Coeur Mining, Inc. (CDE) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the First Quarter 2021 Financial Results Conference Call for Coeur Mining. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. Paul DePartout, Director of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining's first quarter earnings conference call. Our results were released after yesterday's market close. And a copy of the press release and slides 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 first quarter 10-Q and 2020 10-K. Now I'll turn it over to Mitch, Mick and Tom.

Thanks, Paul, and good morning, everyone. As we said in our release yesterday, our first quarter results were in line with our expectations and represent a strong start to the year. We're feeling confident in our ability to accomplish our key objectives and achieve full year guidance at each of our sites. Turning to Slide three of today's presentation and looking at the highlight for the quarter. Solid production and higher realized prices helped drive margin expansion, leading to significant double-digit year-over-year improvements in revenue, OCF, pre-working capital and adjusted EBITDA. These results were supported by the overall performance of our portfolio, particularly for gold. With over 85,000 ounces of gold produce and the first quarter expected to be our weakest of the year. We're feeling good about being a quarter of the way towards the midpoint of our full year production guidance, which is ahead of the 22% we indicated earlier this year. Additionally, overall cost performance has been well managed. All of our site level unit costs for gold ended the quarter either below or within their full year guidance ranges. We also achieved some important strategic milestones during the first quarter. The most noteworthy was the successful refinancing of our senior notes, which Tom will cover in more detail. We're extremely pleased with the outcome and how well positioned this leaves us for the future. The catalyst for this refinancing was really to shore up our balance sheet as we continue executing major construction at Rochester, which kicked off earlier this year. The project was approximately 20% complete at the end of the first quarter, with detailed design substantially finished in almost all the equipment procurement and service packages committed. If you turn to Slide seven and eight, you can see a more comprehensive breakdown of the project timeline, as well as the progress we're making on the new 300 million ton leach pad. Importantly, this company transforming project remains on schedule to be largely completed by late next year. Turning to Slide 10, I'd be remiss not to mention exploration, building on the strong double-digit reserve growth in 2020, we decided to further bolster our efforts and plan to spend just under $70 million on exploration this year. Notably, we invested roughly $15 million in the first quarter, which is almost as much as we spent during all of 2015. We drilled nearly 40% more feet quarter-over-quarter as pre key programs at Silvertip and Crown ramped up, while drilling campaigns continue to advance across the rest of our portfolio. Although it's still early, we're seeing encouraging results that continue to validate our ongoing commitment to this higher level of exploration investment and the higher ROIC it generates. With such an important program underway, we plan to provide some additional updates on our progress throughout the year, including one in a few weeks that will focus on Silvertip and Crown. Before passing the call to Mick, I want to briefly mention our responsibility report that was published yesterday. We pride ourselves on being an ESG leader and the report does a fantastic job showcasing our commitment to transparently disclosing our ESG related goals and accomplishments, including our initial target to reduce net greenhouse gas intensity by 25% over the next five years. With that, I will now turn the call over to Mick.

Thanks, Mitch. Before discussing the operational results, I want to quickly add to Mitch's comments on ESG. Slide 17 and 18 in today's presentation do an excellent job at highlighting our commitment to pursuing a higher standard. We're passionate about being responsible stewards of the environment and strong contributors in the communities where we operate. By setting goals into reducing our overall impact on the environment, we are not only staying true to the purpose statement, we are also enhancing the integrity of our operations to drive them further down the cost curve. Now turning to Slide 6, and starting with Palmarejo, production results were ahead of expectations for the quarter, largely due to higher than planned recoveries, partially offset by lower mill throughput as a result of the change in mine sequencing. This was driven by some challenging ground conditions we encountered, which led us to pivot and mine in different areas. Despite the change in the mine plan, unit costs for both gold and silver ended below the low end of their guidance ranges. This quarter was a perfect example of how Palmarejo was consistently able to produce results while balancing multiple priorities. Moving to Rochester, we anticipated a slower start to the year which was broadly in line with our results for the quarter. Gold is a bit ahead of where we thought we would be, well silver has some catching up to do. We ran into some softer ore which caused us to dial back throughput rates to help manage the amount of things being sent to the leach pad. Importantly, we expect to improve those throughput rates and control [indiscernible] during the second half of the year with the new secondary crusher that we have just commissioned. We also plan to place fresh material closer to plastic once the fourth phase of our inter lift-liner strategy is completed around mid-year. Shortly thereafter, we are scheduled to begin delivering over-liner material for the new stage six leach pad. Though we have solid plans in place, we are anticipating some near-term variability in our production profile as we continue to operate with the legacy crusher and stage four leach pad to maximize our learnings while POA 11 completed. The valuable experience and runtime with the recently modified crusher and inter lift-liner on top of stage four during the remainder of the year will be key to helping us further derisk our ability to achieve the expected results from POA 11. Turning over to Kensington, production was slightly ahead of our expectations, albeit a little bit lower quarter-over-quarter as a result of a reduction in mill throughput and average grade. The decrease in throughput was primarily driven by a routine mill shut down for maintenance that we moved from December into January and slightly lower average grades were due to the targeted focus on ore development and installed drilling capacity earlier in the year. Unit costs for the quarter totaled roughly $990 per ounce, up slightly quarter-over-quarter, but below the low end of Kensington's guidance range. Overall, Kensington had a very solid quarter and we are anticipating another great year for the operation. Lastly at Wharf, operational results were ahead of plan. Production totaled roughly 19,000 ounces of gold and unit costs came in below the low end of guidance, giving us a strong foundation for the rest of the year. With that, I'll pass the call over to Tom.

Thanks, Mick. I'm going to run through the financial results on Slide five which showcase the key points that Mitch and Mick already hit on. 2021 started much stronger than 2020 with revenue up 17%, 42% increase in adjusted EBITDA and a 6% expansion in margins, all of which contributed to a third consecutive quarter of GAAP earnings. We're pleased to be ahead of our internal expectations to start the year. We mentioned on our last call that we were anticipating relatively weaker cash flow in the first quarter based on the buildup of inventories on our leach pads, as well as the timing of tax payments in Mexico and annual incentive payouts across the company. We forecast to return to stronger operating cash flow over the remainder of 2021 to help fund the planned capital expenditures at Rochester and our aggressive exploration Program. Turning over to Slide 12, I wanted to provide a bit more color on the improvements we made to our balance sheet. We successfully refinanced our 5.875% senior notes that were set to mature in 2024 with $375 million of 5.125% notes due in 2029. This represents a tremendous achievement on multiple fronts. First and foremost is the financial flexibility this gives us as we execute a period of significant capital investment. Next, we took the opportunity to upsize the offering to further bolster our cash position and enhance our liquidity. We also made significant improvements to certain terms of the bond indenture. Finally, the 5.125% coupon represents the lowest coupon of any high yield, mid cap precious metals bond ever. In addition to the bonds, we also extended the maturity on our $300 million revolving credit facility from October 2022 to March 2025. With no borrowings under the revolver, and the additional cash from the refinancing, we ended the quarter with nearly $420 million of liquidity and a net leverage ratio of under one times. I'll now pass the call back to Mitch.

Thanks, Tom. Before moving to the Q&A, I want to quickly highlight Slide 13 that summarizes our top priorities for the remainder of the year. By staying disciplined, and executing our strategy, we're confident we can achieve these priorities and deliver solid results from our balanced portfolio of North American precious metals assets. With that, let's go ahead and open it up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Joseph Reagor with ROTH Capital Partners.

Good morning, guys, and congrats on a solid start to the year. First question, G&A seem to be a bit elevated compared to last year, is that something we should expect to continue? Or was that kind of a one-time thing?

Yes. That's the highest quarter of the year. We'll still end the year in that guidance range which is what 37 to 41, I think.

Yes.

Slight up tick in there, Joe, to reflect some additional costs we expect to incur to help get all the new S-K1300 technical reports done, as we head into 2022. So we'll have some additional third-party resources in place to help us there. That's one extra bump in this year's G&A, Tom, anything else.

No, the other -- the first quarter is always a bit lumpy with as we true-up annual bonuses. We've estimated what the long-term incentive is going to be. So those are the key things. But as you -- the main message there is, will be on track to that the guidance for the year, Joe.

Okay. Fair enough. And then, on the cost front, have you guys started to see any inflation impacts on the cost side? Whether it be, reagents or any other items, even labor?

Yes, I'll start and then Mick, maybe you can chime in. We're seeing some pressures on some commodity related inputs. Joe, I know, even though diesel is only about 6% of our overall costs, we saw I think about 17% increase in the price per gallon in the first quarter versus fourth quarter. So that one's very real. We've all read had headlines about lumber, cement, plastic, those kinds of things. We've seen some cost pressure, not so much on the labor front that, Mick anything that I'm missing.

Just I mean, across the board, right, we expected some of that. So we built that into our model and we still expect to meet the cost guidance across the portfolio. But certainly there were some potential high exposures with the projects we're doing particularly at Rochester, but because of the progress on that project, the majority of those contracts are locked in and that looks really good for us. So certainly some exposure there, Joe, and we're watching that carefully. But overall, we're in control.

The next question is from Michael Dudas of Vertical Research.

Good morning, gentlemen. Good to hear about the question, the fixed cost lots of contractors on the price increases, they are going to certainly see this inflationary environment. So first question is COVID, could you just update us on the vaccination rates, how much you threw in your U.S. operations that you've got to and how things are in Mexico? And is it trending in the right direction to kind of get to the other side? Maybe as we get more vaccines over the next few months?

Yes, great question. I'll start and then Mick, you can fill in any of the blanks. It's a function, Mike, largely, as you might expect, of where you're talking right. In the Western U.S. are kind of layers of controls that we've put in place over the last year seem to be very effective and we're operating very well out especially at Wharf, Rochester, Kensington, that was the source of about 70% of our COVID-related costs last year were related to Kensington and quarantine, especially requirements there, we've now been able to kind of roll that back. For those vaccinated, there's no quarantine. Otherwise, it's a three day quarantine. So that's a far cry from where we were about a year ago, when we were dealing with about a two week quarantine. So that's allowed us to really reduce our COVID related costs even quarter-over-quarter, I think they've gone from 5.5 million to down to 3 -- in the 3s. Mexico is still clearly the lagger. The controls that we have are effective. But when it comes to any vaccines or anything like that and we're still quite a ways away. Up at Silvertip, that asset sits just south of the border with the Yukon. And we've managed to see some really great cooperation with the Yukon province in terms of PCR tests and vaccines. And so that's really helped Silvertip kind of catch up to where we are here in the U.S. Overall vaccination rates vary by site Kensington's, I think the highest around 50 or even higher. We're still below 50 at Wharf and Rochester. Mick, you want to pick up from there and fill in anything I didn't cover?

Yes, for sure. Clearly, one of the higher exposures would be fly in, fly out, sites Palmarejo in Kensington and particularly Kensington, where we'll have that -- had that strict quarantine, but we hit a milestone the other day. We actually have 75% of the workforce that have at least one vaccine and above 60% that have to. And so that program is going really well. And overall the controls both at Palmarejo and all of the other sites are working very well. We have multiple layers of protection with testing. And the other controls around hygiene and masks and those controls are doing great.

And just the last thing Mike, I'd say is that here in the office, it's actually a full room here this morning in person. And June 1, we'll be going into more of a hybrid return to Office model. And we'll see how that works. But a lot of signs of return to something approaching normalcy.

Yes. That's certainly encouraging. Mitch, I'm glad to hear that. Maybe for Tom, you highlighted the working capital headwinds this quarter. The reversals and how much of the tailwind we think we'll see in timing over the next couple quarters.

Yes. The first quarter is when we tend to build up the heap bleach inventory -- the stockpiles at both Rochester and Wharf as well as we have the really lumpy one-time Mexican tax payment as we pay the annual EBITDA tax and then true-up our 2020 tax bill. So those are kind of behind us. And so I wouldn't expect to see any large build ups and again, hope we'll be monetizing what was put on the stockpiles, or on the heap bleaches as fast as possible.

I appreciate that. Then, final question then maybe for Mitch or for Mick. As we're looking at the Rochester build out, what are -- you did nice summary on the slide deck. But what are some of the things we're seeing this quarter, maybe into the summer that are milestones that we should be concerned or focused about as we ramp up 2% complete, above, we are at 20%?

Yes. I'll start and then Mick and Terry Smith is here as well. The stage six leach pad is moving along nicely. I think. If we haven't, we will soon be starting to put over-liner material out there on stage six. That'll be in the second quarter. The new power line with Nevada Energy is moving along on schedule. We'll see that -- not complete, but I think later this fall will be completed. We've kicked off obviously on not only the leach pad, but the Merrill Crowe. And what's the third?

Crushing train.

And the crushing train, yes, and so those are more of a mid to third quarter 2022 completion. But in the summer, any other big highlights that we should be looking for in the second quarter?

Not really, I think you have most of them Mitch. It's really a lot of excavation work that we're working through this year. The big milestone that we'll try to hit is getting all of that over-liner material out through the third quarter and complete that leach pad before snow hits us in the fourth.

[Operator Instructions] The next question is from Brian MacArthur of Raymond James.

My question has to do with Palmarejo. Your costs in the first quarter were 621. But you're getting towards 710 for the year. So that implies a pretty big increase later this year. Is that a relation to the switch in the [Franco] [ph] mind, ounces land? Or is there something going on? Or I'm just surprised because it looks like the annualized production you're sort of on schedule, so I'm just trying to figure out if there's anything else going on there?

Nothing. We came in lower than plan in the first quarter. Let's hope that that continues throughout the remaining three. But Mick, is there anything that you want to point out there?

Yes, it's absolutely expected, the grids will continue to go down a little bit across the year. And we will continue to optimize and move more tons to hit that production profile. So right now, we expect to be in the guidance range for costs. But of course, we're striving to be at the bottom end of that guidance or below, but for the moment we expect to be in the guidance.

More tons.

Sorry, just to follow up. You don't hedge the pace or anything there or do you? Is there any peso effect that's happening as well?

There is and Tom, you want to summarize around that?

Yes. So Brian, in the guidance, we gave the guidance, pre any hedging. But when we report it includes the impact of hedging. So we have roughly $50 million of pesos hedged in 2021. And we had a benefit of about a million bucks a month through the first quarter. If you look through the financial statements, there are the [indiscernible] on the balance sheet as an asset of about $9 million. So if the FX rates stayed where it is, we would have a $9 million additional tailwind on costs. But that's how we handle -- that's the hedging profile for the rest of the year.

And that FX rate is what 25?

25, yes.

Okay, that's very helpful. But I could also assume there's not a real big mix in which materials coming off Franco land versus non-Franco lands? Because, again, that might affect the cost. But obviously, you get a different -- if you get more of your stuff, you get a better revenue and there's no other function going on there or anything?

That really only impacts the revenue line, Brian. So I think in the first quarter, the revenue we had 34%, where we only received that $800, which is quite a bit lower than the fourth quarter, which was 44%. Now that 34% is probably the right number to be thinking about for the rest of the year based on the budget. So hope that clarifies that.

The next question is from Dalton Baretto of Canaccord.

Just one question for me. Hey, guys, as you move forward towards a decision on Silvertip, just given what's happening with the industrial commodities. Is there an opportunity on you guys considering hedging out a substantial portion of the zinc and lead production there?

Great question and it's an active topic. Tom smirking over here on the other side of the table. You want to take that Tom? The short answer, spoiler alert is yes. Tom you want of…

Look we have been, I think we've demonstrated with the Rochester build, we're not afraid to put on hedges during periods of capital intensity. It makes sense. People on the credit side and the equity side, completely get it. And as we advance those discussions as this feasibility study comes to a conclusion here in the second half of the year and begin our discussions primarily around off-take financing, we would expect to include some element of hedging.

That's great. That's what I thought you'd say, Tom, you know, there is the next market better than most. That's all for me, guys. Thank you.

The next question is from Ryan Thompson of BMO.

Hey, guys, thanks for the update. Just a quick one for me. Can you just give us an update on Southern Nevada with the Crown and Sterling and CRS and just sort of some of the activity there? And what the latest sort of update and thinking is there? Thanks.

Yes, sure. Ryan. Thanks for the question and Hans is on the call as well. Hans you can chime in after me if I miss anything. But it's a very dynamic area down there around Beatty in Nye County, Southern Nevada. The Crown, Sterling complex is one of our biggest allocations of exploration spend this year, which is a reflection of how enthusiastic we are about what we're seeing down there. In particular, up there to the north, in that Crown block, you'll recall, Ryan, when we bought Northern Empire. The Crown block was consists of SNA, Secret Pass and Daisy. And then, about a year ago, right now, we made the discovery of Seahorse which has been exciting. Now, we've been drilling on all four of those. And what we are planning to do is continue to drill, spend that budget that we've allocated this year and then pulled together a PEA middle of next year, that reflects a mine plan and hopefully a future operation for us that encompasses all four of those deposits in some sort of sequence. And so that's kind of where our focus is. We'll be putting out, Hans, I mentioned this in my prepared comments, next month, an exploration update and Crown will be a focus of in that release. So there'll be some good information and drill results for you to see next month. Hans, did I leave anything out?

Now, just -- hi, Ryan, just a couple of points about what our focus is there. Mitch pretty much described it. It's a big area where we're focused only on resource expansion at the moment. There's so many things to drill and we just got our 300 acre plan of operation, drill disturbance last October. So with a limited area at Crown, are at Seahorse, I mean, where we only have five acres to drill. We've pulled the rigs down to these other assets, at Daisy, Secret and SNA to focus on expansion around them. We've done a lot of geologic work down there. And we've got some great targets that we're drawing and seeing some good visible visual indications of growth there too, in addition to the seahorse that we've been talking about for the last year. So it's really exciting, three RC rigs are turning right now. One core rig and we've doubled -- almost doubled the budget there over last year, so you can tell, we're quite excited about that area.

Perfect. Thanks for the updates Mitch and Hans. I'm looking forward to watching the results as they come out there.

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

Thanks, everybody. I know a busy day here. Thanks for your time and thanks for the questions. And we look forward to speaking with you this summer to discuss our second quarter results. So thanks have a good day. Bye.

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