Hello, this is the conference operator. Welcome to the Endeavour Silver Q2 2013 Production Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Meghan Brown. Please go ahead, Mrs. Brown.

Thank you, operator. Good morning, everyone, and thank you for dialing into our Q2 production conference call. In the Vancouver office this morning is Brad Cooke, the company's Chief Executive Officer; Dan Dickson, CFO; Terry Chandler, VP of Corporate Development; and on the line from Mexico, we have Godfrey Walton, our President and COO. I'm going to turn the call over to Brad now. He has a few remarks, and then we will open it up to your questions. Brad?

Great. Thank you, Meghan, and welcome everybody to this conference call to discuss our second quarter operating results. A quick recap. We announced this week another great quarter, another new record actually for silver and gold production for the company with silver production up almost 50% to in excess of 1.5 million ounces of silver production, gold production jumped at almost 160% to just under 20,000 ounces during the quarter, and on an equivalent basis, 60:1 silver-gold ratio. We came in at around 2.6 million ounces of metal production for the quarter. A spectacular quarter by the operating group, and I think those guys have done a wonderful job. Revenues jumped also to $63.5 million. The only drag on revenues really were metal prices. And our realized prices on sales were $19 for silver, $11.50 (sic) [$1,151] for gold. We carried small inventories through quarter end, about 200,000 ounces of silver in bullion, 500 million ounces of gold. In concentrate, we carried about 41,000 ounces of silver and 800 ounces of gold. The main themes of the quarter, obviously, with the waterfall effect in the metal prices was what's everybody doing to cut costs. Endeavour was a leader in announcing in early April a company-wide cost review. We slashed capital costs by 20% including deferrals of capital. Exploration costs were cut by 25%. We looked at a 10% G&A cut. And we've been doing everything we can to get similar reductions in operating costs, I think, to the mine sites. We won't see the financial impacts of those cost reductions in our Q2 financials. Obviously, it takes time to enjoy the benefits of, for instance, layoffs. And in fact, there are some onetime severance costs that will hit the Q2 operating costs at El Cubo where we did lay off…

[Operator Instructions] The first question comes from Heiko Ihle of Euro Pacific Capital.

Let me start by saying congratulations on a good quarter during a pretty difficult metals environment. I think this speaks quite highly of you, the management team, and all the workers at the site. Just 2 quick questions. Can you sort of walk us through the expected grades for El Cubo for the remainder of the year because the numbers you had came in just a touch lower than where I had them and I just want to make sure that my model's in sync with what you guys are seeing at the site or in the mine plant for the remainder of the year?

Yes, thanks for your question, Heiko. And El Cubo was behind plan during the quarter, partly, of course, for the capital programs and the interruptions in the plant but also because of our focus on mine development. Our 2-year turnaround plan for El Cubo has been lumpy. As you know, we had 3 very good quarters of rising production and falling costs. This was a step-back, but it was a scheduled step-back while we got the CapEx programs done and also some mine development done. So we do expect that El Cubo will start to resume rising production grades and falling cash costs in Q3. In terms of putting numbers on grades, I can tell you that these mines have produced at significantly higher production grades and at higher cut-off grades in the past and we are trying to speed up on a month-to-month basis our -- a quarter turnaround of those production grades. What does that mean? Getting out of uneconomic stopes faster than planned, getting into more economic or higher-grade stopes faster than planned. So it's not only a cost-cutting exercise, it's a revenue enhancement exercise on a per-tonne basis. I can tell you that our new short-term plan, we were looking at, I think, 100 grams silver and 1.6 grams of gold in Q1 and we took a dip from that in Q2. We'd like to get back to that and higher in Q3 and then higher again in Q4. I know on a silver equivalent basis, at $19 silver, this operation needs to make something in the order of 220 gram equivalents per tonne to break even all in. So that's the short-term plan. The change to the long-term plan is simply to speed up our closing of low-grade stopes and opening of new high-grade stopes. One last comment there. As you know, we have been exploring at El Cubo. The turnaround story is only half of the story at El Cubo. Our strategy there wasn't just to turn it around from losing to making money, but to expand it. And the exploration does look like it's starting to bear fruit. We haven't said anything on that yet, we will this quarter. And in fact, the operations team are working furiously to try and gain access to some interesting new areas. Let's leave it at that.

How much high grading you say can be done at full -- especially given the response to my last question, how much high grading do you think can be done at Bolanitos, especially now that the incremental capacity from the Las Torres plant is going to go away this month?

Well, so our response at Bolanitos wasn't so much grades. We did see a bump in grades, but that actually wasn't planned. We enjoyed higher-than-reserve grades during the quarter. We did not plan on that. What we did plan was to push the tonnes, which we did successfully. So we got a double whammy on Bolanitos. Hopefully, what that means is that our reserve estimation at Bolanitos has been overly conservative. We don't know it.

I'll phrase the question differently. How much -- in the future, how much more selective mining can you do given the lower planned capacity and how much of -- maybe if you could quantify it, what impact do you think that'll make?

Are you talking about Bolanitos?

Correct.

Godfrey, you want to take that? Do we want to selectively mine Bolanitos?

Heiko, this is Godfrey. Thanks for your question. I don't think we really want to selectively high grade Bolanitos. To be honest, the grades in Q2 were just in an area of the deposit where the grades are higher. And when we saw that when we were drilling, we saw some quite spectacular grades. And so this is just part of that higher-grade zone. But we -- with the [indiscernible] and mineralization, there's no real need to, say, high grade it. I think we just continue on as we've been mining it all along.

I'll give this question one more try. You're going to cut production by about 28%, going from the 2,200, 2,500 to 1,600 tonnes per day. So we should sort of model the grades to be exactly the same as they were in Q2 for the remainder of the year.

Heiko, maybe I'll tackle that. I understand now where you're going. With the return of the Las Torres plant, we have reduced processing capacity for Bolanitos ore. And as you pointed out, are we going to adjust our mine plan? No, we're not. Basically, we have 5 parallel ore bodies accessed by 1 mine ramp. And the high-value mining we were able to do in the second quarter and the first quarter at Bolanitos, way ahead of the 1,600-tonne plant capacity at Bolanitos. That's simply a function of having ore availability. It's not about selective mining at all. So we'll pull back, not to the 1,600-tonne range, but probably closer to 1,900 tonnes, which is what you should probably be thinking about modeling and the extra, let's call it, 300 tonnes per day can go over to El Cubo after we return Las Torres.

The next question comes from Benjamin Asuncion of Haywood Securities.

I've got 2 follow-up questions here. First, Brad, with respect to the comments you are making in regards to a revised mine plan for El Cubo, when will we get indications of these higher grades? So when does the rubber hit the road that we can start to evaluate whether or not that's has been successful?

Certainly, we're basically responding to the metal price on the environment on an almost monthly basis now and that's been true since April. So you will see -- for instance, we're already seeing in the first 10 days of July a remarkable jump in daily production grades. Is that sustainable? We're moving so fast, Ben, that we'll simply wait till the end of each month to see what else needs to be done to make our new higher cut-off grades. So that's not much of an answer, I know. But we are a very flexible group and we're basically, at El Cubo in addition to our cost cutting, what's new since April is revenue enhancement. Because there was a history of 8 years of no mine development there, it's not something that we can just hit the accelerator and go. It does take a little time, so the mine development we did in Q2 should bear fruit in Q3.

Okay. And the second question, I guess, this is more geared towards Dan. Give me a sense, the realized metal prices that you reported there was 19 and some change, can you give me -- quantify what the negative, I guess, adjustment was between the average spot of around $23.5 annual realized metal price?

Yes, that's a good question, Ben. Thanks. It comes down to the fact that we start shipping concentrate in Q1. And when we ship that concentrate, it's recognized as gravity and with provisional prices. As everybody knows on the call, prices significantly fell during the Q2 period, resulting now to mark to marketing a lot of these provisional prices. With that, we lost about $4 of silver per ounce and that results in mark-to-market at $18.86 at the end of the quarter. The good news with all that is a lot of these prices aren't fixed yet. So any upticks that we see here over the next 2 months will flow back into essentially Q2's revenue, but it will be recognized in Q3. So it was about $4 -- to answer your question directly, it's about $4 and change for silver and about $250 for gold.

And Ben, just to reiterate, so we mark to market our concentrate sales based on provisional pricing at month end, end of June, but actual pricing takes place this month.

Okay. And just to follow up on that just with respect to the concentrate, can you give me your sense of how many ounces of gold and silver, respectively, out of this quarter's production was in concentrate?

We still got 1.8 million ounces of silver. And of that, 1.2 million were sold through concentrate. As you know, a lot of Bolanitos -- all of Bolanitos we sold as concentrate. And in fact, at the end of the quarter with the refurbishment of the Tajo plant, Cubo actually sold about what was going through the Torres -- the Tajo plant totaled about 300,000 ounces of silver. I don't have the gold numbers off the top of my head. I'll have to get back to you.

Okay, perfect. And then the last thing was, I guess, was final settlement. Is it based on settlement at that date? Is there a moving average window in terms of volume-weighted average price or anything else like that, that we can look towards?

Yes, we have 2 contracts with 2 different parties. One, we're allowed to pick a fixed price within that period. So we can pick a specific day. So if we see a spike here in July, we could lock it in. With the other contract, it's a monthly average and we get to pick the month whether 2 months after shipment or a month -- or 1 month after settlement or 2 months after settlement.

The next question comes from Andrew Kaip of BMO.

Just following along the same theme. Are we going to see some negative adjustments from concentrates that were sold in the first quarter?

Yes, those adjustments have actually always flown through into the Q2 revenue. It's included into that $4 adjustment that I described there.

Okay, okay. Thanks for that clarification. I guess the other question I've got is just on Bolanitos. You had a very strong quarter. Should we expect gold grades to continue to stay above 2 grams for the remainder of the year?

I'll give Godfrey that one.

Yes, Andrew. Thanks for the question. I do expect it to be about $2 for the balance of the year.

Should we be expecting them somewhere in the range that they were in the first quarter and sort of in the second half of last year, sort of 2.25 grams?

Yes, if you want a more exact number, it's going to be closer, I think, to 2.5.

Okay. And then with respect to your capital budgets, you've indicated that you're cutting them. Can you give us a sense of what the budgets look like in the second half of this year just so we can better understand the inflow and outflow of cash?

Maybe Dan, you can handle our anticipated remaining CapEx and exploration expenditures?

Yes, for CapEx, the CapEx what we have remained is mine development. And at Guanacevi, we've been spending about initially we had spent -- budgeted about $12 million in mine development and we dialed that back in April to release about $3 million. So we have about $4 million still planned in mine development at Guanacevi for the year. At Bolanitos, the mine development was about $6 million. We didn't dial that back as much. In Cubo, it was going to run somewhere around $5 million to $6 million in mine development. Those are the key capital items that we still have remaining in our budget. That amounts to about $15 million and it's something that we're actually looking at still at this point going to the second cost review, what more can we delay from a mine development standpoint. Brad alluded to earlier in the call that we had at least 1 year at all our operations. In fact, at some of our operations, we have 2 years ahead in mine development. So we have that flexibility that we can pull back mine development and survive for at least 2 years. But at that point, we have to -- obviously, mine development becomes critical again. We have to start it up. So it's going to be a balancing act between how much we defer and how much we continue with.

Okay, okay. So we should see some, certainly at Bolanitos, but I suspect at El Cubo you're going to have to continue your pace of development and that will continue to be a focus?

That's right. Conceptually, we're going to continue mine development at El Cubo and we are now considering an additional reduction or deferral of mine development at Bolanitos and Guanacevi. That decision will be taken this month. We just want to see where we're at in the mine plans. At Bolanitos, for instance, we had a jump in production. So we don't have as much mine development ahead of us as we had in the first quarter and we're reevaluating that. And at Guanacevi, we're still well ahead of the mine plan and we're reevaluating that.

And then with that, I'd probably throw it to Godfrey with regards to the exploration expenditure. We have made further changes there. I don't think we publicly said it, but we are looking to reduce staff again in the exploration group and reduce drilling through the next 6 months. So we had originally gone from $16.1 million of exploration expenditures down to $12 million. A lot of that $12 million was going to be in the Q1 and Q2 because we had a lot of commitments at the end of Q1 for Q2. But what's going forward for exploration for Q3 and Q4 would be significantly lower than what we've seen in the first half of the year. Godfrey, would you like to add anything more to that or...

No, I think that's right. We are looking at reducing our exploration down significantly. We'll be talking about that over the next little while. I just would like to add to the mine development. Because we mine using cut and fill or long hole stoping, we do require fill to fill these stokes as we mine them. So we need to do some, but we can reduce the amount of development that we have been doing. And so it won't be 0 but it will be a reduction.

Yes, and then just one other thing, Godfrey. San Sebastian, you've been putting out some very interesting results on that project. And I'm wondering in your -- in light of what you're discussing, are you still planning on delivering an engineering study on that project in the second half of this year?

We are going to be evaluating the drilling as it continues on. It looks extremely encouraging to us and whether we will do an external evaluation or just an internal evaluation, we're just discussing now at this point. But I think we'll have at least some numbers for people to evaluate.

[Operator Instructions] The next question comes from Chris Thompson of Raymond James.

Just got a bunch of questions here. We'll start off with just a clarification, I guess, of adjustments on a quarterly basis. Are we looking at adjustments in Q3 now? Is that where we're getting at when we're talking about those concentrate adjustments?

Oh yes. Absolutely, there will be adjustments again in Q3. With any concentrate that goes out, it's recognized in a provisional amount. So if we shift it yesterday, it was recognized at $19. And then once we fix it and then we fix it at $22, you'd see a $3 bump. So there'll forever be these adjustments going forward as long as we're selling concentrate.

All right. Just moving over to the operations quickly. I guess, starting off with Guanacevi, we noticed some good grades, I guess, for the Q2. Are they sustainable at these sorts of levels?

Chris, this is Godfrey. Yes, thanks for the question. It looks like they are and -- so we do expect it to go forward with these grades.

Okay, great. And looking at recoveries, can you give us a sense of whether we're going to see those improving at all?

The recoveries are moving around a little bit and it's primarily because we're getting towards the deeper parts of North Porvenir and we're seeing a drop in our recoveries from that area. So we're just looking at that and we're just evaluating it whether they will continue at those same levels.

Okay. And finally, on Guanacevi, as far as costs, any strategies there on putting back on some of the costs there?

I think as we mentioned earlier on, we're looking at all our costs and I think you will see some adjustments -- reductions of those costs as we move forward and I'm sure we'll be talking about that in the next month or so.

Okay, great. And just on Bolanitos, quickly, we spoke about the gold grades. What about the silver grades, are they sustainable at current levels?

Yes.

All right, perfect. And then finally, just to reiterate, so we're looking at sort of ramping up mine production to about 2,200 tonne a day, is that the idea?

Well, it -- I think it averaged, Q2, about 2,300. In fact, in June, it averaged 2,500 tonnes per day. So I think we're talking about -- depending on what happens with Torres and what happens with the Tajo plant, how much room we have there, that will determine how many tonnes a day we'd come out of -- or pull out of Bolanitos.

Okay. But you definitely obviously improved the capacity requirement there. I guess, it's just a matter of working it into plan with what's sustainable based on current cost reductions, et cetera, et cetera?

Yes, yes, and we are doing at least 50% long holing from Bolanitos now and so moving the tonnes up is fairly straightforward and we've got some very good well bodies to work with there.

Thanks, Chris. I should also point out that at each of the operations, the mine plans and scheduled output each year are very much dependent on our ability to replace reserves and make new discoveries, fast track development of new mines. And Bolanitos is not done yet. We've milked it hard in the first half of this year, which might be a concern to some, but we haven't commented on and will comment on in Q3 here some of the exploration successes that we've taken at Bolanitos this year. So we have identified some new areas that will come into our mine plant. And really on the short term, Bolanitos was just an opportunity for us to increase our cash flow. That will dial back when we relinquish the Las Torres plant, but we'll still continue at the mine to overproduce the capacity of the Bolanitos plant. And really, the decision on what's next for Bolanitos is driven by El Cubo. We're working hard on the exploration at El Cubo as well and as soon as we can effect the second half of our 2-step strategy at El Cubo, that is like a new discovery, fast track it to production and see if we can expand the output at El Cubo and fill the El Cubo plant capacity. That would then drive a expansion decision at Bolanitos. We're certainly not taking that decision this year, but it might be something for next year.

Next, we have a follow-up question from Benjamin Asuncion of Haywood Securities.

Yes, just one last question here. Can you just comment on roughly where you're drawn down on the debt facility?

Yes, we've drawn $6 million this quarter. So end of Q3, we -- or during Q1, we've drawn $24 million and in Q2, we drew $6 million. So it puts us at $39 million at the end of June 30, right the end of June.

And we do expect that to peak.

Actually, maybe I can add a comment here. We did model it being a lot higher than the $39 million. So we've actually managed that drawdown very well.

There are no more questions at this time. I will now turn the call back over to Mr. Cooke for closing comments.

Well, thank you very much, everybody. I guess, my closing comments are just to remind you that at sub-$20 silver prices, Bolanitos is still very much a cash cow. It is pretty much bulletproof even at these prices and we do think that this is a correction where -- even though we have long-term plans for lower prices, we have to be prepared, that doesn't mean that is our expectation. We're coming through the seasonal low of gold-silver pricing and it does look like those metals are trying to put a bottom in. We're not raising bugs here. We don't think we're going to see $1,900 or $1,600 gold this year. And just a reminder that silver was $23 an ounce 30 days ago, that it was $30 an ounce a quarter ago. So this is, I believe, a temporary phenomenon. There will be a base found here and even if the resumption of the up cycle is slow and tedious, all of these cost cutting and revenue enhancement efficiencies will benefit not only Endeavour but everybody in the sector. So on that note, thank you very much, and we'll talk to you on our financial call in early August. We'll be announcing that date next week. Thanks, operator.

Ladies and gentlemen, the conference is now concluded. Thank you for joining and have a pleasant day. Goodbye.