Coeur Mining, Inc. (CDE) Q2 2018 Earnings Report, Transcript and Summary

Good morning. Welcome to the Coeur Mining Second Quarter 2018 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 to Jonathan Chung, Associate Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Coeur Mining’s 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. I would like to remind everyone that our press release and some of our comments today 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 recent 10-Q and 2017 10-K. I’ll now turn it over to Mitch.

Thanks, Jonathan, and good morning. Thank you everyone for joining our second quarter earnings call. As we head into the second half of the year, we are on track to deliver solid 2018 results. We increased our full-year production guidance earlier this month, and we have now reduced our full-year cost guidance ranges, mostly due to the strong performance of our Palmarejo operation in Mexico. Meanwhile, we are well-positioned to deliver on several important initiatives that advance our strategy of discovering, developing and operating a balanced portfolio of high-quality precious metals mines in safe jurisdictions. For the quarter, we have reported revenue of $170 million and net income of $2.9 million, representing quarter-over-quarter and year-over-year increases. Adjusted EBITDA increased 52% year-over-year to $48 million and all-in-sustaining costs declined 6% to $14.65 per ounce. Quarterly cash flow was impacted by two items we’ve previously discussed with you. We invested approximately $26 million during the quarter at Silvertip to complete our initial drill program and to bring the mine closer to commercial production, which we expect to happen this quarter. And we paid $31 million of Mexican taxes early in the second quarter. About $17 million of that related to 2017 earnings and about $14 million of that related to the year-to-date 2018 earnings. In terms of our second quarter results, Palmarejo led the way once again. Both gold and silver productions were about 40% higher year-over-year, driven by higher grades. Costs were below $7 per silver equivalent ounce for the third consecutive quarter at $6.64 per silver equivalent ounce. The new ADR plant we constructed for $2.4 million and started up in April, has already generated over $4 million in savings by mid-July. It’s a great example of the kind of returns that optimization investments like these can provide and why they rank so high among our capital allocation priorities, which are laid out on slide eight. As we anticipated, Wharf in Rochester both delivered stronger quarters compared to the first three months of the year and are expected to build on this momentum during the second half. In fact Wharf’s production increased 25% and free cash flow increased from slightly negative in the first quarter to over $10 million in the second quarter. That brings the cumulative free cash flow since we acquired Wharf in February of 2015 for $99 million, to just over $135 million and climbing. Kensington positioned itself during the second quarter to begin delivering on the plan we summarized in April that showed a 25% increase in the mine’s overall reserves, a higher overall average gold grade, lower per ounce costs, and stronger free cash flow over an extended mine life. Mining from the Jualin zone is a key component of this plan. Our dewatering efforts are succeeding and we expect mining activities to pick up from Jualin during the second half of the year. Approximately 10,000 ounces of gold at an average grade of about 0.5 an ounce per ton are expected from Jualin this year, which is expected to drive Kensington’s production levels higher and per ounce costs lower, especially in the fourth quarter of 2018. And as you can hopefully tell, we remain focused on allocating capital to opportunities with the potential to deliver solid returns and facilitate further cash flow growth, cost reductions and higher margins over the longer mine lives. Funding and delivering on Silvertip’s ramp-up is currently our top priority. Once up and operating at steady state early next year of about a 1,000 tons per day, this operation will become a high-margin source of cash flow for the Company and will be a key component to our expected growth in cash flow and production. After completing mill commissioning in March, the team has increased processing rate to just over 500 tons per day. We expect to declare commercial production this quarter and reach 750 tons per day by the end of the year. Our total year-to-date investment in Silvertip is approximately $49 million with about $26 million of that occurring in the second quarter. Slide nine in the accompanying deck provides a breakdown of our investments through June 30th. We are maintaining our full-year production guidance at Silvertip of 1.5 to 2 million ounces of silver and 23 to 28 million pounds of both zinc and led or approximately 4 to 5.1 million silver equivalent ounces, which includes ounces produced prior to reaching commercial production. Our investments at Rochester to incorporate high-pressure grinding roll technology or HPGR to the crushing circuit are moving ahead. Slide 13 provides a summary of the PEA we published earlier this year and highlights the substantial impact this expansion is expected to have. Slide 14 shows the location of the current and planned surface infrastructure involved in this planned expansion. The first phase of this investment is to upgrade our existing X-Pit crushing facility later this year. We expect to complete all front end upgrades prior to installing an HPGR unit in the first quarter of next year. In parallel to upgrading in the X-Pit crusher, we will decommission our smaller N-Pit crusher which will reduce overall throughput from the current 15 million tons per year to about 13 million tons per year next year. However, this lower throughput level is expected to be offset by lower operating costs from the elimination of the N-Pit crusher and by higher assumed silver recovery rates from the HPGR crusher. The second phase of our investment at Rochester includes the construction of a new, larger scale crushing facility that will support the operation for the balance of the anticipated mine life. The current facility is about 50 years old and is located near the edge of the pit where mining is scheduled to take place in future years. This new facility will reuse some of the equipment from X-Pit upgrades, mentioned earlier, along with the installation of a second HPGR unit. This new plant is being designed to support throughput rates of approximately 20 million tons per year. This new crushing facility, a new leach pad and larger Merrill-Crowe plant are being permitted through POA11 for which we expect approval in early 2020. One of our other top capital allocation priorities I’d like to briefly mention is our near-mine exploration investments from which we are seeing strong results. Our total year-to-date investment was $28 million, up 53% compared to the first half of 2017. At Silvertip, we completed a 44,500 meter drilling program on schedule and under budget. The program was focused on infill drilling and discovered several new high grade mineralized zones. We issued a separate release this morning that provides more details about the success of this program. And given this success, we are accelerating our drilling efforts and have kicked off a $4 million second phase, focused on expanding resources and testing prospective targets. We remain on track to file our first 43-101 technical report later this year that will include an initial reserve estimate and will incorporate most of the Phase 1 infill drilling results. At Rochester, our near-mine infill drilling immediately southwest of the pit in the Sunflower area has intercepted shallow, higher grade mineralization. At Palmarejo, we invested a total of $7 million in exploration to the first six months of the year. Slide 11 shows the location of the various veins and targets that have been drilled so far this year. Nación, which is located about 300 meters west of Independencia is a good example of the quick payback we can generate from our near-mine exploration investments. We began drilling Nación just two years ago, and we are now developing toward it and expect it to begin contributing about 400 tons per day of mill feed by later next year. We hope to follow a similar path with the Zapata discovery, which is located about 200 meters west of Guadalupe. At Kensington, we invested a total of $5.4 million in exploration year-to-date on drilling that targeted previously known high grade structures that have the potential to become future sources of higher grade ore. We remain optimistic about Kensington’s potential, given the number of historical mines in the district, many of which are now new targets that have never been drilled. I want to briefly highlight a series of slides contained in today’s presentation that summarize the key elements of the Company’s ESG priorities. Whether it’s our environmental stewardship, our support of local communities and our people, or our best in class corporate governance practices, you will be hearing more from us about our efforts in all these areas. Our ESG programs are a key component of our strategy and fundamental to our overall success as an organization. We are excited and proud about how we do things at Coeur Mining and we are looking forward to showcasing these efforts going forward. So, just to wrap up quick. Overall, the first half of the year basically went according to plan. Our top priorities during the second half are to successfully achieve the ramp up at Silvertip, to set ourselves up for success at Rochester as we start taking the initial steps to upgrade its crusher facility, to deliver higher production levels at lower cost at Kensington with higher grade contribution from Jualin, and to sustain the strong performance at Palmarejo. Overall, we are well-positioned to deliver strong production and cash flow growth from our 100% North American platform of precious metals assets. So, with that, let’s go ahead and open it up for any questions.

[Operator Instructions] The first question comes from Mark Mihaljevic with RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone. I guess, my first question just deals with the Silvertip. I was just wondering if you can give us some more operational details, kind of as you’ve got a few months now behind you on the mining side of things, how the grades have been reconciling and then how the plants have been performing in terms of recoveries and the payables that you are getting on the concentrates.

Yes. Frank, go ahead.

Hi, Mark. This is Frank. We began commissioning activities on the mill in March. So, we’ve got several months under our belt right now. We think about the process facility in terms of segments like crushing and feed systems to the grinding circuit, grinding circuit, the floatation circuits for lab, concentrate, zinc concentrate, and then also pyrite concentrates. And then, we have to back into the plant where we do our dewatering activities to package up products for shipment and also feed into our dry stack tailing system. So, in our due diligence work, we entered in a quite a number of areas within those segments. Until we get actually turn things on and get things running, it’s bit difficult to figure -- understand just how big of an issue these things will be. So, we’ve been systemically working through all that since March. Today, we have increased plant availability, a full 25%, targeting more, still got more work to do. That’s been accomplished through some significant downtimes that were scheduled in both May and again in early in the month of July. Those are completed and we are just taking these things off. So, addressing mechanical issues and then operational issues, and that’s become more about the operation itself. We are fully emerged in optimizing these circuits for grinding circuit for optimal grinds. And we are going to need two different types of grinding going on in that circuit to support the lead flotation process. And the zinc needs to be a little bit finer zinc. So, we are currently busy getting ready to commission to regrind mill there, adjusting the reagents, getting a good feel for the PH controls that are required, getting some instrumentations installed on this rather old plant that’s been quite useful to us here in recent times. So, things have been progressing. We are seeing much better availability on the mill. We’ve consumed all the ore that was sitting in front of crusher in the stockpile and we are starting to flow fresh ore out from the mine itself into the crusher and into the plant. We are seeing recoveries for lead and zinc on the upward trend. Tonnages per day are coming along as we had planned. We are not quite to a point where we are averaging 500 tons per day, but we see the frequency that we hit that level on a big increase. And one of the things I’m quite pleased with is that the grade material, whether it was in the stockpile from the beginning or what’s coming out of the mine now is tracking very well with our resource model that we took on board during the acquisition. It just couldn’t be better than what we are seeing right now. So, it’s progressing, and I’m pretty pleased with the direction we are headed at the moment.

And just in terms of the payables and just the concentrate you are producing, is that performing as expected as well?

Yes. The grades or the products that we are producing are coming up, we still got a bit of work to do there through the optimization of the flotation circuits. But, we’ve been since March are shipping zinc around every -- just between two and three days and shipping lead about every three to four days. Shipments have been active since March, as recently as just a few days ago.

Okay. And then, I guess nice exploration update from there this morning. So, what type of update or what type of benchmark should we be using when we evaluate the resource update and an initial reserve that’s expected later this year?

Well, we organized our drilling plans for this year around what we call a category 3 drilling which is infill within the existing resource model that we acquired at the acquisition or at the time we acquired it. So, that drilling has been very useful. We are improving our block model. So, mine engineers are currently working with that block model now to optimize the mining plants that come out of that. We are seeing a very useful data confirming what we thought we would find. And we are actually experiencing some nice surprises in various areas of the mine. And that’s highlighted in the press release now on exploration. So, on the operation side, we have been really focused on that kind of drilling to improve our mine plants and help us build out, like mine model that would have perhaps a little less risk in it, due to the knowledge that it yields. And then, Hans is here, and I think he might like to talk a little bit about the longer term exploration.

Yes. Hey, Mark. This is Hans. Just to finish up on that comment about what you expect in October. If you look at the figure 10 in our slide deck, there is some subtle lighter shapes that are the original interpretations. So, that would be the basis for our original resource model. And you could find that in our press release, when we bought the mine. The expanded resource model from our new drilling has the new shapes. So, if you wanted to just to estimate what you would anticipate for a size difference, you can sort of see that in graphic there. We’re -- like Frank said, we’ve just got the model now, and we are working through the numbers publishing in October. The ore body itself is giving a hard look right now by expert geologist. We’re building our first stratigraphic column and then, we’re launching on the district program. And so, the next phase of drilling will basically be expansion of mainly the discovery zone. And then future drilling next year and beyond will be growth. And we see a lot of potential here in this project, just because most of the focus historically has been in the Silver Creek area where the known resources were and trying to develop that. So, everything is looking really positive right now. I’m very excited about the project.

There is one another plan, I’ll add as well, Mark, which is that this drilling that we’ve been conducting in the mine, a lot of it was aimed to trying to identify areas where we would be able to do our mining by the transverse longhole method where it’s more about finding oriented and better unit economics for that kind of mining and cut and fill, which will be taking place us to the mine. And we’re seeing some areas where that will become an opportunity. Little premature to say how much of the mine will be long haul, but that work is going on right now. So, you get better economics of the mine.

Awesome. Thanks for the update guys. And then, I guess, shifting gears over to Palmarejo, obviously you guys have had a lot of success in that faulted off area at Independencia that’s given you some really nice grades the past couple of quarters. I was just wondering if you had a sense of how much of that areas is left and how long you could still be getting those benefits for.

Yes. We’ve actually spent more than just a couple of quarters that we’ve been experiencing that great grade benefit that we’ve been seeing. And as we mine along the contact, hanging wall, footwall contact in the central and to the upper parts of the mine, a lot of the drilling that we have done historically and found this material, the recovery in core was not that great, martial was so altered. But, we’re actually in there mining now, and it requires little additional ground support and so on. But, given the fact a lot of sample didn’t come out of these particulars zones, it’s been a great positive reconciliation aspect for us. We will be mining in the areas that I’m describing right now for the rest of this year, well into next year. And I can’t really say that these grades will be sustainable over that entire period of time, but certainly for the next quarter, it should be a distinct possibility.

[Operator Instructions] The next question comes from Michael Dudas with Vertical Research. Please go ahead.

Mitch, turning to Rochester, we expect crusher upgrade, and talk a little bit about the timing of the switch out and the process from 15 million to 13 million tons per year and how that plays through and the timing of the better recoveries as you see it, I guess going into ‘19. And secondly, on the overall -- on the new plant and the crusher, an update on timing. You mentioned 2020 on permits, but is there a chance that things can move along a bit quicker? I know that you have been putting a lot more focus on getting things throughout there in the state of Nevada, so a little feedback on that?

Yes. Frank, do you want?

Sure. As far as timing, I think as Mitch covered in his opening remarks, this is -- we view this as a two-phase process to get HPGR in service at Rochester. The first phase is already in ground in the real short-term, like towards the end of this year, replacement of an existing cone crusher or secondary crusher that sits behind the jaw crusher, the primary, and replacing it with a larger cone crusher which will then be reused when we make the bigger move some years later. And then, that will fill into what we installed the first of two HPGR units in the early next year. That’s about as much as we will be accomplishing in this first phase while the remaining engineering and design and so on continues for what we planned to do out for 2020 and 2021. As far as permitting is concerned, things are moving very efficiently out there in the Nevada with the regulators that we are working with. But we are still pretty much holding to the timeline that we’ve discussed previously that that would become available that permit would be in our bag in the timing that we need for selling the remainder of HPGR equipment and moving that fixed plant crusher we operate today and getting it out of the way of the mine.

I think, Mike, this initial phase capital wise, late this year and then early next year, and I think we’ve flagged this in the PEA release earlier this year is around $20 million to $25 million to accomplish what Frank mentioned there in terms of this cone crusher and then this first HPGR unit. And then, down the road, to say 2020, 2021, there is more significant capital obviously, when you think about everything that we will be doing there as far as entirely new crusher facility, leach pad, Merrill-Crowe, the whole basically a new surface infrastructure out there. And that’s all reflected in that PEA. We filed that sometime in the first half of this year. That can give you a better handle on the kind of capital. It’s a big capital project, something that we are obviously already thinking a lot about and planning for. But, the benefits and the impact on Rochester are so significant, I think the rate of return on the entire capital, both this first phase and that subsequent phase is well north of 30% and really not only drives cost down but extends that mine life through a lower cut upgrade and pull forward those silver ounces through the HPGR technology. So, it just has so many great benefits for us, but it’s a big focus. Silvertip got to get that up and going first and then the next big initiative is going to be capturing all of the advantages that HPGR can offer or is offering out of Rochester.

I totally support process -- the thoughts there on that. And then, just looking at second half capital spend, you have a timing on the Mexican -- next Mexican payment. And looking into 2018 and bleeding into ‘19, how much, without giving out too much on the planning front, are we going to be cleaned up on Silvertip, or is that going to be in the first half in ‘19 and will we see just expectation on growth capital moderating a bit or is that still going to be focused much more, given some of the other opportunities you may find?

Yes. So, first half CapEx companywide was $80 million or $85 million. That should decline in the second half of the year, mainly because of Silvertip. I think second half Silvertip CapEx is closer to $20 million. And then, sort of offset then with some incremental capital that we’ll be investing down there at Palmarejo to access that Nación deposit. Overall, you saw in our release that we upped our CapEx guidance range from 120-140 to 130-150 to kind of factor that all in. But, even at that higher range, you compare the first half of 80 to 85, we’re going to be down a little bit in the second half of the year. And then, as you look forward in 2019, Silvertip will drop way down and will be back closer to that of $100 million target for CapEx. Keep in mind, between Palmarejo, Kensington and then Silvertip, there is about 75 million of annual underground capitalized development each year that is the lion’s share of our ongoing annual CapEx planning.

As part of the 100 million.

Yes. And then, we will see some incremental capital in 2020 as we get into this Rochester expansion.

That was just helpful to flush that on the timing of the CapEx as we move forward as metal prices have come down here little bit. Mitch, thanks for your thoughts. And I look forward to seeing you soon.

Yes. Thanks, Mike.

The next question comes from Mark Magarian with UBS. Please go ahead.

Hi, guys. How are you doing.

Hi, Mike. Okay. And you?

Super duper. My surname butchering was slightly less worse than usual there. But, Mitchell, I just had a question regarding cash flow. So, the stock obviously not performing particularly well. There is obviously various reasons, taxes, CapEx for the second quarter in a row, pretty decent free cash flow burn. But looking into the second half, especially now with the previous question mentioning obviously future CapEx at Rochester going forward in the future. Can we expect operating cash flow and free cash flow to start to normalize somewhat and steady, which should hopefully keep the balance sheet in good shape for that CapEx in the future, especially with low metal prices because otherwise someone like me who is shareholder here, is going to start to think you guys are going to dilute again. So, what’s there to say on that?

Liquidity wise, ending the quarter with, what, $123 million of cash, on 75 million or so available under our credit facility. And then according to plan, our cash flow grows now starting in the back half of this year for a variety of reasons. Starting with Silvertip, as we cross the threshold into commercial production and ramp up those mining and milling rates Silvertip stops being the consumer of cash that it was in the first half and starts to become a source of cash. Obviously, we don’t have the double whammy of Mexican taxes that we had in the second quarter that related to both this year and last year. And then, you can go down the list of the other operations. Wharf should continue to have stronger cash flow, Rochester; Palmarejo should be more of the same. And then, Kensington with this Jualin high-grade kick, it should be a source of operating and free cash flow as well. So, the plan had always been that kind of midyear is when we’d sort of hit our trough point from a liquidity standpoint, and then build up from there. So, that’s been the plan and that’s how it’s gone so far, and that’s how we expect it to play out throughout the rest of the year and into ‘19.

Our next question comes from Mark Reichman with NOBLE Capital Markets. Please go ahead.

Good morning. Just one question on your exploration program. Just big picture, when you look out and in your presentations how you would like to see the mining rate, Palmarejo go up over time. I was just wondering how you think about your exploration budget over the next several years and your thoughts on in terms of extending the mine lives for the existing assets. And where you think you would like to be in terms of growing the reserves and resources and extending the mine life, and what type of investment you think that will take over the next several years?

Yes, sure. I’ll start and then Hans can chime in. We’ve now accelerated, as you can tell and as you probably know, exploration is now running around $50 million in total on an annual basis. And it’s important that we continue at that level with 80% plus of that money going into drilling programs around our existing assets. There’s just -- given the assets that we have in our portfolio, that is one of the best places to deploy capital to generate good returns and have a very rapid impact on the economics of each of those assets as well as the overall Company. Palmarejo, Kensington, Silvertip are the three largest chunks there of that $50 million. We are -- and given the state of the earlier stage exploration, end of the spectrum of our industry, there are a lot of interesting earlier stage projects out there that are not attracting any funding, and it’s giving us a chance to generate some value from the drill bit on the earlier stage side of the equation where we’ve slowly and sort of carefully grown that component of our overall exploration budget. And we just feel that fundamentally as a mining company, one way to truly generate value is to the drill bit. And starting and prioritizing with the near-mine, but increasing in a methodical way, some of these earlier stage opportunities that we’ve started to take on and drill with some success. Hans, do you want to fill in?

Yes. I mean, Mark, as you’ve seen, the success at Palmarejo is a great example where we hit a real low drill activity there and realize we were behind the April, [ph] and now, we’re up to what we call steady state, meeting reserves completion plus growing with new discoveries on the budget, at Palmarejo. So, I don’t anticipate that one slowing down for a while. We’re finding new veins every year now. It’s a process, and good teams, good people on site that are understanding the geologic model now. So, that’s a great example. Silvertip, we’re at the earlier stages of the exploration program. And I would foresee the same kind of success there as we’re seeing at Palmarejo if not more because we bought a mine that was underexplored and it’s an immense land package that we’ve got to start tackling here. Kensington is more difficult, as you probably followed, a little more expensive to find gold there in mine, the finding is just as tough. Rochester, we’re starting to wind down with such a long mine life, we don’t need to spend as much money at Rochester. And similarly at Wharf, we don’t need to spend as much money there because it’s a well-defined plan of operations there. And then, as Mitch mentioned, the pipeline is one place I spend a lot of my time and the opportunities are coming in the door right now because the capital markets aren’t funding early-stage gold explorers, and they’re looking for funding sources like Coeur and other cash flowing companies. So, it’s a matter of prioritizing those and picking the good ones. So, it’s definitely exciting times. Like Mitch said, we don’t see things slowing down for us in the near future but we will slow it down if we need to make ends meet future.

It’s having a pretty profound impact on our income statement as well. When you look at, and there is a good slide in the deck today, slide 16 in the bottom left there that shows as we’ve funded our exploration prioritizing near-mine, growing the reserves, extending the mine lives has a positive impact on our amortization line on our income statement, which to the extent we can keep doing that, it’s going to help boost the bottom line. We I think this year, our full-year amortization is going to be something like $150 million. So, the more we can spread that out over more periods, the better our earnings will look too. So, there is a whole host of reasons to keep funding the levels of exploration that we’re now at.

This concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Krebs for any closing remarks.

Okay. Well, hey, thank you everybody for taking the time. I know there are a lot of companies reporting today. We look forward to speaking with you again in October to talk about our third quarter results. And in the meantime, enjoy your summer. Thanks.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.