me an idea of what those were?

Yes, the grade at Guadalupe is ranging in grams per ton around 130 to 140. I typically work in gold equivalence most of the time, Chris. So it's around 5 grams per ton gold equivalent Guadalupe. We were close to 5 ounces per ton in general from the ore sources that come out of the Independencia mine, around 5 grams gold equivalents, sometimes quite a bit higher. Like Mark just pointed out, we've been benefiting from some of that material this year. But if you look at our release, you'll see normally mill feeds are running around 5 ounce per ton silver and 0.08 ounce per ton gold. It's Independencia than Guadalupe.

Right. Okay. And I would imagine as I think you've indicated in your press release that as these production rates increase from Independencia, the grade to the mill -- the head grade will increase. What sort of -- what you're looking at from a blended perspective at year-end?

150 gram is the target.

Okay. That on the equivalent or that will be the equivalent...

I'm mixing units here pretty bad. Let's say, 3 gram gold and 150 gram silver.

Thanks, Frank. Just quickly moving on to some [indiscernible] here. Obviously, you've increased your cost guidance for the year. But I guess if you look at the costs on the Q2, will those be representative of what you're anticipating for the back half of this year?

Costs?

Yes.

The short answer is yes, I guess. There are a few things working in different directions there. We should see some higher grade coming from a higher level of third-party ore purchases, but some of those third-party ore purchases we expect will be coming from further distances away. So there will be some additional transportation costs to get that higher grade to the plant. So that kind of offsets some of the grade benefit. But I'd say overall, yes, we're going to be in that kind of $16 an ounce range throughout the rest of the year.

And then finally just Kensington quickly. I guess the same sort of question I asked related to Palmarejo. What sort of grade expectations when you bring on or begin to see the beginnings of Jualin at year-end are you anticipating by way of head grade to the mill?

Yes, you'll see us rise from where we're now at $0.17 ounce per ton this year to in excess of $0.20.

And just give us a sense if you wouldn't mind the component by way of percentage of mill feed that Jualin will be produced?

Okay. Yes, we're targeting let's say a nominal 350 tons per day from Jualin and we'll continue to mill around 1,800 tons per day. So all this be 20%, little more than that, little less now.

And our next question today comes from Joseph Reagor of Roth Capital Partners.

So a couple of things. I guess first on the guidance side at Rochester. Your guide for the year of 4.2 million to 4.7 million ounces of silver, in your production update from earlier this month you guys said you expect the second half to be better than the first. First half was 2.3 million ounces of silver. So inherently even 100,000 more at the top end of the guidance. Could you guys speak to why you didn't elect to move the production guidance higher there given your expectation that if you beat the first half at all you're going to be right at the high end if not above it?

Yes, sure. It's Mitch. As we've talked about the first quarter was down due to all the rain out there in Nevada. Where we see the real kind of the focus in terms of second half production increases is really more on the gold side than on the silver side and that's really a function of we've put in a lot of money and a lot of time in some stripping in areas of the pit to open up an area that's got some pretty juicy gold grades that we will be mining now in the second half of the year. And that's going to really be the source of the production growth and cost reductions and stronger cash flow. And then of course, you've got the CapEx dropping away now that Stage IV is basically done. So silver isn't necessarily as much of the story or focus when it comes to the second half stronger production. It's really going to be more on the gold side and that's going to be driven more by a pickup in that average grade. Frank, anything I missed?

That's exactly right. I mean I view silver in the second half as -- it will be up incrementally, but the real big value drivers are gold and the gold sites.

And as you know, Joe, I mean the silver is slow to come out, gold is quick to come out. So I guess we picked the right metal to have some higher grade impact, especially the tons that are sitting on the fresh liner now on Stage IV that all should really help us boost that second half gold production.

Okay. Continuing on the guidance side, it's kind of a tough reaction to have today in the market for the quarter. It looks like Q2 is going to be the weakest quarter of the year. And your cost guidance seems to imply very strong second half from Palmarejo, Rochester and Kensington. But those 3 mines, whether any of those were the weakness in the first half on the cost side? You have any concerns going into the second half with guidance or do you guys feel highly confident that you get your cost numbers down to within guidance?

Frank, do you want to...

Yes, this is Frank. I'm feeling pretty confident about the prospect that we're going to improve our cost in the second half. On a just spending basis, things have actually tracked pretty close to plan at both Palmarejo and Kensington year-to-date. We had a second quarter increase in costs at Rochester that are the result of a one-off situation resulting from some increased maintenance costs and we're in a pre-stripping phase in the open pit at Rochester which is coming to a conclusion at the end of this month and that required some rental trucks and additional field costs. And then as -- in relation to all the precipitation that we've had this year, we've had to add additional cyanide to keep our concentrations of cyanide up on the leach pads. So everything is dragging out Nevada. We've got some of those maintenance done that will not have to be done later in the year. So a lot of these things just go away. And then, like we always are, we're targeting cost reduction opportunities and we'll continue that through the end of the year.

Yes, I think -- it's Mitch, Joe. If you think about the costs and guidance in the first half, second half -- by the way there is a good slide I think that we've tried to put together in the deck that talks about some of the first half or second quarter impacts and then second half kind of key drivers that might help answer the question better than we're. But it's -- it's Slide 8. But it hasn't been necessarily that numerator, like Frank alluding to, the numerator, the cost, the dollar spend has been -- performance has been really good. It's been more the denominator and that's been more a function of grade like we said at Palmarejo for reasons that we mentioned, mining some lower grades temporarily. At Kensington, we were cycling through some of those lower grades and then for all the reasons Frank mentioned at Rochester we get that denominator up driven mostly by grade in the second half that we've set ourselves up to be mining and ending the year in those guidance ranges for costs are something we feel good about.

Okay. And then maybe a bigger picture question. You had $250 million in cash, you guys have debt that you're much more comfortable with. You are going to be free cash flowing from the sounds of things in the second half, gold and silver prices held constant. What you guys want to do with the money? I know you're examining La Preciosa but if you decide for whatever reason not to go further or if it doesn't use up a big enough portion of free cash flow and current cash, what else can you guys do with that money kind of to generate some value for shareholders?

Yes. We'll do more of the same that you saw in the second quarter. Drilling around Palmarejo and Kensington is the best bang for the buck that you can find, high return, high certainty of success, quick payback. We'll keep funneling money into an aggressive but targeted drilling campaign around those existing operations, those 2 in particular. Underground development, as you know, is not cheap and with Palmarejo now being 100% underground and with mining rate expected to continue climbing, that's a lot of development capital that we will continue to invest there. Same goes for Kensington, not only in Jualin, but just to keep ahead of ourselves at Kensington. So we need to take care of those things first and foremost. But you go back to the San Bartolome discussion and that's a couple of years away from probably being mined out. And so we have -- a lot of our energy and focus is talking about how do we not only offset or replace that but use that as an opportunity to materially upgrade the quality of the mines that we have. So we're actively considering that looking at different alternatives, what can we bring into the company that would timing wise fit in nicely with the end of San Bartolome that could give us better jurisdiction, lower cost, longer life, higher grade, all the things that we need as a company to kind of keep improving ourselves. And so having that cash balance plays a key part in those discussions and initiatives. And so that's -- and La Preciosa may or may not be a part of that. So having this cash available to fund the organic stuff that a lot of opportunity still remains there, but then also to support and facilitate this growth and this enhancement of the portfolio having that cash on hand is a real strategic advantage over a lot of other companies. So that's kind of how we think about it. Peter, did I miss anything?

I think that's key and certainly we [indiscernible] Joe, it picked up basically an additional $70 million, but with a relative coupon savings there really was virtually no incremental cost associated with that as well.

And our next question today comes from Michael Dudas of Vertical Research.

Just want to maybe follow up further on Joe's thoughts on CapEx to your guidance from $109 million to $129 million this year and the mix of sustaining versus development is changing. So maybe as we've kind of gotten quite through the first half of the year moving to second half and then maybe to look forward without giving guidance to '18, level of maintenance level or what you consider maintenance level on your major operations and some important investments starting to wind down here over the next -- this year or next?

Yes, I'll start and then Peter or Frank can quote me. We spend a fair amount of time thinking about that and looking at that. In -- you're right in the second half of 2017, there will be an increase in the proportion of our CapEx that is sustaining versus development. Probably the key driver there, Mike, is in the third quarter we have -- we're replacing all of our gensets up at Kensington. So that's a pretty significant kind of one-time hit to sustaining CapEx that obviously goes away. But as we've transitioned Palmerejo to 100% underground and then with Kensington underground, just the sustaining CapEx associated with the capitalized underground development, you can pretty much pencil in $40 million a year for each of those, so $40 million plus $40 million, as the basic kind of sustaining CapEx there going forward. The thing that pushed up CapEx this year up into the whatever $120-ish million range was the one time leach pad expansion project that was something like $35 million or so which -- obviously we won't have that next year. CapEx at Rochester next year will drop back down to $5 million to $10 million. Wharf will be $5 million to $10 million. And then you kind of pencil in those 2 numbers for Palmerejo and Kensington and that kind of gets you to where directionally we'll be heading. I mean, the headline is it's kind of down. It should be down again the year after that. Probably the next year there will be a spike is out in 2021 when back to the Rochester TR discussion that's when we anticipate having some capital to spend out there again. But between now and then for Rochester those -- they're going to be good years of free cash flow. But kind of in summary I guess, Mike, peak CapEx this year driven mostly by Stage IV, come down a little bit over the next few years. But the proportion between sustaining and development is much heavier towards sustaining because of these 2 underground operations.

I think that's important that the market kind of recognize that as your portfolio has been changing over past few years. But 1 follow-up on La Preciosa. We're going to get some news, I guess, sometimes September maybe after gold show time. Remind us what you and the board are thinking about or looking at what you'd like to see coming out of the study?

Frank and I are looking at each other smiling, what we like to be...

I don't want to rephrase that, what would you like to see versus what [indiscernible]?

I know what I would like to see -- what I want to see and like all the informations just coming in, so this is just whatever you call it, painting in the sky a little bit. But the concept is a lower capital, smaller operation focused around a couple of open pits and then an underground component and what we want to see is a mine that would fit the same criteria that we look at in any growth opportunity in terms of a positive impact on our per share metrics and overall reduction in the company's costs, a rate of return that's probably in the 15% range and a capital profile that allows us to achieve that. And I don't think we'll have anything ready for the Denver Gold Forum. We want to make sure that we get all the trade-off studies done and have a good view on where we might or might not want to take La Preciosa. But that's definitely coming here between now and the end of the year and that's what I hope to see. Frank, do you want to present your view of the word?

Yes, I'll tell you, Mike, where we're [indiscernible] a lot of work is going on in relation at La Preciosa but we've completed the drill program which has been the basis for us to update our geologic model, our resource model to accommodate 2 different types of mining that we're focused on with the La Preciosa resource. Mine engineering is underway. We're coming close to finalizing our viewpoints on operating costs and currently starting through many different capital scenarios, trying to pick the one that's most optimal for the project. So that's kind of where we're at. Lots more work to do. And looking ahead to the end of this year it's just a bit early to comment. We're right in the middle of it.

Tough course.

Mike, it's Mitch again. As you know, as we've talked about, we keep pushing so hard on this because there are not a lot of good silver projects in the world. As a historically a predominant silver mining company to look for good quality high return primary silver assets around the world, it's a pretty short list. And to have one inside our company that's kind of a special asset. And so we really want to try hard to make that into something that can be value creating and give us a good boost to high quality long life silver production out of Mexico. So I know we're doing everything we can, but a good silver asset like that is hard to come by.

Now, that's well said. And then on the flip side it will support pricing going forward because there is not a lot of primary silver expected to come to the market as I'm sure you are quite agreeable with.

Yes, totally.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like turn the conference back over to the management team for any final remarks.

Well thanks everybody for your time this morning. I know it's a busy reporting season right now. I just want to thank everybody at the company for their continued commitment and hard work. I know there are a lot of them on the phone right now. So thank you and we look forward to speaking with everybody again in October to talk about our third quarter results. So thanks again. Have a good day.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.