Coeur Mining, Inc. (CDE) Q4 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Coeur Mining Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions]. Please note that today's event is being recorded. I would now like to turn the conference over to Courtney Lynn, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining's Fourth Quarter and Full Year 2017 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 include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentations as well as the risk factors described in our 10-K. I'd also like to mention that we are in the process of selling our Bolivian subsidiary. Therefore, we have presented our San Bartolomé mine as a discontinuing operation, and excluded it from any consolidated operating metric or financial results discussed, unless otherwise noted. I'll now turn it over to Mitch Krebs, President and Chief Executive Officer.

Thanks, Courtney, and good morning. Thank you for joining our call. We had a strong finish to the year, resulting in record fourth quarter and full year silver equivalent production, improved cost performance and solid financial results from continuing operations. If you have the slides in front of you that we just uploaded, the first five slides provide a summary of these results. For the full year, we generated net income of $11 million, EBITDA of over $200 million and free cash flow of $60 million. In the fourth quarter, net income totaled $14 million, EBITDA was $77 million and free cash flow in the quarter was $45 million. As Courtney mentioned, San Bartolomé is excluded from our fourth quarter and full year results we reported today since it's considered an asset held for sale according to U.S. GAAP rules. To help with any comparisons between estimates and actuals, we've added 2 slides in the earnings call materials that we uploaded just a few minutes ago that show the financial results of this discontinued operation for the fourth quarter and full year. I think they're Slides 26 and 27. In summary, if we had included San Bartolomé in our fourth quarter and full year results, costs would have been higher and EBITDA would actually have been slightly lower. The key takeaway from these comparisons between discontinued ops and continuing ops is the strong rationale for the sale of San Bartolomé, which was our highest cost mine, had the shortest mine life and is in the least attractive jurisdiction of all of our operations. We expect that transaction to close by the end of the month. The primary focus of our strategy has been on investing in our existing assets to sustainably reduce our cost structure, generate solid returns and increase cash flow. We supplemented this focus with three other strategic priorities, making targeted acquisitions to upgrade the quality of our asset portfolio, sustaining a heavier investment in near-mine exploration to improve the quantity and the quality of our reserves and resources and bolstering the strength and flexibility of our balance sheet to support future growth opportunities and to mitigate future metals price risk. Our fourth quarter and 2017 full year results demonstrate the progress we've made in all of these areas. Slide 3 of the slides we uploaded highlight many of these accomplishments, and I'd like to take a few minutes to highlight examples of successes we had last year relating to these priorities and emphasize why we believe these strategic priorities have us well positioned to deliver ongoing strong operating and financial performance. The first area I mentioned is our focus on investing in our assets to generate strong returns and sustainably reduce our costs. Slide 10 in the materials summarizes 3 examples of this, and Palmarejo is probably the best 1 of the 3. In 2014, we kicked off a bold plan to reposition our largest operation, which is now largely complete. This plan involved the renegotiation of a punitive gold stream; the transition from mostly open-pit mining to 100% underground mining with the startup of operations at the Guadalupe deposit in late 2014; the acquisition of Paramount Gold and Silver in 2015 to consolidate the ownership of several high-grade deposits; and now the ramp-up in mining last year from a second underground deposit named Independencia. Combined with an aggressive and targeted near-mine exploration program over the past 18 months that has led to multiple new discoveries and significant reserve and resource increases, Palmarejo is now very well positioned. The fourth quarter in 2017 results reflect the impact of this plan and the solid execution the team has delivered there. Grades in 2017 increased by 21% for silver and 12% for gold compared to a year ago, and we achieved the targeted mining and processing rate of 4,500 tons per day a quarter ahead of schedule, which was 50% higher than the average mining and processing rate in 2016. This increase in grade and tons led to a 64% increase in silver equivalent production compared to 2016 up to 14.5 million ounces. It also led to a 50% reduction in cost per ounce since we started this transformation back in 2014 to $8.38 an ounce for the full year last year and just $6.64 an ounce in the fourth quarter. With higher production and lower costs, Palmarejo delivered free cash flow in 2017 of $110 million for the year. About the only negative is that our Mexican subsidiary used up its net operating losses during 2017, so 2018 Mexican cash income taxes are expected to be over $35 million, with about half of that amount due in the first quarter of 2018. Rochester is another great example of how our strategy of investing in our existing assets is leading to strong returns and cash flow. We completed the Stage 4 leach pad expansion project on schedule in the third quarter, which helped us deliver a very strong end to the year. Production in the fourth quarter increased 45%, and unit costs were down 9%. The mine benefited from concurrent leaching on the Stage 3 and Stage 4 pads and from the timing of recoveries off Stage 4. With the completion of this expansion project, capital expenditures dropped off in the fourth quarter, leading to $19 million of free cash flow in the quarter. The Stage 4 project was one of the last pieces of our multi-year strategy at Rochester to achieve a higher level of scale and efficiency. We expect 2018 to be a strong cash flow year at Rochester as we now start to see the payoff from the strategy. One last piece of our plan for Rochester that will be reflected in an upcoming PEA and technical report is a crusher enhancement and expansion project that offers an opportunity to boost silver recovery rates, drop operating costs and even further extend Rochester's mine life. We look forward to sharing these results and the potential impact on Rochester's economics with you in the next few weeks. We just hosted EPA Secretary, Pruitt, and Nevada Governor, Sandoval, at Rochester on Monday who were both very complimentary of our operation, our people, the positive impact on the community we're making, our safety record and our outstanding environmental performance. The last example of our strategic focus on investing in our existing assets that I want to briefly cover is the Kensington gold mine. To make Kensington into a sustainable source of free cash flow for the company, we need anywhere from 200 to 400 tons per day of higher-grade ore sources to supplement the 1,500 to 1,700 tons per day of reserve-grade material. In the fourth quarter, the Raven zone served that purpose for us. The fourth quarter was our strongest production quarter in 4 years due to mining from Raven, which drove average grades 29% higher quarter-over-quarter to 0.22 ounces per ton and led to positive free cash flow during the fourth quarter. Jualin is another example of a high-grade ore source that we anticipate having a meaningful impact on Kensington's economics. It's taken us longer than planned to start accelerating mining activities due to the amount of water we've encountered. That said, we're mining development ore out of Jualin now and expect to reach commercial production levels later in the year. To facilitate more efficient drilling development and mining going forward, we have begun efforts to dewater Jualin, while we continue to develop and mine in this new area. With sources like Raven and Jualin helping to boost our average mill grade, we expect positive free cash flow at Kensington in 2018. The second strategic priority I mentioned that is helping us reshape the company is enhancing our portfolio through targeted acquisitions. We closed the acquisition of the high-grade Silvertip mine in British Columbia in October of last year for initial consideration of $200 million. Slide 12 provides a summary of Silvertip. We have since invested nearly $18 million at Silvertip in underground development, mill and infrastructure upgrades and ongoing fixed costs. Mill commissioning is proceeding according to plan, and initial production remains on track for later this quarter. Throughout the year, mining and milling rates are expected to accelerate and end the year around 750 metric tons per day. We expect to reach and sustain a 1,000 metric ton per day rate in 2019. Our production guidance for Silvertip's initial year of operation is 4 million to 5 million silver equivalent ounces, and our cost guidance is $12 to $12.50 per silver equivalent ounce. CapEx guidance for 2018 is $37 million to $42 million, and we expect to spend about half of that amount during the current quarter. This includes about $15 million of preproduction costs that will be capitalized. Another $10 million of that CapEx guidance range represents the infill drilling program we recently kicked off. That drilling should be wrapped up midyear and incorporated into a technical report we plan to issue by the end of the third quarter. We expect Silvertip to be a slight drag on the company's free cash flow during this initial year of production, our only operation that isn't expected to be free cash flow positive in 2018 due to the investments we're making to achieve commercial production for the drilling and due to a working capital build associated with the timing of concentrate shipments. On the permitting front, we obtained a permit amendment in December that allows us to operate according to our planned ramp-up schedule throughout 2018. During the second quarter, we plan to submit an application for a permit that will allow us to operate at 1,000 metric tons per day, 365 days per year, and we anticipate receiving that permit by year end. When talking about a focus on acquisitions to enhance our portfolio, it's hard to find a better example anywhere than our acquisition of Wharf. Slide 11 in the deck provides a good summary of the Wharf acquisition. We generated over $40 million at Wharf in free cash flow in 2017, bringing total free cash flow since we acquired it to $127 million and an IRR of around 20% and climbing. In addition, year-end reserves increased 36%, and M&I resources rose 38%. This is the second significant increase to reserves and resources that we've delivered since the acquisition in 2015. As a result, Wharf's mine life now stands at roughly 10 years compared to a mine life of about 7 years at the time of the acquisition. Since that time, over 300,000 ounces of gold have been mined there at Wharf. Not only have we been selectively adding higher-quality assets, we've been monetizing lower-quality assets as we seek to reconstruct and upgrade our overall portfolio. Including the sale of San Bartolomé, we have divested 9 assets totaling over $65 million over the past 2 years. Slide 29 summarizes these activities. The third strategic priority I mentioned at the beginning of my comments is our sustained higher investment in higher-success, low-risk, near-mine exploration. Slides 13, 14 and 15 provide additional details on our efforts in this area. About 18 months ago, we expanded our exploration program with the aim of adding high-quality mine life at our existing operations. Exploration investment increased 66% last year compared to 2016 to $42 million. We plan to spend a similar amount in 2018. About 80% of this investment last year was around our existing operations where the success rates are high and the payback is quick. That'll be about 85% of this year's planned exploration investment. We issued a press release and hosted a call in December to highlight the success we're having with this approach at Palmarejo and Kensington. You might have seen on Tuesday that we reported year-over-year increases of 10% to our company-wide silver equivalent reserves, 42% to measured and indicated resources and 45% to inferred resources. Nearly 3/4 of our reserves are now located in the U.S. And once the San Bartolomé sale is completed, 100% of our reserves, resources and production will be North American-based, which we believe offers investors safe, balanced precious metals exposure. Palmarejo saw a 17% increase in its year-end reserves, which was a great result given the strong production year it had. M&I resources expanded by 56%, while its inferred resources increased 48% at year end. With the number of new discoveries near existing infrastructure and the potential to further grow both Guadalupe and Independencia, we are very pleased with the returns we're seeing from our investment in exploration at Palmarejo. Our drilling efforts at Rochester resulted in a 2% addition to its year-end reserves, while M&I resources increased 71% and inferred resources grew over 50% year-over-year. We have a lot of material to work with at Rochester, and we look forward to finalizing the PEA I mentioned earlier that will include an updated life of mine plan. We also plan to sustain a higher level of exploration expense at Kensington this year, given the promising results we saw from our program last year. Net of depletion, we increased reserves there by 5% compared to 2016. We plan to publish an updated technical report for Kensington later this quarter and look forward to a further increase in its reserves, including an initial reserve for Jualin. The fourth and last area of strategic focus I mentioned is bolstering the strength and flexibility of our balance sheet, and Slide 17 in the materials provides a balance sheet summary. Since the beginning of 2016, we've completed over $1 billion of capital market transactions to reshape our balance sheet. During the second quarter of last year, we refinanced our senior notes, extending the maturity from 2021 to 2024, reducing the coupon by 200 basis points and adding $70 million of cash to our balance sheet. We also established a 4-year $200 million revolving credit facility during the third quarter, which we used to partially fund the Silvertip acquisition, and it provides us with additional liquidity for the company. Because of the lower average debt levels in 2017 and the lower interest rate on our new senior notes, our full year interest expense decreased over $20 million or 56% year-over-year. It's these interest savings that have been the main source of funding for our accelerated investments in exploration. Before we wrap up, I'd like to add that the board appointed 2 new directors earlier this week. Eduardo Luna's career in the precious metals mining industry spans more than 40 years and includes experience developing and operating mines throughout Mexico for some of the largest mining companies in North America. Eduardo is also a former President of the Mexican Mining Chamber as well as the Silver Institute and was recently inducted into the Mexico Mining Hall of Fame. Jessica McDonald's background in both the public and private sectors is equally impressive and includes her most recent role as President and Chief Executive Officer of BC Hydro and Power Authority, a clean energy utility with over $5.5 billion of annual revenues. She's currently Chair of Canada Post Corporation and previously served as Deputy Minister to the Premier, Cabinet Secretary and Head of the BC Public Service and has been named to Canada's Top 100 Most Powerful Women Hall of Fame. Both Eduardo and Jessica bring strong and complementary skill sets to our board, and we are honored to welcome them to Coeur and look forward to working with them. As a final remark, I'd like to thank our employees here at Coeur. Our team worked incredibly hard to deliver a number of strategic wins and strong financial results in 2017, and I'm honored to lead such a remarkable group of people. I would also like to thank our stockholders and our Board of Directors for their continued input and support. We look forward to pursuing an even higher standard in all areas of our business in 2018. Now that's the extent of our prepared comments. Let's go ahead and open it up for any questions.

[Operator Instructions]. And our first question or two will be Joe Reagor with Roth Capital Partners.

I guess, first question on Rochester. The cost guidance there was a little higher than I anticipated. Is there any -- anything particular driving higher costs there? And then on the PEA you're working on, is there an order of magnitude we could think about as far as potential cost reductions?

Yes, I'll turn that one over to Frank, Joe.

Hi, Joe. In the guidance, what you'll see in more detail as the year unfolds, the mining rates are going to be a bit of an off from what we achieved in 2017. So the denominator is going to shrink just a bit. However, grades will remain relatively constant, supporting a good production stream. And we have allowed for higher fuel costs during the course of the year. Diesel is a pretty big driver in the Rochester budget for 2018.

Okay. And then as for magnitude on the PEA cost reductions?

We'll be able to obviously give you more detail on that once the results come out, but what we'd like to think that we're going to see there is a step-down below the $10 level on the back of some of the efficiencies that, that crusher project can bring to us.

Okay. Moving over to Kensington with the dewatering issues at Jualin. Can you give us kind of a rough estimate of the additional costs you're incurring specific to the dewatering?

I'll start, and then, Frank, fill in. It's in the CapEx guidance. I think it's just shy of $2 million of costs associated with that, mostly drilling a raised borehole and some pumps to pump that out and take it over to the water treatment facility over on the Comet side there. Frank, anything I missed on that?

No, it's a fairly straightforward project. It's not super capital-intensive, and we've completed some hydrogeologic studies and identified where the pumps need to be located and water-bearing structures. So it's a simple matter of getting a raise bore machine in there and drilling -- pulling this borehole through and then get some pumps in there and start pumping.

And then we can move a lot faster. We've been grouting that whole way down as we've done that development, and water has just been a constant struggle and has slowed us down. Doing this will really set us up nicely then to move forward much more efficiently.

Okay. And then one final one, if I could, on Silvertip. Is your guys' thought process that you'll provide similar free cash flow reconciliation information as things move forward over the next, call it, 3 years, like you've done with Wharf? Because that's been very helpful for painting the right picture.

Yes. I'm sure what we'll end up doing is we'll do with Silvertip what we've done at our other mines in terms of disclosures and our transparency. This is obviously, as a startup year, the year with the most potential variability. So we've been mindful with that as we've established guidance ranges for Silvertip. But as we get to the end of the year and hopefully, see things moving along as planned, we'll -- and we get that technical report out, which will have an updated life of mine plan, the next few years will become a lot clearer.

And our next question for today will be Mark Magarian with UBS.

Just I'd like some color on guidance for costs for 2018. I mean, given the sort of the recent run rate, it looks -- they look a little kind of high. Are they conservative? Can you -- have you got any more color on that?

Yes, I'll start. Anybody else can chime in on what I missed. Palmarejo and Rochester are kind of similar to last year. That diesel headwind is something that both of those sites will struggle with this year. Kensington is -- the guidance is basically a carbon copy of last year. Wharf is the big exception. It's up by about 30%, and there's a couple of things going on there. It's a slightly lower-grade year according to the plan. There's about 4 million tons of waste that needs to be moved to get at some additional higher-grade material in subsequent years. So that obviously doesn't get done for free, and that'll be one of the cost pressures there at Wharf. All that said, Wharf will still generate good free cash flow again in 2018, but the cost on a unit basis will be a little higher. And they've got -- especially moving those 4 million extra tons with the higher diesel assumptions, that doesn't help either. And then Silvertip is maiden year there, so we don't have any prior period comp on that front. CapEx is about the same. G&A is about the same. And exploration, although it shows expensed exploration's down a little bit, our capitalized exploration is quite a bit higher than last year. So on a total of basis, the total spend on exploration between expensed and capitalized will be similar to 2017's levels. Does that help?

Yes, that's fine.

[Operator Instructions]. And the next question today will be from John Tumazos with John Tumazos Independent Research, LLC.

Excuse me for not asking a Coeur-specific company question on your operations. But what is your view as to why the silver price language is around $16? It's underperformed gold. Has gold rebounded a little bit? And World Bureau of Metals Statistics data shows silver mine output down 9% last year. It would seem like silver is doing a lot worse than it could do. Platinum has to sell off due to battery markets from investor stockpiles there, but silver benefits from solar and other macro entrants. I'm just interested in your view.

Yes, yes. Hi, John. You're right, supply is heading down like it is for gold, which is a positive, both in terms of production and scrap. The industrial side of silver is looking good again. Solar panel, demand has really skyrocketed, and even with some of the recent noise around tariffs, there's still a lot of photovoltaic installations taking place really around the world, most notably in China. I think the place you're seeing some real weakness that has to be a factor in silver's underperformance is coin. Coin and bar demand, it's off big time, and it's off again even as we start 2018 compared to last year's start to 2017, which was down a lot from 2016. ETF demand is -- although it's always -- it seems to be stickier than the gold ETF demand, it has been a little bit weaker as well. And I think maybe the commonality between those two comments is just the fact that we've seen such strong broader equity market performance, that a lot of that retail money may be chasing those returns in the broader equity markets and foregoing the safe haven demand from silver. But it has definitely the silver gold ratio or gold silver ratio has definitely stretched out. Usually, as you know, it tends to snap back when it hits a certain level, but that hasn't quite happened yet. But those are a couple of thoughts from my perspective, John.

So you think the swing is in investment demand?

I think so. I'm not seeing anything really on the industrial demand side, whether it's electronics, ethylene oxide. Even on the jewelry side in the U.S. and India, we've seen good strength for silver. I think it's that investor side and retail investor side that I can see as a notable point of weakness.

And the next question for today will be from Mark Mihaljevic with RBC Capital Markets.

So obviously, you guys have been pretty active, as you highlighted, on the portfolio optimization side of things. And I was just wondering if you still saw work to do there in terms of really anything to go there. So are you pretty happy with the portfolio you've accumulated now and -- or just focused on optimizing it the best you can?

That's kind of a loaded question, Mark. We can never be happy with the portfolio that we have. We've always got to be getting better and higher-quality assets to the extent that we can. Right now, we've got to keep our eye on the ball of Silvertip and delivering on a smooth of a startup there as we can. That doesn't mean that we can't keep our eye on some other opportunities that don't distract our focus from Silvertip. And we'll continue to evaluate things that can check the boxes in terms of where they're located and the quality of the ore body, grade, margin, ability to extend it and expand it through ongoing drilling, low technical risk, the things that everybody look for in new opportunities. But we have a few things that are unique to our company. We still have a very large pool of tax loss carryforwards here in the United States. I think it totals $370 million at year end. Even though the federal tax rate here has gone down, it's still a valuable asset that we have and something that we could bring to U.S. growth opportunities. So there are things like that, that factor into our thinking as we look at how we might go about continuing to upgrade and enhance the asset mix.

Okay. And I guess, since you opened that can of worms, I was just wondering if there was, well, a, how your cash tax -- or when you could become cash tax payable in the U.S. based on the NOLs you have now. And any other things we should note from the tax overall?

Sure. From a cash taxability standpoint in the U.S., obviously, it's a function of our sales production going forward. But overall, we're many years away based on spot prices from being in a taxable position in the U.S. As you probably are aware, we do pay mining taxes in South Dakota and Nevada. So we are paying a fairly modest amount of cash taxes in the U.S. away from income taxes, about $5 million a year. But in terms of impact from tax reform, we had a very modest favorable adjustment associated with the new legislation related to the repeal of the alternative minimum tax, about $1.5 million. There was an adjustment on our balance sheet. We do carry a deferred tax asset related to the tax value of those NOLs, which is offset by a full valuation allowance. So we reduced both the deferred tax asset and the valuation allowance by about $85 million. So no P&L impact. It's just the carrying value of that asset and the offsetting valuation allowance. Interest deductibility, the 30% cap on U.S. interest expense against U.S. -- sorry, total interest expense against U.S. EBITDA, that's having -- does not present an issue for the company. But for us, like every other company with leverage on their balance sheet, will be a consideration, especially if and when we become taxable as to how we capitalize our balance sheet. So that's something that we'll watch. And then, probably, the punchline is the lower corporate tax rate itself, 21%. Similarly, should we become taxable, I think it creates a strong incentive -- benefits, certainly, going forward of having operating assets in the U.S. in that corporate tax rate, which now aligns very competitively on a global basis.

And I guess, just digging into the expected Rochester PEA. I was wondering kind of broad strokes you can guide us on how we should think about that relative to the life of mine plan that we've seen early last year. Obviously, you had, had the crusher and conveyor upgrade in there as well. So just do you see difference in terms of timing or the potential scale? Or how should we be looking at that?

Yes. Frank and I are smiling at each other because I want to tell you all about it, and Frank wants to wait until the PEA comes out, which, I think, is probably the better approach. But it is different than -- the PEA or the technical report we filed a year ago for Rochester was sort of a dud. A lot of people looked at that and were not all that impressed with what that technical report reflected for the future of Rochester. And a lot of that's centered around a significant amount of capital that was served as kind of a placeholder in, I think, 2021 to cover the expected need to construct a new crushing facility -- move the existing one, build a new one as well as build a new and hopefully, the last leach pad out there that we call Stage 6, which is now in permitting and is called POA 11 for those purposes. What we've been working on then over the past year is how can we get a better handle on those capital placeholders that we had in there for 2021. So we've done a lot of engineering work around getting some better numbers there, trying to both reduce and spread out that capital expenditure and get a better handle on what the potential impacts -- positive impacts could be of new -- of a new crusher. And those are sort of the high-level themes of what we've been working on over the past year and what will be reflected in that PEA. Does that help?

Yes. And I guess, the one question or follow-up question to that would be, obviously, you guys have had a lot of success on the exploration side of things. They're pushing the reserves up quite a bit. Does that justify potentially going or looking at a bigger operation or a larger-scale operation than what you'd previously kind of talked about?

Mark, this is Frank. I wouldn't necessarily make that connection today. We've got a long life out there. We've had, from historic drilling, lots of resource potential sitting in our area of operations at Rochester. The uplift we gave to our resource price deck this year in terms of modeling, as you can see, brought in quite a bit of new M&I. So the tonnage is increasing, probably see some incremental grade reductions. But a part of the way we see the future is, yes, we want to incrementally expand the scale of mining to a degree to offset any grade reductions that we might see in this next plan that we're working on. But it won't be like step change kind of a difference, still be a real long life. I'm excited about the fact that if we look at the future kind of comparing ourselves to the past where we built a lot of individual leach pads, investing capital each step of the way and then last year, expanded an existing leach pad with some capital investment. The pad that we're going to build out in a basin near our current operational area is, hopefully, it's a pad that's big enough to hold all the reserves that we can envision that we'll ever actually mine and process. So there'll be some benefits on how our capital profile looks going forward after we make the investments in a new crushing facility and build a new leach pad and new process facility. And we know that we're going to be looking at some improved operating costs, so.

Mark, it's Mitch. Just to underscore that. I think as a PEA, we'll incorporate all the resource material into that work. And along with some of the efficiencies that we hope to bring into that PEA, I think what that will end up doing then at year end this year is allowing us then to bring a lot of that inferred and M&I material into -- or at least a good chunk of it into reserves. So that will lie ahead for year-end '18, but that's a good additional sort of by-product of this work that we'll summarize in that PEA.

And it looks to be no further questions, so this will conclude the question-and-answer session. I would like to turn the conference back over to Mitch Krebs for any closing remarks.

Okay. Well, hey, we appreciate everyone's time this morning and the questions. If you think of anything else, don't hesitate to reach out to us. Otherwise, we look forward to speaking with you again in April to discuss our first quarter results. Thanks again.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.