Coeur Mining, Inc. (CDE) Q4 2022 Earnings Report, Transcript and Summary

Good day and welcome to the Coeur Mining Fourth Quarter 2022 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. Please note, this event is being recorded. I would now like to turn the conference over to Mitchell Krebs, President and CEO. Please go ahead.

Good morning, and thanks for joining our fourth quarter and 2022 earnings call. Before I begin, please note our cautionary language on forward-looking statements in today's slide deck and refer to our SEC filings on our website. I'll start with the main highlights on slide three before turning the call over to Mick, Tom and Aoife. The fourth quarter was Coeur's strongest quarter of the year, which helped to achieve our overall full year production guidance for the third consecutive year, definitely not an easy task last year with such unprecedented volatility. Rochester was the main driver to our solid finish last year. Both silver and gold production increased over 30% quarter-over-quarter with sharply lower costs. Ongoing operational enhancements and higher grades contributed to Rochester's results as we begin the transition to the newly expanded infrastructure where construction remains on track to be completed mid-year. We achieved several critical objectives last year that we believe are important value drivers for the company in the short, medium, and long-term. In the short-term, we continue to derisk and advance the Rochester expansion. The project is nearing 80% complete this month and remains on track in terms of budget and schedule. We also further fortified the balance sheet to support our elevated levels of investment in our existing assets that are intended to increase production, decrease costs, extend mine lives, and drive a return to positive free cash flow, which Tom will provide more details on in a few minutes. In the medium term, the team at Kensington got an early jump on their multiyear development and drilling program last year by adding approximately a year and a half to its mind life. As we laid out during our Investor Day in December, we're optimistic about further extending Kensington's mine life and generating solid returns from higher production and lower costs from this investment. Over the longer term, I want to highlight the great results from yesterday's reserve and resource update on slide 11, which reflects another year of successfully replacing mine reserves. Year-over-year our gold reserves increased by roughly 12%, while silver reserves increased approximately 3%. Over the past five years, we have invested roughly $245 million in exploration during a time when many companies have under-invested in this critical component of the business. Over that time, our gold equivalent reserves have expanded by nearly 2 million ounces or roughly 34% net of depletion. In addition, our gold equivalent resources have increased nearly 4 million ounces or approximately 80%. Aoife will provide some additional comments on our exploration successes and our year-end reserve and resource results in a few minutes. Just a few quick thoughts as we look ahead to 2023. Overall, the key for us this year is obviously execution, not only at Rochester with the completion of construction and ramp up post expansion, but across the entire portfolio to achieve our objectives that can transition the company back to positive free cash flow. We anticipate 2023 will be comprised of two very different halves. During the first half, capital intensity is expected to remain high, while we experience weaker seasonal operating results from our two open pit operations. The first half also includes our normal first quarter outflows relating to 2022 tax interest and compensation driven payments. During the second half of the year, capital intensity is expected to sharply decline, and production levels are expected to increase as we begin the commissioning and ramp up process at Rochester. Overall, 2023 production is expected to increase over last year driven by Rochester's stronger second half, and by an expected strong bounce back year at Wharf after a lower grade year in 2022. To quickly wrap up, we remain confident in the key pillars of what we think is a unique strategy in our sector, an exclusively North American and U.S.-centric footprint, a contrarian multiyear commitment to exploration that continues to generate meaningful results, investments and expansions that are designed to deliver sector leading growth and have transformative impacts on the business and a metals mix that offers meaningful and growing exposure to silver. An unrelenting focus by our team on executing this strategy is bringing us closer and closer to that point of transformation that everyone has been working so hard for. With that, I'll turn it over to Mick.

Thanks Mitch. I'll start by echoing Mitch's comments on the great job our teams have done this last year to deliver guidance amid challenging circumstances. With the right people in the right chairs executing the right strategy, we feel confident in our ability to consistently deliver significant long-term value. Our journey to zero harm progressed well in 2022 with the teams delivering the best environmental health and safety performance in the history of the company. What a fantastic achievement to be proud of, but that journey is not over as we continue to control exposures as we drive to get to zero as quickly and sustainably as possible. Turning to a brief recap of our fourth quarter production summary on slide six and beginning with Palmarejo. Higher gold grades and an uptick in mill throughput led to a nice finish to the year. Full year gold and silver production came in on the high end of guidance range and CAS for gold and silver finished closer to the high end of guidance as Palmarejo fought inflationary headwinds all year long. Despite these challenges, the team delivered nearly $46 million of free cash flow in 2022. Looking ahead, guidance for 2023 anticipates a similar year in terms of gold production, while silver production gains is significantly higher. Despite continued easing in certain of Palmarejo's input costs, our 2023 cost gains reflects caution as overall costs remain volatile. Moving to Rochester. The 30%-plus increases we saw in gold and silver production in the fourth quarter were driven by significantly higher grades due to the main sequencing placed on pad four in September and October that began the breakthrough in the latter half of the quarter. This surge in grades made the difference in helping Rochester exceed its gold production guidance for the year and come in at the high end of its silver production guidance. Fourth quarter adjusted CAS for silver and gold on a core product basis were down versus the previous quarter due to high attributable metal sales. We have elected to defer pervading 2023 cost guidance at Rochester until mid-year, given the transitional nature of the year ahead. There will be a lot of moving parts as we start placing crushed ore on Stage VI leach pad on February 1, we turn on the Merrill-Crowe plant during Q2 2023, and we begin placing rock through the new crushing circuit later in the summer. The number of prins visible in the POA 11 four door slates [ph] demonstrate clearly that construction is at peak levels on the crushing corridor. The work is proceeding. The project remains on budget, non-schedule, steel erection and equipment installation is proceeding above the corn crushers in the secondary crusher area, as well as above the HBGR crushers in the tertiary crusher area. Slide 12 in the presentation highlights the progress on our key milestones for 2023 at POA 11. The Merrill-Crowe process plant remains on track for completion at the end of the first half of 2023, in line with the P85 project schedule. Mechanical equipment setting, process plant building cladding, control systems programming and factory testing are all now complete. Electrical cable and piping installation are well unaware. I'm also pleased to report that the construction project has now passed 1.5 million hours as of January 31st without a lost time incident. Turning to Kensington. Once again, a great job by the team to reach a new all-time record in mill throughput. New leadership there continues to make a strong mark and bodes well for the future of this key asset. Challenging recoveries through most of 2022 led Kensington to just missing the low end of the production guidance. 2023 guidance reflect similar levels of production and cost. With the previously discussed infusion of capital at Kensington, this year will be a busy period of development to set the Main up for a strong future. Finishing briefly with Wharf, the team overcame some significant snowfalls in the quarter to finish within expectations near the high end of its 2022 guidance range. 2023 guidance reflects a return to more typical gold production rates with similar CAS ranges, setting the stage for stronger anticipated cash flow in the year ahead. With that, I'll pass the call over to Tom.

Thanks Mick. Turning to slide four. I'll begin with the review of our consolidated financial results before touching on our 2023 guidance and the balance sheet. As expected, Coeur's improved fourth quarter financial results were driven by our highest goal production of the year and the $62 million gain on sale from Sterling Crown. Higher prices, along with gains from our gold hedges led to a 96% increase in our EBITDA quarter-over-quarter. Speaking of hedging, our 2022 program provided $24 million of net gains, $13 million of which was realized in the fourth quarter. Subsequent to year-end, we took advantage of some short-term momentum in gold and silver prices to add additional downside price protection for 2023. Inflation remains a headwind on our sector's financial performance. While we have seen some moderation in diesel prices, slide five demonstrates the continued pressure on our key cost buckets. Accordingly, our 2023 outlook continues to assume a challenging year for operating costs. I am pleased to report that Coeur capital cost exposure at POA 11 continued to decrease with approximately $605 million of the estimated capital now committed and $495 million incurred. As Mitch and Mick both mentioned, the project remains on track and on budget with approximately 75% of the remaining CapEx expected to be incurred during the first half of the year. Turning to 2023 guidance. Our guidance remains consistent with our December, 2022 Investor Day as we approach the free cash flow inflection point post completion of POA 11. Mitch and Mick have already hit on the key messages around production, operating costs, POA 11 capital and the tale of two halves this year. I want to highlight a couple of additional very important items within the guidance, which we expect will deliver NAV growth and reduce overall risk for the company. We have allocated value accretive capital for additional underground mine development and exploration at Kensington and Palmarejo, which is expected to extend mine lives and reduce risk at both mines. To accommodate these extended mine lives, both sites are investing in new tailings capacity during 2023. Obtaining that crucial POA 1 permit amendment at Kensington last year has allowed us to progress on the aggressive multiyear program at the mine, which includes this permitted tailings capacity. At Palmarejo, the new tailings capacity will be inside the old open pit, which is a significant environmental derisking milestone. Turning to the balance sheet, slide 16 provides a good snapshot of our financial position, featuring total potential liquidity of over $500 million. We do, however, remain concerned in the short-term about the overall macro environment for gold and silver prices and continued operating cost inflation. This concern, coupled with our tale of two halves of 2023, has led us to take several actions to keep our balance sheet flexible during these final few months of capital intensity at Rochester. The key elements of our financing strategy include we recently monetized our remaining position in Victoria Gold for $40 million, a revolving credit facility, which has $280 million of capacity. Our hedging program designed to provide downside commodity price risk protection during this period of capital intensity. We head into 2023 with approximately 180,000 ounces of gold hedged at $1,961 per ounce and 3.2 million ounces of silver hedge at $24.55 per ounce, and we put a new ATM in place for gross potential proceeds of up to $100 million. These key initiatives taken to enhance our total potential liquidity leave us feeling comfortable that the balance sheet will provide the required flexibility to deliver the industry-leading high return growth that will transform our company. I'll now turn it over to Aoife.

Thanks Tom. As Mitch said earlier, successful exploration in 2022 led to an increase in our global reserves with growth at each site. Looking at a few key highlights. At Kensington, the multiyear exploration plan described in our December Investor Day is already bearing fruit, with reserves increasing by an impressive 56%. The majority of this growth came from upper Kensington zones 30, 30A, and 30B. These zones remain open and we will continue to expand and info drill these areas through 2023. In addition to Kensington, we saw resource and reserve additions at Elmira, and this deposit along with the Johnson deposit show opportunities for growth in 2023 and beyond. Detailed geological modeling is increasing our understanding of all deposits in Kensington, and we are hopeful that this will help us vector to both higher grades and new zones. At our high grade Silvertip exploration project, we also saw notable growth with silver, lead and zinc measured in indicated resources increasing by 73%, 69% and 81%, respectively year-over-year. 2022 was an exciting year for exploration with the following notable achievements. Firstly, expanded drilling increased mineralization at the Southern Silver Zone to approximately 500 meters vertical extent and 1,800 meters along strike as shown on slide 10. Mineralization was also intersected in multiple stratigraphic units, thereby increasing the amount of the stratigraphic column that is amenable to mineralization. This opened up significantly more opportunity for stack manto and multiple chimneys. Secondly, the discovery of new chimney structures beneath the discovery manto zone. And thirdly, scout drilling in the saddle zone generated new chimney targets for follow up in 2023. We believe Silvertip is good potential to be a long life mine, and right now we have visibility on how to build a sufficient reserve base to enable a decision to proceed once the economics are sufficiently compelling. We see that continued growth at Silvertip is opportunity to expand Coeur's future global production, reduce costs, and boost free cash flow. I'll now pass the call back to Mitch.

Thanks Aoife. Before moving to the Q&A, I want to highlight slide 17 that summarizes our clear priorities for 2023. As I mentioned at the outset, execution remains front and center in this pivotal year. By successfully delivering on these objectives, we plan to reach the end of 2023 on the cusp of a new growth base for the company. With that, let's go ahead and open it up for questions.

We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Dudas from Vertical Research Partners. Please go ahead.

Good morning everyone.

Hi, Mike.

I know 2023 couldn't consume enough, Mitch. Regarding Rochester, what -- what's the hurdle or what's the pinch point you guys are seeing over the next few months that is -- the marketplace confidence that your targets on construction completion and the ramp will occur within what you guys are talking about today?

Yeah. Good question. This is the -- it's a busy year with a lot of moving parts out there. All of this coming together here now with the first half focused on the Stage IV leach pad, which is now complete. We're stacking or on that. Merrill-Crowe comes next in the second quarter, crusher midsummer, and then we start putting rock through it and ramping it up throughout the second half of the year. Mick, do you want to give a little bit of detail on some of the other moving parts that are going on there throughout the year?

Yeah. Yeah. Exactly. So, we completed stacking on pad four and moved across to pad six, on schedule. That was a great achievement that milestone on February 1. And then, now we'll continue to leach pad four, so we'll see some metal from that throughout the first half of the year. But we're stopping now and building up inventory on pad six right through to that middle of the year when we expect to commission the heat leach in the Merrill-Crowe. And then, we'll start seeing that metal come out of inventory in the second half of the year as per the plan. From a project perspective, we're still on the P85 project schedule. And although we went through the normal challenging Nevada winter around -- continuing to stay on track, we're still on that track. And from a manpower and loading perspective for the project TIC and Keywood [ph] have done a fantastic job at reloading and covering any attrition on that project and what we're fully man up to get the rest of the project done throughout the year.

Just to add onto that, Mike. The conversation around here has started to transition quite noticeably less about construction activities and schedule and more about operational readiness, plans around the ramp-up schedule and everything that needs to go into ensuring that this thing ramps up smoothly throughout the back half of the year to deliver on that second half production growth and set us up for what should be a -- that inflection point in cash flow as we head into 2024. So, it's -- there's been a noticeable shift in terms of what the -- where the priorities are and where the new focus areas are out there now. So, that's exciting to see.

That's very encouraging, Mitch. My follow-up is, you just discussed on Silvertip some pretty positive results. Any changes in thoughts from Investor Day to how you're thinking about the project today? Timing or structure, recognizing job one is getting Rochester done?

Yeah. You said it right there. Job one is in 2023 is POA 11 execution. The priorities at Silvertip this year really are twofold, minimizing that the holding costs as we prioritize POA 11 and continuing to expand the resource up there, which we have a lot of confidence in. We've seen it grow significantly since we acquired it and even year-over-year. Aoife mentioned the percentage growth in the different metals just year-over-year. We have a lot of the confidence that that will continue. It'll be a bit of a smaller program this year compared to last year. Targeting a little bit more on the expansion side to step out a bit more with the thought being that as we do that, and we have a lot of confidence that we can, that's just going to help us put together a compelling business case in a few more years that will justify the capital that would go into expanding and starting that up, as a another operation. But -- so the priority for now is, is keep growing the resource, which Aoife I think has some confidence in and a couple things you want to maybe say about that Aoife.

Yeah. I mean, we had a great year in 2022 up there at Silvertip. We really are -- our understanding of the deposit really developed. Southern Silver Zone itself is becoming quite an important part of this story at the moment. So, we've extended mineralization there over vertical extent of 500 meters. And the -- along strike extent to date, it's still open is 1,800 meters. So that in itself is opening up that Southern Silver Zone is a very -- something that can add significantly to the tons there. It's a vertical ore body, it's a chimney, so it's potentially an easier mining scenario for us as well. In addition to that, we did some scout holes under the discovery zone, which to date has been a manto horizon zone and more sub -- a sub horizontal zone. And we found some new chimneys under that, which we'll follow up on this year. And also down to the South, all the way down to Tour Ridge, we are scheduling -- all our scheduling over the last few years intersection mineralization, and that's another few kilometers of extent that we can expand into.

So, Mike, just to pull the lens back then, and POA 11 this year get back to positive free cash flow, lower costs, reduce debt, keep expanding that resource at Silvertip in the meantime, get to a point where we have an attractive business case at Silvertip, at which point then we can have some options to think about whether we go it alone, whether we bring in a partner, whether that's a strategic partner or a financial partner, operating JV, non-operating JV. But we need that compelling business case to get to that point and drilling is the way to get there. And so that's the kind of the progression, and priorities as we sit here today.

Sounds very prudent, Mitch. Appreciate your thoughts everyone. Thank you.

Okay. Thanks Mike.

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Krebs for any closing remarks. End of Q&A:

Okay. Well, hey, we appreciate everybody's time today during this busy reporting period, and we look forward to talking with you all after the first quarter in the springtime. Thanks again. Have a good day.

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