Coeur Mining, Inc. (CDE) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Coeur Mining Third Quarter 2019 Financial Results Conference Call and Webcast. All participants will be in a 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 Paul DePartout, Director of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining's third quarter earnings conference call. Our results were released after yesterday's market close and a copy of the press release and slides for today's call are available on our website. 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 as well as the risk factors described in our 2018 10-K. Now, I'll turn it over to Mitch.

Thanks, Paul, and good morning. Tom Whelan and Terry Smith along with a handful of other members of the management team are here with me today. Our third quarter results reflect the start of a strong expected second half. We saw a second -- we saw quarter-over-quarter revenue climb 23% to $200 million, adjusted EBITDA jump 99% to $61 million and free cash flow nearly double to $11 million. We are reiterating our full year production and cost guidance given our strong expected finish to the year driven by higher gold and silver prices, continued solid performance from Palmarejo and Kensington, strong fourth quarters at Rochester and Wharf and an improvement at Silvertip. Starting off on slide 3. Some key highlights from the quarter were: the strong revenue and cash flow growth due to a 15% increase in our gold production and higher precious metals prices; a second consecutive quarter of positive free cash flow on the back of solid performance at Palmarejo and Wharf; the commissioning of the new crushing facility at Rochester; another solid quarter at Kensington reflecting the ongoing benefit of higher-grade ore from Jualin; and the significant amount of debt that was repaid and the bolstered liquidity at quarter end. As the quarterly results demonstrate, four of our five operations are performing well. Clearly, Silvertip remains our biggest operational challenge. Once we're able to transition the operation from a consumer of cash to a generator of cash, our overall financial performance will obviously be even stronger. Although Silvertip's third quarter production levels didn't reflect the same level of progress as prior quarters we are seeing steady improvement and believe we are nearing the completion of our commissioning efforts and will soon be accelerating our optimization and potential expansion initiatives. Before handing the call over to Terry, I want to call your attention to a set of slides starting on slide 17 that highlight our commitment to partnering with the communities where we operate. These valued local partnerships have a tremendous impact on the people who matter the most our employees, their families and local organizations and are integral to our overall strategy. Also, I want to compliment the team for winning the 2019 Verdantix EHS Innovation Awards, which reflects our use of technologies such as drones, wearables and sensors to increase overall efficiency and improve employee safety. And with that, I'll turn it over to Terry.

Thanks, Mitch, and good morning everyone. From an operations standpoint, the third quarter showcased a solid start to what we expect will be a strong second half of the year. As highlighted on slide 5, several operations showed improvement while others are in a position to finish the year strong. And although, we have a work cut out for us at Rochester and Silvertip, we remain confident in our ability to achieve our overall production and cost guidance. Starting off at Palmarejo, higher grades during the quarter led to a 13% increase in gold production quarter-over-quarter while silver production remained relatively consistent as higher grade was offset by lower recoveries and mill throughput. Reported recoveries, which are based on payable metal production, were lower during the quarter as a result of additional in-circuit inventory and adjustments on final settlements of doré sales. We began mining at La Nación during the quarter and plan to continue ramping up production through the end of 2019. In the fourth quarter, we expect to average approximately 400 tons per day from La Nación, leading to a slight uptick in throughput rates quarter-over-quarter. We also completed commissioning of a new thickener on-budget and on-schedule during the quarter. We expect the project to improve metallurgical recoveries for gold and silver by roughly 2%. Early indications are encouraging, and we've now begun to see solid performance only a few months after commissioning. At Rochester, we've successfully commissioned the new three-stage crushing circuit that many of our analysts had a chance to see at our site tour back in September. The commissioning process impacted placement rates which affected production during the quarter. However, crushing rates improved post commissioning and will support stronger production going forward. As highlighted on slide 8, the crushed product from the HPGR as well as recoveries from bottle roll tests are in line with expectations. While it'll take some time for us to fully validate these improvements from the Stage IV leach pad, early indications are positive. In September, we began placing material close to the liner on the north end of Stage IV facilitating faster silver recovery, which is expected to be a key catalyst in the fourth quarter for increased silver and gold production. At Kensington, we experienced another strong quarter producing over 34,000 ounces of gold at a cost of $822 per ounce resulting in just over $14 million of free cash flow. Approximately 15% of production came from Jualin at an average grade of 0.41 ounce per ton. We expect this trend to continue in the fourth quarter with plans for Jualin to account for approximately 15% of Kensington's production for the full year. As you may recall this is slightly lower than the 20% we guided towards at the beginning of the year. This is primarily due to an increase in production from the Kensington Main deposit where we've been seeing positive grade reconciliations. At Wharf, results reflected a significant improvement in operational performance, helping to drive a 65% increase in gold production quarter-over-quarter. Wharf's results reflect strong crusher performance, higher grades and better weather. Combining this operational performance with a higher gold price led to nearly $17 million of free cash flow at Wharf during the quarter. This represents the third largest free cash flow quarter since we acquired the operation back in February of 2015. At Silvertip, we significantly extended planned downtime to complete the important maintenance projects spanning the flowsheet, including the grinding, flotation, thickening, filtration and paste backfill circuits. This work was tied to areas where we've seen the most downtime in the past. During the quarter, I spent most of my time at Silvertip working directly with our team, and while extended planned downtime is a significant part of our overall strategy, we've also been focusing on our employees. This includes implementing a coordinated human resource strategy to retain and attract employees, adding third-party resources to supplement mill operations training and reduce unforced errors, and mobilizing a maintenance contractor to reinforce our mill rates. This revamped and bolstered approach is paying off and we expect fourth quarter results to show a marked improvement. With a stabilized operation we can foresee achieving positive operating cash flow by the end of the year. Before I pass the call over to Tom, I'd just like to say a quick thank you to the dedicated folks working at our operations for their continued commitment to delivering safe and efficient results for the company. Next, Tom will speak to the financial highlights for the quarter.

Thanks, Terry. I'd like to start-off by highlighting our continued focus on reducing debt to more comfortable levels. As presented on slide 11, we retired over $70 million of debt during the third quarter, a 19% reduction compared to prior periods. Our debt is currently $299 million compared to $459 million at the start of the year. We ended the third quarter with a debt-to-EBITDA ratio of slightly less than two. Our cash balance increased 72% and totaled $65 million at the end of the quarter helping our liquidity position improve by 34% to $315 million. As you may have seen in our Denver Gold presentation, we are seeking to build a capital structure able to withstand commodity price cycles and are targeting a long-term total leverage of one times and a net leverage ratio of nil. Turning to our financial results on slide 4. Our 23% increase in quarterly revenue reflects the sale of over 100,000 ounces of gold and 3 million ounces of silver as well as significantly higher realized precious metal prices. As Mitch mentioned, we saw a second consecutive quarter of positive free cash flow a trend we expect to continue in the fourth quarter. Our third quarter cash flow figure reflect a $15 million working capital outflow associated with the $25 million prepay we completed during the second quarter. We expect the remaining balance will be reflected in our fourth quarter results. Finally, I want to mention the hedging program that we implemented during the third quarter, which is highlighted on slide 12. We implemented a series of zero-cost collars on a portion of our gold production in 2019 and 2020. The structure is designed to provide downside protection, while also enabling us to participate in the potential upside in gold prices. It is important to note we purposely have not hedged our silver exposure. The hedges carry an average floor of roughly $1,400 an ounce and a ceiling of approximately $1,800 an ounce and cover 42,000 ounces in 2019 and 96,000 ounces in 2020. As you've heard us say in the past, we are focused on generating dollars not ounces; prudently managing costs; and allocating capital according to our framework as summarized on slide 10. With that I'll pass the call back to Mitch.

Thanks, Tom. Looking at slide 14, you can see the key items we are focusing on for the rest of the year: number one, demonstrating higher and faster silver recoveries as well as lower unit costs at Rochester; further optimizing mill availability and rationalizing cost at Silvertip; and number three, delivering an even stronger fourth quarter and positive free cash flow for the full year. We plan to continue pursuing a higher standard in all that we do. And remain committed to generating solid results, and quality growth, from our balanced portfolio of North American precious metals assets. With that, let's go ahead. And open it up for any questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joseph Reagor with ROTH Capital Partners. Please go ahead.

Good morning, guys. And thanks for taking my questions.

Yeah. Hi Joe.

So I guess first thing is on the debt reduction. Do you guys have other plans to do things like what you did with the Kensington, forward sale or ATMs? Or any of these other things you've used to reduce debt? Or is -- at this point is the debt reduction just cash flow-based?

Tom?

Sure. Thanks, Joe. I mean, we're obviously constantly evaluating the landscape of potential alternatives. But at this stage with a debt ratio under 2, a debt balance that starts -- that's under $300 million and a strong cash flow expected for the remainder of the year, that's the main focus for us right now. So I wouldn't anticipate us doing anything more. But obviously we sort of set our target for ourselves of where we'd like to see our leverage head towards in the long run.

Joe, its Mitch, just to add on to Tom's comments, we've paid off the revolver, so that's gone. Really all that's left in are two things. The five, 7/8, senior unsecured notes and those don't mature until 2024. So that's a low-cost flexible patient piece of debt. And then, just capital leases and those we expect to roll off a chunk each year over the next five years or so. So to echo, Tom's comment really the next level of delevering that will take place will primarily be driven more by the denominator increasing from all of the different initiatives that we have underway at the operations.

Okay. And then, shifting gears a bit, on the Crown Block assets, obviously there's been a lot of news and speculation in that region of Nevada. What does your guys' thoughts there? Are you guys going to continue to explore? Or trying to develop your own mines? Or do you think some of the speculation out there about a major kind of consolidating that district is the most likely outcome?

Yeah. I'll start. And then, Hans can talk a little bit more about, what's going on in that part of Nevada. We are drilling at both Sterling and Crown currently. We're also engaged in permitting activity at both to facilitate larger-scale exploration programs that we plan to commence in 2020. So we are planning to increase the level of exploration at both Crown and Sterling in 2020. We plan to have an updated resource at Crown as part of our year-end reserve and resource work. And I know, we're also shooting to put out an exploration update release sometime in December, which will summarize the drilling highlights from Crown and Sterling from this year. Neither one of these represent near-term consumers of significant capital. We're not trying to hit Sterling, which as you know is a past producer. We're not rushing to put that back into production. What we're more focused on is drilling, expanding, improving the economics, doing engineering over time here and being mindful at the same time of the overall kind of pipeline and portfolio; and where these fit into the sequencing and overall timing to fit in, in a way that takes liquidity into account, takes returns and overall maximizes value. So those are some of my thoughts on Sterling and Crown. Hans, do you want to talk about what's going on maybe out there around us?

Yes. How is it going Joe? The drills are turning right now at Sterling and Crown, one each -- in each location. Sterling, we found that the prior explorers really didn't understand the geology. And where we're drilling now we're finding new zones of mineralization, new extensions, some excellent grades and we'll have some of that in our news release in December. Similarly at the Crown, we really haven't even finished the geologic mapping but have unraveled a lot of the complexities that prior explorers had not unraveled. And that will lead to more growth for sure up there. And we're looking at basically one rig right now. But once we get this permit that Mitch mentioned, that will give us 300 acres of disturbance under the BLM guidelines, so that will enable us to test these new targets. That should be sometime in the second quarter next year we get that. At the same time, you mentioned the competitors in the area. You're very aware of Corvus. As you follow them but also Anglo, we've heard are getting their plan of operations later this year and ramping up their drill program up on the Silicon Project. As far as district consolidation, we don't even know we have yet as far as our resources. There's just so much potential in the district, so much potential growth that we need to continue to just focus on growing our own before thinking about something like that.

Okay. Fair enough. I’ll turn it over. Mitch keep going.

Thanks, Joe.

The next question comes from Adam Graf with B. Riley. Please go ahead.

Hey, guys. Thanks for taking my questions. Congrats on a solid quarter. Just a couple of quick questions on Palmarejo and Kensington, you guys addressed some of these in the comments. But on Palmarejo you guys are forecasting or talking about higher throughput levels through the mill there and with -- bringing on La Nación. And I was curious is -- are you going to be able to hold those higher levels through 2020? Or is it sort of a temporary blip up while you're getting La Nación is coming on? And sort of similarly at Kensington, are you going to be able to hold those grades well into and through 2020?

Terry, do you want to take those?

Yes sure.

Maybe Palmarejo first?

Yes good questions, Adam. With Palmarejo I think throughput levels you can see those remaining constant, but our grade will dip off here as we progress through 2020. That's a simple way of thinking about that. As far as Kensington is concerned, you can look at our run rate with Jualin is progressing at this level through 2020, so that is a sustainable rate that we're hitting there.

That's great. That's great. And maybe I'll -- if I could change the subject a little bit to Silvertip. In the -- in so far in the fourth quarter have you guys made any zinc concentrates? Have you guys made any zinc concentrate shipments that have made spec? Or do you expect to in the quarter?

Hey Adam, it's Tom. We tend -- just to make sure we get the right economies in our zinc shipments. We tend to save it up and get -- aim to ship out 10,000 dry metric tons. And so, we've got a shipment scheduled in November. And yes, we have a long-term -- or we have done a short-term contract to have that material sold and no issues. Obviously, some headwinds in terms of treatment charges that are out there these days with so much zinc supply on the market and I could go on and on about this topic, but suffice it to say, we've got a happy home for both our zinc and lead cons throughout the rest of the year.

Great. And then finally, again to change the subject a little bit, you guys -- in the release you sort of had maybe a little bit more aggressive language around La Preciosa in your investigations there. When can we expect the new resource? And will that be followed by a new PEA? Or what's the timetable there?

Yes, I'll start and then Hans feel free to -- or Terry. We're taking advantage of time here and with a bit of a resurgence in the silver price to take another look at La Preciosa. Hans and the geology team have been doing a fair amount of work there this year, reinterpreting the geology. We expect in the first quarter to have an updated resource model. We're then kind of middle -- no second quarter of next year, we'll be taking a refreshed look along with some third-party help at the CapEx, OpEx and we'll see where things shake out. And if there seems to be something there that appears to have some positive economics, we can make the decision at that point what we do from there. But yes, we continue to try and find a way to make La Preciosa a viable economically attractive opportunity that's worthy of receiving some capital investment.

And taking about -- yes go ahead.

Sorry just to follow-on that. The project through the last couple of iterations didn't get a fair treatment on the geologic model. And we found when we've been going through core that there's a completely new interpretation that we can throw at this. And what that will do is add more high-grade veins that will constrain future resource model. And those high-grade veins then will be a lot more coherent as far as how we look at mining this thing in the future. So, that's what the process we're going through right now. We'll be done in December with the first cut of the geologic model for the project. It's taken us almost a year. And then first quarter we're -- we have a third-party engineering firm looking at the resource and determining as Mitch said if it will be better than the prior one or what kind of metal prices we need to crack the code there.

Are you guys going to be doing some drilling to confirm your new interpretation?

We don't really need to drill anymore. There's plenty of infill drilling. It's just really looking at the core again and there are some areas that we might have re-assay. But funny enough it gets back to basic geology. And this is a fundamental part of resource calculations as you have the geology first; resource second. And we've got a chance to do that now with La Preciosa.

Great. Looking forward to hearing an update there. Appreciate it. I'll get back in the queue. Thanks guys.

Thanks Adam.

Our next question comes from Mark Reichman with Noble Capital Markets. please go ahead.

Good morning. So, the company is getting to a good place on generating cash flow has a strong cash position and increased financial flexibility. So, I was just wondering if maybe you could kind of address your capital spending priorities in 2020 kind of what's your expectations are? And also how you think about acquisitions? You did two kind of in the latter part of 2018 so I was just kind of wondering in terms of whether you're looking at more -- focusing on the current portfolio. Or whether we might expect some activity in 2020?

Yes, great questions. Filling in the blanks that I'm sure that I missed but I can't remember the slide number. But that capital allocation framework that we hold pretty near and dear to our hearts around here is a good way of thinking about our -- how we set our priorities and just thinking about 2020. You know asset optimizations tend to always come up to the top of that list. And I think about POA 11 out of -- at Rochester think about some other mill optimization opportunities down at Palmarejo, obviously, a lot of the incremental projects at Silvertip on an incremental basis have good returns associated with them. So, investing in our assets and getting back quick paybacks on those type of investments remains priority number one. We do intend to accelerate our near-mine exploration in 2020. That is a tremendous opportunity for us to deploy capital in a way that has a high success rate, good returns, and can extend mine lives in particular I'm thinking about Palmarejo, I'm thinking about Kensington, and I'm thinking about Silvertip. And those will be key priorities in 2020 as we think about how and where we deploy capital. And then M&A does always factor into this kind of holistic view of how we deploy capital. And to the extent that there are opportunities that come along that can jump up on the list there of priority based on economics we always will be open to taking a look at those things as long as they are opportunities that fit within our criteria of jurisdiction being North America help us reduce overall costs, help us extend overall mine lives, do the things that we're trying to do to improve the quality of the overall collection of assets, whether they're producing or not producing. It's a focus on quality and a focus on returns. And if M&A is an avenue to achieving that, then we're open to it. But in the meantime there are plenty of opportunities in the business that we can allocate capital to and unlock good returns.

Maybe the only thing I'd add is that we'll be issuing our 2020 guidance early in the first quarter. We're in the midst of our budgeting process and capital allocation discussions as we speak. Obviously, keeping an eye on where prices are going and we'll have more to report early in the first quarter.

Great. Thank you very much.

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 we appreciate everyone's time this morning. Thank you for dialing in. And we look forward to speaking with you again, hard to believe, but in the New Year, to discuss our fourth quarter and full year 2019 results. Thanks, again. Have a good day.

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