Coeur Mining, Inc. (CDE) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Coeur Mining Inc. Second Quarter 2019 Financial Results Conference Call and Webcast. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Paul DePartout, Director of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to Coeur Mining's Second Quarter Earnings Conference Call. Our results were released after yesterday's market closed and a copy of our press release and slides for today's call are available on our website. I would like to remind everyone that our press release, slides 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, risk factors described in our recent 10-Q in 2018 10-K. Now I'll turn it over to Mitch.

Thanks, Paul, and good morning. With me here are Tom Whelan and Terry Smith, along with a handful of other members of the management team. Results from our five North American operations were largely in line with our expectations and represented a strong increase over the prior quarter. As we look to the second half of the year, we are reiterating our full year production and cost guidance as our plans for stronger third quarter and an even stronger fourth quarter remain intact. Four of our five operations saw improved operating cash flow and free cash flow during the second quarter, and overall, our operations delivered a solid double-digit production growth across all four metals leading to 17% increase in adjusted EBITDA. There are four highlights from the quarter that stood out to me. First, it was great to see Kensington generate strong free cash flow on the back of higher grades from the Jualin deposit, which we expect to continue. Second, I'm very proud of our team at Rochester as they have now begun to feed material to new crusher configuration, and we look forward to reporting its impact on silver recoveries to you in coming quarters. Third, at Silvertip, we recently hosted an analyst tour, many of you attended. The goal was to provide a better visibility into the operation and to showcase the potential of the high-grade deposits. While Silvertip is not yet achieving break-even cash flow, we demonstrated significant quarter-over-quarter improvements. We resumed our drilling efforts in June, which have returned exceptional results thus far and make us optimistic about our ability to significantly expand reserves and resources at Silvertip over time. And finally, I was glad to see our total debt declined by $82 million during the quarter or nearly 20%, which greatly improves our balance sheet flexibility going forward. Tom will provide some additional color on this in a few minutes. Before handing the call over to Terry, I wanted to note another items you may have noticed in our earnings release relating to an option agreement we signed for the Richmond Hill project. Richmond Hill is a past producing gold project owned by Barrick Gold, it's adjacent to our work mine, and represents an opportunity to further extend that in mine's life and leverage its nearby infrastructure. Lastly, I want to highlight a set of slides starting on Slide 18 that outline our proactive approach to managing our tailings facilities. And with that, I'll turn it over to Terry.

Thanks, Mitch, and good morning, everyone. From an operational standpoint, the second quarter represented to step up from the prior period. As Mitch mentioned, this trend is expected to continue into the second half of 2019 as we remain focused on a generating positive free cash flow. Slide 5 highlight our production results and the key catalysts at each mine for the remainder of the year. Starting at Palmarejo, we saw gold and silver production increased 22% and 36%, respectively. Quarter-over-quarter, largely due to the completion of maintenance and an expansion of our cemented rock field plan, which took place in the first quarter. This allowed us to access secondary stokes with better recovery characteristics and to increase mill throughput by nearly 20%. At the end of the quarter, the team achieved an important milestone by reaching the oraphase of the La Nación deposit and began mining in early July. As a reminder, La Nación is expected to add around 400 tons per day of additional mill field once ramped up. We also completed commissioning of a new thickener last week, which is expected to improve metallurgical recoveries for both gold and silver, are roughly 2%. Together these initiatives are expected to deliver production, cost and CapEx in line with Palmarejo's full year guidance ranges. At Rochester, Slide 7 of today's presentation, summarizes the current status of the new Russian configuration, which includes the HPGR unit. The newly upgraded crushing circuit is now fully up and running, and I'm pleased to report that preliminary gradation and reach recovery test work is in line with our expectations for higher and faster silver recoveries. With the crusher upgrade complete, we plan to place fresh material on a newly completed section of the Stage IV leach pad, which will allow solution to hit liner quickly helping to accelerate recoveries. In addition, we've been hiring higher grade runner mine to Stage IV. We're planning to continue using this strategy and maximize access free capacity through the end of the year. With the extra, fully operational, promising, preliminary, metallurgy results and our supplementary run of mine ore stream. We remain confident in the team's ability to deliver on Rochester's full year production cost and CapEx guidance. At Kensington, production remains ahead of our internal expectations, with approximately 17% of production coming from Jualin at an average grade of 0.38 ounce per ton. We anticipate this trend to continue in the third and fourth quarters with plans for Jualin contribute approximately 20% of Kensington total production for the period, driving strong expected free cash flow and improved unit cost. Kensington generated approximately $11.5 million of free cash flow at an average cost of 842 per ounce during the quarter. Kensington second quarter operating and financial results demonstrate that a high-grade deposit like Jualin can do for the overall economics of the operations. Our strategy at Kensington is to continue drilling other known Jualin like deposits, including Elmira, Eureka, [indiscernible] Raven and Johnston to extend this higher grade lower cost profile. At wharf, we experienced unseasonably wet weather during the quarter, which diluted leach pad solutions and impacted crushing capacity. In fact, we treated and released the whole double our annual amount of water in just six months. Our investment to upgrade our denitrification plant last year has proven to be extremely beneficial allowing us to keep up on these unseasonable conditions. While to achieve our 2019 plant, our crusher contractor has been mobilized to crash an additional 300,000 tons of ore, which is planned to take place primarily during the third quarter. Production has also expected to benefit from the stacking of higher grade or through the remainder of the year. And last but not least, I'll finish off with Silvertip. As we highlighted on Slide 8, second quarter 2019 was the best period of operational performance since acquisition. Although our throughput was down slightly quarter-over-quarter, higher grades and improved recovery rates drove significant increases in production. As expected, we work through the type mass balance challenges we discussed last quarter. It was also very encouraging to see recovery rates increased during the quarter, including many days of mill recoveries for all metals above 80%. While feed grades and recoveries are heading in the right direction, we still have a way to go on mill availability. We remain focused on key priorities, which are highlighted on Slide 9, and are confident we will continue stabilizing the operation. As Mitch mentioned, we are seeing very encouraging results from resource expanse drilling at Silvertip, which are highlighted on Slide 10, and help demonstrate the potential of this high-grade deposit. Our goals at Silvertip remain simple, stabilized top line performance began reducing cost and achieved positive operating cash flow by the end of the year. Before handing the call over to Tom, I'd just like to take a moment and thank everyone across our operations for their continued dedications, safe production and delivering positive results for the business. Now Tom will cover the financial highlights for the quarter.

Thanks, Darry. Before I dive into our financial results, I'd like to add a bit of color to the balance sheet initiatives that Mitch referred to in his opening. That mentioned during last quarter's call, we are focused on reducing our debt to more comfortable levels. We took several steps during the quarter to work towards this goal. In the second quarter, we executed a $50 million at the market equity offering and completed a $25 million prepay within existing sales counterparty for portion goal concentrate at Kensington. These initiatives helped us reduce a revolving credit facility balance from $135 million down to $53 million and lead to a 19% reduction in total debt quarter-over-quarter. We remained in compliance with our key conveyance at June 30, 2019, including a minor amendment of the revolving credit facility for mill additional cost. Providing some additional color on the prepay, this is recorded as deferred revenue following through our working capital for the quarter and is presented in accrued liabilities and our balance sheet. And in fact, we brought forward $25 million of cash flow that was originally expected to be received in the second half of the year. However, it is important to note that we maintained our exposure to the potential upside in the price of gold and expect to recognize the full value of the prepay by the end of the year. As highlighted on Slide 12, we increased our liquidity by $53 million during the quarter to $235 million. Turning over to our financial results on Slide 4, second quarter free cash flow was positive $6 million compared to negative $43 million in the prior quarter. This was driven by higher operating cash flow from improved top line performance, disciplined cost management as well as proceeds from the prepay and lower CapEx. In the second half of the year, we expect to continue investing in key growth projects across our portfolio and remain within our full year CapEx guidance range. As we stated in the past, we are extremely focused on delivering positive free cash flow to the business. Between our strong anticipated second half performance and strengthening gold and silver prices, we are optimistic about achieving this goal. We plan to continue focusing on generating dollars not ounces, managing our cost and continuing to allocate capital according to our framework summarized on Slide 11. With that, I'll hand it back over to Mitch.

Thanks, Tom. Looking at Slide 13. You can see the key items we need to deliver on during the second half of the year. To reiterate, our Top 3 priorities for the remainder of 2019 are generating higher silver recoveries from HPGR Rochester between now and the end of the year. Optimizing top line performance of Silvertip and starting to rationalize its cost structure with the gold achieving positive operating cash flow by the end of the year and reducing leverage levels and maximizing free cash flow so we can be well positioned to generate meaningful long-term value for our stockholders. We will continue to pursue a higher standard and everything we do, and remain focused on delivering positive results and quality growth from our balanced portfolio to North American precious metals assets. With that, let's go ahead and open it up for questions.

[Operator Instructions]. The first question comes from Michael Dudas with Vertical Research Partners.

First question, again, wonderful results with Kensington. You did talk about mix on Jualin to 20%, early look into going forward, is that mix gets sweetened a little bit over through 2020 and how helpful or quickly somebody drilling that you've been doing out some of those targets that can help the mix going forward in the profile?

Yes. Sure. I'll ask Terry to take that.

Sure. Mike, good question. We're just really getting going at Jualin. We are declared commercial production late last year, as you'll remember. And we're just two quarters into the project now. We are starting to take long hold strokes more consistently. And so I think that there is our good consistent Jualin profile that will establish. And there are numerous other high-grade sources at Kensington, Raven is another one, but we've been mining in for some time. I will have more news on some of the other means events that we've been exploring, and we're pretty excited about. So the idea is to continue this high-grade supplemental ore stream for as long as we can.

Secondly, on at Rochester, good news on the early might earth for indications. Anything else that's been surprising to the upside? Or something -- maybe any challenges that you look through the second half to meet the targets and looking at the plans on accelerating those investments into 2020, '21.

It's Mitchell. I'll start, and then Terry will go ahead. As you recall, Mike, from of our production release, we highlighted the fact there were a secondary crusher that failed on us and the team out there did a great job of implementing its contingency plan to get that thing removed and replaced and everything up and going here in the last part of July, early part of August. So that was a challenge, and team did a great job responding to that. I think now what we've seen is pretty steady 24-hour a day performance out of the entire three stages of the crusher and [indiscernible] material is going on in the liner, and that test we've seen is so far so good. Terry, anything as you look at between now and the end of the year that you should be mindful of?

Yes. Mike, I think as we get through the third quarter here, we're going to have more metallurgical information, more operating history on this crushing configuration. We're just starting to dial in to system now, so there's a lot of opportunity to optimize around that. So I think by the time the third quarter's through will have much more to say about the performance of the system. Certainly, on a preliminary basis, we're really excited. We've been working on this for some time to get to this point. And the quarter talking more about it in a couple of months.

Thank you. Just two more for me. First on your CapEx expectations full year, after you've done so far in the first half, certainly, is it timing related on the range? Or is there -- would that certainly with the market, some cash flow might be excelling a little bit more than maybe planned to accelerate trying to get some things before we turn to 2020?

Yes. You are right, Mike. It's mostly timing, it's mostly underground development related. And as we see mining grades pick up at Palmarejo and a silver flip, we'll see underground capitalized development increased at both well locations. Kensington has been for the -- to the first half of the year a little ahead of its CapEx. I think that is expected to, kind of, stabilize in the back half of the year. Now that they're up and going there in Jualin on a more sustained level. So we're -- yes, we're -- at halftime of the year here we're a little less than halfway through our CapEx midpoints guidance range. But based on our plans that we are looking at here so show that sending up within that range for the full year.

And so my final question is, Mitch, treat by the Richmond Hill announcement, maybe some background? How long you've been thinking about it? And what's the concept there? Any addition to what you, kind of, just briefly mentioned in your prepared remarks.

Yes. Sure. I'll give you my views. Terry, feel free to chime in on this. I think you recall, Mike, we've bought Wharf in February 2015. This has been on the radar screen of the work team prior to our ownership. This is an old lack of minerals producer, that's less than 5 miles.

Old school.

Yes, exactly. Haven't heard that name in a long time. But -- so as we look around for opportunities to grow the business in a way that can generate the best returns, obviously, leveraging existing infrastructure is the best way to do that. And there's only a few -- those are a fairly short list of opportunities to do that. Richmond Hills sits there that close to the infrastructure at Wharf. And so with the historic resource -- and for Barrick I think, it's, kind of, nonfactor, so it makes a lot of sense for us to have that and to look for a way to tack that on to wharf's operation and add that via a further extension. The option we thought was a good way to go about this to get us two years to better understand the opportunity and have a better sense of exactly how and when Richmond Hill potentially fit in to wharf's future. So we're excited, I think, and I know the folks that work for us are excited to start taking a look. We'll spend only, I think, less than $2 million this year on some mental gold work and some drilling. So not a big spent at all. But could be nice enhancement to wharf. Terry, that's pretty much.

Yes, you covered it pretty well. I think, what we see there is very similar to wharf from a technical perspective, the geology is very similar, the metallurgy is very similar. So this, to me, is a natural fit with the wharf operation.

Your next question comes from Joseph Reagor with Roth Capital Partners.

Just a couple of minor items. I guess the first one on Silvertip, there is -- once you get the permit of the $25 million payment due, I believe, what's the timing on that? Do you have to make the payment immediately? Is it within a certain number of days, quarters? And then also, with the resource drilling even you've been doing, how soon do you think you'd to make their resource related payment?

Yes, sure. It's due -- both of those are due 15 business days after in the case of the permit after we receive it, 15 business days. And then that initial $25 million payment, which is 75% stock, 25% cash. Sorry, I mixed that up. 25% stock, 75% cash. And then in terms of resource milestone payment of another 25, structured the same way that would come then on the back of year-end reserve and resource calculations that we typically complete in, kind of, the February timeframe and then a similar 18-business-day timeline on the back of that.

Okay. And given the research drilling, you've done so, would you say it more 2020 or 2021 item for that?

That's I think we could fall on a bet and still hit that number by early 2020 with the results we are having.

Okay. On a different note, you guys purchased the Northern Empire assets over a year ago now. And that area has seen a significant landgrab. There is a number of majors that are ticking up land down there, your neighbor Corvis [ph] has been purchasing additional, hence taking additional land. And obviously, that would imply that the valuation of land in that area has gone up. Is it possible you guys would book to sell that? I know it's a big part of long-term future, but given the focus on debt reduction and improving the balance sheet, is that an opportunity you think is out there right now?

I would never say never to anything. It's really a function of value. If someone is willing to pay us a price for something with an excess of what we think it's worth then it's something, obviously, we need to something to look at, and think we all hard about. I think the challenge there is we're still in that early phase of determining just what the value potential is there at Northern Empire, both ex-Sterling and Crown. I agree with your comment, Joe, that the activity in the area has been quite significant over the last 12 months and without having done a ton of drilling, I think, we have seen probably that value increased just by virtue of all that activity going on around us. We're really excited about the drilling we're seeing at one of the deposits in the Crown block. We've been drilling on Daisy for now. And so with the land position that we have there, it's quite strategic, and I think, ideally, I would like to see our own work progress and see how things evolve in the neighborhood. But always open to anything that we think can unlock some value.

Grade. And then one final one on Silvertip. You guys go as to get to cash flow break-even by the end of the year: one, what is the things that you think might stop you from getting there? Or might help you get there? and then two, if you don't get the mine to cash flow break-even by the end of the year, what would that mean moving forward?

Yes. I would say, it all comes back to mill availability. The sooner we get to high 80% or 90% mill availability, the sooner we will achieve that objective. And I would like to think that we can do that before the end of the year but we are giving ourselves until the end of the year to achieve that. That by far outweighs what operating cost reductions can do in terms of achieving that goal. But that said on a go-forward, kind of, sustained basis, we need to see, and we will see, we think, the OpEx there all declined pretty dramatically. The cost that we're showing right now are not very indicative of what a sustained, sort of, ongoing operations there should look like. Just given the resources that we're throwing at addressing somebody at mill challenges that we have been wrestling with. And as those get peeled back and those will take a little bit more time that will kind of give us a second tailwind behind the -- achieving that mill availability. And in terms of the second part of your question. Look, we have to not be emotional about how we allocate capital. We need to maintain discipline. We need to stick -- stay true to our framework and our priorities. When we'll always assess. If we're not there by the end of the year, we'll need to take a silver look at it, and say, are we allocating capital to a good opportunity there versus other opportunities inside the business? I'd like to think that it's a pretty given the nature of that ore body with the grades and drilling results. There's a very attractive business sitting there for us once we get to that steady-state. And our main focus is on getting there. And that really, like I said, is driven by the mill availability focus that we have.

Your next question comes from Brian MacArthur with Raymond James.

A couple of questions. Just, Mitch, can you just go over the options for paying the $25 million. You said it's 25% stock and 75% cash. Is that at your option? Or is that at seller's option? How does that actually work. It's just to find that way, Brian. Its $25 million in total for the first payment, $25 million on the resources. And it's just perspective in terms of the agreement of the 75/25 breakdown. So that not negotiable? That's just the way it will be?

That's right.

Okay. Second question, just for this obviously you have to make those payments? And what's your focus on debt reduction. I thought the prepay was kind of interesting. Do you see yourself doing more of that going forward? Or would you do it on silver as well as gold?

I'll start, Tom feel free to add to it. Tom should, kind of, spear headed that the effort on this in the second quarter, and I agree it was a good way and elegant way of bringing forward some cash flow to help us accelerate our goals around debt reduction. And it's a good tool that happen to toolbox going forward. As I think about funding sources for the next expansion at Rochester, this POA 11, just sitting out there in a couple of years from now. Do you realize this type of a tool to help looking internal funding alternatives project like that? It's something that definitely worth keeping on the radar screen. And silver could be used just as much as gold, I guess, when we looked at it, gold had a much better run relative to silver, and that was a bit of a consideration. But yes, it's something that we keep in the toolbox for sure.

And are those prepay, are they asset-specific? So I assume, if something went wrong and couldn't deliver from Kensington, you just deliver in from one of the other assets to buy in the market, is that, kind of, the way it works?

That's exactly. We have the alternative to deliver some another asset or find some other of on fulfilling that delivering into the ounces that we committed to, that just buy in the market. But again, just to give some perspective, $25 million based on current prices, I mean, that's -- that is -- will easily be able to achieve that at -- from Kensington in the second half of the year.

Right. No, I get that. It's more just some drastic thing happens or whatever. I was just curious what the other side of the trade. So that's very, very helpful.

Your next question is from Adam Graf with B. Riley.

Just getting back to Silvertip. You guys are second quarter in a row now that cost attributable to sales have been about $24 million there. Should we expect that to be steady run rate per quarter going forward?

No. That will start to decline here as we achieve steady-state on the top line and we start to peel away some of these, kind of, one-time cost that we're incurring right now that help pass address some of these mill projects. We'll see that that's been level decline. Terry, you want to give a couple of, maybe, examples or...

Yes, sure. Adam, there's just a number of different resources that we're throwing at Silvertip to help this revenue stabilization that we're describing. Contractors, additional employees, lots of one-time items associated with just ramping up no throughput and trying to turn mill availability into 80s and the low 90s. It just requires lot of resources and you start to pull back those resources after you've have achieved that stability. So it's sort of a series of stabilization, optimization, if that makes sense.

Do you guys have a feel for the run rate, a quarterly run rate? You guys would be expecting what you have all those things in hand?

It's Mitch, again, Adam. If you look at where we are right now in mining cost per ton, I think, in 70s. We stepped too far off. I think where we would expect to be. And as you can imagine, it's more a function of processing in G&A cost. I think, on a per ton basis right now, both of those are up in the $150, $140 a ton range. You look at our other underground months, you look at any, kind of, benchmarking. You look at sort of where we think that could get. That -- It's not a stretch at all to think that, that should be, kind of, -- both of those should be half of the numbers. That gives you a sense of the magnitude of the OpEx reduction. It can go from $140 to $175 per ton basis, 1000 tons a day. I think last quarter, I mentioned an objective of hitting on an operating cost basis about $7 million a month or so on a steady-state basis. So obviously, multiply that times three that gives you low 20s. I think that's not a bad way to think about it.

That's a perfect answer, Mitch. Now I don't have to ask you to break down into mining milling and G&A per ton. Perfect. And just to switch tracks over to Rochester wharf, when I look at your cost quarter numbers, I'm left scratch in my head there that perhaps Rochester and perhaps wharf, I know, you had issues there on the quarter. But perhaps they had high stripping quarters that would bring sort of the numbers in line on a cost per ton basis. Can you give us an idea of the strip in the second quarter at Rochester and Wharf? And what that's going to look like for the rest of the year?

Yes. I want to say that Rochester strip ratio in last quarter was around 0.3 or 0.4. So it's low, like, we traditionally have seen there. If you're looking at mining cost on a unit basis, and you go back sort of through Rochester's last couple of years when we're, sort of, open pit mining tonnage north of 5 million tons. You will see our unit mining cost below $2. And when it's sort of in the 3 million and 4 million ton range, like it is in the moment, our unit costs are, obviously, above $2. And two compounds, our unit cost problems lately, we've been doing PCRs on our [indiscernible] which show up in our cost. And those are completed up every couple of years, and we have just been hit with a lackism here in the last couple of quarters. So that's compounding a low tonnage, fixed variable issue there. So does that help, Adam?

Yes. It felt like it wasn't a stripping issue, because that sort of a regular strip, more or less, for Wharf -- sorry, for Rochester. And in Wharf, I know you guys had a lot of water issues. So was it a -- what was the strip at wharf roughly in the second quarter?

It's a good question. I want to say that it was around 2.5:1. I think our reserves are roughly 4:1, but we had a lot of positive ore reconciliation. And -- yes, sorry, it's 3:1 in last quarter. We've had a lot of positive reconciliation there, which is a good problem means there is more ore at every bench than we thought. The mining cost at wharf are quite -- they fluctuate a lot. We have a reasonable Leach pads, which is different in Rochester, which are life of mine pads. So every time we had an off-road event at wharf, kind of, compounds are cost. And you see that sharp in the mining cost. So that's -- you'll get some variability quarter-over-quarter from those types of activities.

[Operator Instructions].

Okay. We appreciate everyone's time.

I was going to conclude the question-and-answer session.

Yes. Go ahead.

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

Okay. I was just going to say we appreciate your time to get on the call this morning. And we look forward to speaking with you again this quarter to talk about our third quarter. So thanks again.

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