Endeavour Silver Corp. (EXK) Q4 2015 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver 2015 Fourth Quarter and Year End Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions] I would now like to turn the conference over to Meg Brown, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning everyone, and welcome to the Endeavour Sliver 2015 fourth quarter and year end earnings conference call. On the call today, we have the company's CEO, Brad Cooke; as well as our President and COO, Godfrey Walton; our CFO, Dan Dickson; and our VP Corporate Development, Terry Chandler. Before we get started, I'm required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2015 and future years, including revenue and cost forecast, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines in mineralized zones. The company does not intend to and does not assume any obligation to update such forward-looking statements or information other than as required by applicable law. And with that, I will turn the call over to Endeavour's CEO, Brad Cooke.

Great. Thank you very much Meg, and welcome everybody to this 2015 financial results call. As usual, I'd like to start by hitting the highlights of today's news, and then we'll look forward to 2016, and we'll put it up for Q&A. So without further ado, on the financial side, Endeavour saw its revenue decrease by 7% last year to $184 million. That was primarily due to the lower metal prices. Our operating cash flow though increased 20% to $35.2 million, and that was a reflection of our increased output. The EBITDA was down 20% to $34 million, and we recorded a net loss of 149.9 million primarily due to the impairment of El Cubo, and to a much lesser extent the Bolanitos mines. That impairment simply reflects the short mine lives and the impairment of reserves and resources that don't make it at $15 silver. Moving on to our cash costs, we beat guidance and saw them pretty much parallel to last year, at $8.39 per ounce of silver natural [ph] to gold credit. And our all-in sustaining costs also beat guidance, pulling 7% to $15.62 per ounce silver natural to gold. We finished the year with cash of 20.4 million, working cap of 17.2, and subsequent to year end, we reduced the line of credit to $20 million and converted it into a term loan, two-year term loan. Also subsequent to year end, we raised $5.5 million on an equity financing through the ATM facility to augment our working capital and facilitate our growth projects, primarily at Terronera. So on an operating basis we had a very strong year, beating once again, I think for the third year in a row, our silver production guidance, which was flat at about 7.2 million ounces. We met our gold production guidance, which was down a bit from the prior year, at 60,000 ounces, and our silver prevalent [ph] production last year came in at around 11.4 million ounces. There was a number of accomplishments at the sites, but we've already covered those from our call in January. So I think what I'll do is just turn my attention to 2016. As per our guidance, we expect to be just chugging along at capacity at Guanacevi this year. We had another very strong year last year, and are looking to that mine to continue to perform well here in 2016. That mine has generated after-tax free cash flow for many years, and we expect it to continue to do so even at these metal prices. Same thing with Bolanitos, it's operating at close to plant capacity for the first few months of the year, and then we'll decline to the current mine output, which is approximately half of the 16,000 ton per day plant capacity. And that simply reflects the transition of Bolanitos from mining at the Lucero mine, to mining at the La Luz-Asuncion Vein. It's also our lowest cost producer and we expect it to remain so this year. Last but not least, El Cubo; we had accomplished, I think, an incredible feat of not only expanding the operation and completely modernizing it, but driving the all-in sustaining cost down from $42 an ounce when we bought the mine, to below $20 at the end of last year. That however is not 14, so we made the difficult but right choice this year to slowly ramp down production at El Cubo to care and maintenance towards the end of the year. And we do expect to make a little bit of free cash flow from Cubo this year. So the focus for the company in 2016 is basically threefold. Make money at each of the mine sites, and that's well underway. Focus on advancing the Terronera project, which represents the next significant leg of our growth for the company. And we did defer any pre-feasibility study late last year by a full year to allow us to more aggressively explore and expand the resource base at Terronera. We've set a $7 million budget for that, plus the attendant engineering and tradeoff studies and final metallurgy, et cetera, so that we are in a position by late this year to complete a pre-feasibility study, and hopefully go to the Board with a bigger and better project. That's the point of this year's exercise, grow the resources and improve the economics through drilling and engineering. And last but not least, we're still quite active on the M&A front. We are obviously looking at both brownfields and greenfields opportunities. And brownfields opportunities, there's a couple of things in Guanacevi and Bolanitos that we're trying to do. And in terms of greenfields, it's really hard to find a highly profitable silver mine for sale nowadays. People who own them don't want to sell them, and what is available in production anyway is typically not that interesting at low metal prices. I have to qualify that statement. But we are seeing some interesting developments in advanced exploration opportunities, and that's probably where our focus will be short-term. And so I think, operator, that's the sum of my comments for to start the call. Why don't we open this up for questions and answers?

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Heiko Ihle of H.C. Wainwright. Please go ahead.

Hi, guys. Congratulations.

Well, thank you, Heiko. Good to hear from you.

Always is. Hey, Brad, can you just quantify a little bit the estimate for free cash flow from Cubo. I mean, in our model we're using low-to-mid seven figures, but does this figure that you guys are leading to include the closure and initial care and maintenance expenditures which probably will be incurred in the latter part of this year?

Well, I'll start, and then Dan can finish. We're not proposing to go to full closure, but to go into care and maintenance, obviously there is a consideration for severance of the workforce, and care and maintenance, and security at the site. So maybe Dan, you can address this question.

Yes, free cash flow, when we ran it in January, we would have used the $14 price, is high single digits, somewhere between $7 million and $9 million. And then severance, which would be incurred at the end of this year, would be about $3 million to $3.5 million. And again, as Brad touched on, we're not going to closure for 2016. It would be something that we'd want to keep that optionality available going forward.

Closure was the wrong word. I think I meant shutdown expenditures is the word I was looking for…

Yes, care and maintenance were round about $1 million annually and really divvyed out among the security and our maintenance group.

Regardless, the number is quite a bit higher than what I had. So that's good to know, and I assume it's -- especially now with $15 silver I assume it's probably another million or two, which brings us into potentially low double-digit seven figure or low-eight figures even. And then, so you had an impairment of 134 million at Cubo, and there was another 83 million that were in 2014, is there any more impairments that may be incurred in 2016 at all? Go ahead.

At El Cubo, no, there won't be any more impairments.

Okay, so it's essentially written down…

Yes.

Yes, basically accounting policy is to write it down if you're taking it to care and maintenance. So that's what we did.

Got you. Is it fair to say that the $20 silver may lead to a reopening at a mine? I mean, you guys just made such amazing strides in turning this thing around from where it was when you bought it a couple of years ago, and I've been there a couple of times and I saw the turnaround firsthand. Is it fair to say that $20 silver may lead to a reopening of the site?

Somewhere in that range. Obviously we'll be in a better position to talk about which price; it's a go. When we're closer to $20 -- we managed to dip below $20 on an all-in sustaining basis in the fourth quarter, but perhaps what's more important about Terronera going forward is that we are going to use this year to take a look at a couple of technologies. We don't want to talk in any detail, but we think there's opportunities to improve the cost further, and they will require significant testing. So we're going to try and take advantage of this ramp-down to care and maintenance to see if we can find other ways to reduce the operating costs at Cubo. And later in the year, asking about the trigger price for bringing it back on.

Got you. Well, thank you guys so much for the quarter and for taking my questions. I'll get back in queue.

Thanks, Heiko.

The next question is from Jessica Fung of BMO Capital Markets. Please go ahead.

Hi, good morning. So I just had a question on the IVA refund or receivables, I suppose. I know that it's something that you guys are trying to tap into in order to pull it forward. Can you go through sort of what the process is when you expect you might receive this refund? And also, is it in pesos or is it in dollars?

Thanks, Jessica, this is Dan. It's a good question. Something we've been working on now for the past year. To answer the last part of that question, it's all denominated in pesos. It's receivable from the government. It's our value-added tax refund, and through 2012 to 2013, or indeed dating back, longer than that, we would typically have a [indiscernible] about four months. And Mexico has got a different system in that some of our refunds come from the federal level, some come from the state level. When the refunds come from the state level they come a lot slower than what we've seen. And we've got IVA dating back to 2014 related to our Cubo entity, that's given at the state. And then we've gone through a number of hoops. Basically we submit all the invoices that we pay out to our vendors to collect that IVA back. And typical lag time, like I say, federally is two to three months. Obviously at the state level it's a lot longer than that. We've looked at every channel to try to get those funds back. We've even considered now talking with another arm of the government that will loan against IVA just to see what we do with that. We've gone legal channels. And it's not that the IVA is not -- it's not that -- right now it seems not collectable. It's not that it's not collectable, and it's not good IVA. We've got audits done on those balances. It's just the function of the government saying, okay, we want this gentleman's identification before we give it back. We want maps of the mine that would give it back. On an every-month they've been asking for that, and it's just been growing. And it's effectively delay tactics, and it's not precluded just to us. We've seen it across our peer group that are in Mexico and beyond the mining industry as well. It's a common problem right now at state levels in Mexico.

Do you want to speak to the legal aspects of the Cubo positive [ph]?

Yes, they've come back on a couple of things, and agreed that what they're doing is illegal. However, they continue to do it. So we filed injunction April of last year just to kind of speed that up, and put some pressure at the state level. And we should have fruition there by the end of the summer, if it has to go that far. We expect that the government will actually kind of move off that, and pay our IVA back, rather than having to finalize the court information with it, because in that case, we receive 13% interest. And again, we did it as a pressure tactic in the fact that we want our IVA back. We'd follow our tax returns properly. We've done everything that we're required to do to get that IVA back. And as I say, we get everything back from the federal level, so it's just the state level. And like I say, it's not uncommon, and it's not exclusive to us. It's just one of the challenges of operating sometimes in a developing -- more of a developing world that Mexico is at right now.

This is the first time though that we've really had a very chunky past due. And it's particular to certain invoices relating to El Cubo, and it's illegal. They have recognized it's illegal. And notwithstanding the fact that if we go the legal route we're going to get 13%. Dan, what is the normal rate of interest on IVA?

You get inflation back in Mexico, which hovers about 4%. So it would be 4% plus that 13%.

And so are we optimistic that we'll see it this year.

I'm always optimistic.

Good. Does that help, Jessica?

It absolutely does, yes. I just wanted to get a sense if that was something we might see in the next couple of quarters or is it something that's two years away. So, this is…

No, I would expect it to be in fiscal 2016, a good chunk of it.

Okay, perfect. My second question is on the carrying value of El Cubo. I just wanted to clarify. So you guys have written down about 109 million at El Cubo, from 114. This sort of delta, it seems like that's the deferred tax asset that's remaining?

No, it's not the deferred tax asset remaining. It'd be our estimated cash flows less all taxes paid and less severance for 2016.

Okay, got it. Perfect. That's all my questions. Thank you so much.

Thanks, Jessica.

The next question is from David Garcia of Thomson Reuters. Please go ahead.

Hi, thanks for the call. Two quick questions, one on taxes and one on possible new deductions; on taxes, I was curious if you could share how much these new mining taxes in Mexico that, of course, went into effect in 2014 have cost the company either in 2014 and '15? As well as what you may expect this year? I'm referring, of course, to the new 7.5% mining royalty, and then the 0.5% precious metals tax. And on deductions, it's my understanding that there's an effort to lobby the government to allow miners to deduct exploration costs. My understanding is this would not require a vote in the congress, and this could happen. And I'm curious if you could tell us how much that might save the company, say this year or even over the course of, say, the next five years if there's some sort of estimate. Thank you.

Hey, David, it's Dan again. I'm excited, I don't get this many questions about taxes typically on these calls. The special mining duty in 2014, impact us about $4.5 million, and just the 7.5% EBITDA tax essentially is what it is. And in 2015, it was $3 million. The 0.5% royalty in 2014 was just under a million bucks and then again same thing for 2015, and so, a significant impact is how we thought and we clambered against that when it came in 2013. So I mean if you multiply that over the five years to see that even in 2015 the impact have been $4 million so significant to us is the market cabin, significant to us is cash flow. And hence why we are involved with the rest of our peer group with regards to lobby and again it's a government that such a strenuous tax on us especially when prices were soaring to death, but governments never do anything at the most appropriate time, and I don't want to get into how governments manage their countries. But in reality the other question you had about exploration; it's difficult, and there's a lot more grey around that exploration legislation. For us there are operating it's hard to distinguish between what's exploration and what's offering. So for us we would take that deduction immediately, but yes, if something happens through Congress and that gets repealed -- we've heard over the last two years a lot of things back and forth, whether it was going to get repealed whether the 7.5% was going to get lowered. We've never seen anything how the government -- it seems they come from the mining industry more than it seems to come out of government, to be honest, or I should say also sometimes that comes out of government that those are in backrooms and then we never see anything in the public space.

Does that help, David?

Yes, that does help certainly on the cash question. What about the second question about the possibility of deducting exploration costs in the same year they're exercised? What kind of positive impact might that have if that does get improved, say for this year 2016 or even over the next few years?

Yes, sorry, David. I should have been more clear with that. Prior to 2013, all explorations were deducted immediately, and that changed for 2014 and 2015, but the impact on us is really other exploration properties. So, Terronera, we don't get to adopt a 100% immediately. It's amortized over 10 years. At our operations where we're drilling to know where we're going along the vein, we did many drilling there to be operating costs till we get that full deduction, and as far as all the experts analysis and consultation that we've done as we're doing appropriately. So for us it really won't have that much of an impact.

And David, it's really primarily for exploration on non-operating properties. That's Dan's point, but the exploration on operating properties you can deduct still, whereas on non-operating properties that the issue, and of course what happened was this new taxes is that people were looking at lower cash flow and it's cash flow that drives greenfields exploration. So what Mexico has seen in the last few years is a sharp falloff in greenfield's exploration, which means fewer jobs supplies and services. And we're hoping that they'll allow that deduction back in, and it should have a benefit for the country.

Great, thank you.

Thanks for your question.

[Operator Instructions] The next question is from Howard Flinker of Flinker & Company. Please go ahead.

Hi, Brad.

Hello, Howie, how are you?

Good. You?

Good, good.

A comment and a question, with oil at 35 bucks Mexico is effectively bust, they're going to take a long time to pay up. That's also why they're squealing so much when Trump threatens to disrupt trade between the two countries. Mexico is really is trying strangled for cash. At $15.70 or $15.75 and the current conversion rate of the peso, which is what $17 to 1 something like that?

Correct.

Could you make money? Real money? Fully accounted?

It depends what operation you're talking about Howie. So, at Guanacevi we can, and Bolanitos we will, and at Cubo we will this year, but the key for Cubo was the investments and with the underground vein mining, and I mean in this past year all-in sustaining costs was north of $20 in our best month or best quarter was in the 17. So even with the peso depreciating, it's getting closer, but we're still not there and hence why management made the decision to go on care and maintenance.

And that's just all-in sustaining, that's not complete costs because…

All-in sustaining, it includes our G&A costs out of Vancouver. It includes all our capital costs.

Does it include tax?

If you are not making money, you are not paying tax.

Right. All-in sustaining costs in most cases excludes original CapEx and original exploration, are you including that too in your calculation?

No, no, but those are some cost in our opinion, no.

Yes, still costs, some are not, money gone. Okay, overall, combing the two, would you make a little bit of money?

We expect to have earnings at these prices with meeting our guidance at Bolanitos, and Guanacevi, and El Cubo for 2016.

Presuming the pace, it doesn't rally?

Or prices drop.

Right. Okay, good, thanks.

Thanks for your question, Howie, and I see there is no more questions; it's still open if anybody wants to join the queue, otherwise operator we can wrap up.

Yes, it looks like there are no questions at this time. I would like to turn the conference back over to Mr. Brad Cooke for closing remarks.

So, thank you everybody for listening in. It's obviously tough to decide to take a mine down to care and maintenance and write-off the crude value there, but nonetheless we have hopes for all three of the mines, and we're very active at Terronera. Terronera clearly is a featured project for this year. Stay tuned for our second quarter call. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.