Endeavour Silver Corp. (EXK) Q2 2017 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Second Quarter 2017 Earnings 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 Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Endeavour Silver Corp. second quarter earnings conference call. On the line 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, Dale Mah. 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 2017 and future years, including revenue and cost forecasts, silver and gold production, grades and recoveries, and the timing and expenditures required to develop new silver mines in mineralized zones. We do not intend to and do not assume any obligation to update such forward-looking information, other than as required by applicable law. With that, I’ll turn the call over to our CEO, Brad Cooke.

Thanks, Meg, and welcome, everybody, to this Q2 financial results call. As you saw from our news today, our second quarter financial performance was impacted by lower metal prices, lower production and increased exploration and development spending. I guess, the good news is that, the production increased incrementally from Q1 to Q2, and we expect that to continue from the first-half to the second-half, as we increase access to reserves at all 3 mines. The result of slightly higher production in Q2 compared to Q1 was thanks to improving performance at the Bolañitos and El Cubo mines, but Guanaceví continues to lag behind plan and has been struggling with a number of issues, not the same old issues, but new ones that keep popping up. So let’s look at the financial performance, first of all. On an net earnings base, we basically broken even in the quarter. EBITDA was down to $3.7 million, and cash flow down to $4.4 million, revenue down to $32.7 million, all thanks to the combination of slightly lower production and lower metal prices. Cash costs were up to $8.36 per ounce of silver, net of the gold credit, that’s due to the operating issues at Guanaceví. And all-in sustaining costs were up to $20.46 per ounce of silver, again, a combination of operating issues at Guanaceví plus our increased spending to extend mine life at all three mines. Interestingly, enough compared to the end of the year and even with paying down debt, our working capital has only decreased by about 8%. We are currently sitting on $75 million in working capital. So let’s talk about Guanaceví. Last year, we had a number of issues related to breaking into effectively a hot water spring underground, which caused power outages, pump failures and some flooding. We had just recovered from that when we encountered similar problems this year. In fact, even in July for a third time, we had a repeat of our electrical issues and pump failures and flooding of some of the deeper workings. So it’s one thing after another at Guanaceví. We have recently completed yet another repair of the electrical and ventilation systems. There is completion now of construction of a new underground pump station and all those things should help smooth our production coming into the second-half of the year at Guanaceví. It’s pretty clear though, given the setbacks we’ve had since the start of the year that we are not going to meet our planned guidance at Guanaceví. Aand so we’ve accordingly reduced our consolidated production guidance and raised our consolidated cost guidance. Let’s talk briefly about the development projects. At El Compas, work has begin on installing the project infrastructure, collaring the mine access ramp and refurbishing the plant. There’s ongoing refinements to the project engineering, optimization studies are underway on various mining methods and crushing and grinding alternatives. We have, however, postponed not for very much time, but we’ve had to delay the anticipated commissioning of our mining plant in the first quarter, specifically due to delays in our explosives permit. And that’s government-wide permitting slowdown that we’ve seen at all of our permitting applications in Mexico, so that applies to Terronera as well. Speaking of which work is currently focused on refining our project engineering and optimization studies at Terronera, looking at different mining methods, crushing and grinding alternatives and power options, and like El Compas, mine and plant commissioning has been delayed into 2019. So our revised guidance is now somewhere around 5 million ounces of silver production, 50,000 ounces of gold production, 8.7 million ounces of silver equivalent production for the year, plus or minus. I think, operator, those are my comments for now. Why don’t we open this up for Q&A?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Heiko Ihle of Rodman.

Hi, guys, thanks for taking my question.

Thanks, Heiko.

Listen, you had in there, excuse me, that there was slower than planned mine development due to narrow vein biz [ph] at Guanaceví. Has this – is this continuing? Is this accord from the ore body, sort of walk in on geologists through how this happened?

Well, apparently at every year-end, we do resource modeling and that’s how we reestimate reserves and resources. What we are finding in the deepest levels of the Santa Cruz mine at Guanaceví, and this is something that’s come up just in the last quarter is that, we couldn’t reconcile the model with what we are seeing underground. And we’ve – since then both in internal reconciliation and we asked the independent consultants, Hardrock, to come back and reassess their model. And then the conclusion is that, there was an overestimation of width and to a lesser extent grade in the deeper levels of Santa Cruz. So it – strictly speaking, obviously impacts what we were expecting to see in reserves for 2017. I guess, the only ray of light is that, we’ve been drilling and expanding that area in terms of reserve for placement and resource expansion. So the net-net effect may be neutral based on exploration successes. But it’s one of the factors that really held back our production this year, narrow width there.

With the flooding at Guanaceví, can you just sort of walk us through how many meters got flooded, the pumping capacity at the site, just so to quantify it a little bit?

Well, it’s not that the capacity has changed, it’s – the system – we had [indiscernible] dozen small pumps and pump stations to lift the water, effectively 600 meters vertical to surface. And with the completion of a new and much larger pump station, we are now looking at only two lifts from the deepest levels to surface. And so that’s a significant increase in productivity and decrease in cost, decrease in power consumption, et cetera. So that pump station is just coming on this week.

But quantify the pumping capacity?

Godfrey, do you have the amount out of water we’re pumping?

I don’t actually have the actual amount of water. But we are about 400 meters below the water table, that have been like for several years. So it’s been the – over time, we’ve added a pump as each level goes down, and that’s why the efficiencies and all the electrical issues that we’ve had. Typically, when we have a power issue, we will end up with two or three levels to get flooded. And then it takes us about a week to take – to dry up those two or three levels each time. So – and in June, we had a lightning strike on one of our power lines and that knocked out the electrical system in the mine. Although, we do have backup generators, it will only cover part of the total electrical need for the mine.

Yes.

So, everything else is – with the refinements and the electrical capacity and the pumping, it should be far more efficient.

Got it. Okay. Moving on to Bolañitos, it seems like gold grades came in quite a bit higher than expected. You expect this to continue for the rest of the year? Is there something where we should, maybe amend our models a bit, or was this a Q2 phenomenon and its probably going to come to an end?

Gold grades are definitely higher at Bolañitos. We’ve actually intersected some sections in the Plateros vein that are coming – averaging 5 to 6 grams gold. And so those have been very welcome. But we will find that the silver grades will start coming back to the 100 grams, as we stop mining higher up in the Plateros.

Excellent. Well, thank you, guys, so much for the heads up there. I appreciate it.

Okay.

Yes, thanks, Heiko, just finishing off on Guanaceví, we’ve obviously been wrestling with this mine for a year now. But it’s not – it’s different issues that keep coming up and we keep fixing them. And I think, we are through this latest round of electrical pump and flooding issues. There’s no guarantees that we won’t get hit by lightning again. But we are optimistic that the operations are going to start regularizing themselves and we’ve overcome a number of setbacks. And I think, even though, it’s not going to meet guidance this year, there’s still a very healthy future for the mine. I mentioned in the news release that the longer-term outlook actually depends on the development of two new ore bodies that were found in recent years, but have yet to be developed. Development is now underway on the Milache ore body, and we are timing the future development of Santa Cruz Sur to match that, so both come into production midyear next year. And then the Guanaceví will actually look like a very different mine than it does today, both from a production profile and from the cost profile. Let’s move on to...

I wish you luck and….

Sorry?

Thanks, Heiko.

I wish you luck, and I mean, lightning can only strike so many times, so [Multiple Speakers]

Well, let’s move on to the next question.

The next question is from Malcolm Gissen of First Republic. Please go ahead.

Hi, Brad. The news has not been terrific and the market undid. What can you do – and you alluded toward a little bit in the comments you made at the end of the last question. What can you do to restore confidence in the market in the management team and your operations after these recurring setbacks?

What we are segueing at Guanaceví from the deep high-cost bottoms of the Santa Cruz and Porvenir Norte mines to the shallower higher-grade tops of the Milache and Santa Cruz Sur mines. And that’s the transition, that will take us another year. But that alone completely remakes the mine. And it could well become one of our more profitable operations within a year. So we are obviously still thinking, we can help turn the quarter on the existing deep mines, but there’s still a lot of life in the old grill, and like I said, it will look like a very different mine within the next year. We always look to other mines to try and outperform when one mine is struggling. As you recall, we struggled with Cubo for 3.5 years and had some outperformance from Bolañitos the Guanaceví during that time. So we can’t comment on that now. But both Bolañitos and Cubo are certainly on plan, and we’re constantly looking out for ways to be planned and help our production and our costs.

Okay. Thank you.

Thanks. Welcome.

[Operator Instructions] The next question is from Bruce Zipper of Dakota Securities International. Please go ahead.

Yes. Thank you for taking my call. Can you guys discuss with the guidance that you gave today for the rest of 2017? How that correlates into profitability or lack thereof, give us a little color in that area based on the numbers you think you can do?

Well, you’ve seen our all-in costs guidance jump from around 15-ish to 16.5.

Yes.

So that’s the impact on profitability is that, we are expecting a slightly less cash flow because of the slightly higher all-in sustaining costs, really halfway through the year though. So, as I mentioned earlier, we are going to continue to look for opportunities to outperform at the other mines and that will help.

If I can add that, Bruce, it’s Dan, the CFO. We front-end loaded a lot of our sustaining capital to the first-half of the year. So a lot of that’s come through. A lot of the improvements that we’ve done at Guanaceví is going through our capital investments that impacts all-in sustaining costs. And I know the markets are quite fixated on all-in sustaining costs. But some of those capital items are going to benefit us for the next three or four years, it’s just that certain metric that the market looks to, it impacts today. And I think it’s important to realize that it’s not just today’s capital, but that capital is going to benefit us hopefully for the next three or four years that we are putting into the ground. So I think, we need to look at both cash costs and all-in sustaining costs and recognize that we are putting investments back into these mines today, because basically over 2015 and 2016, we reduced our investments to make sure we can get through some of the trough periods in the prices. And hopefully, now we are coming back into a period, where silver price is going to gain, and we are going to try to keep these costs where they are.

And I think, what Dan saying is that the all-in sustaining costs peaked in the second quarter, and we do expect them to decline because the bulk of our all-in sustaining capital has been invested in the first-half. So we are not looking for massive changes in our costs forecast. But if you just do the math on our revised all-in sustaining costs forecast versus the second quarter, obviously costs have to come down to meet our forecast.

Right. Okay. But as far as declines that I have in your company’s stock, can you discuss your balance sheet, your cash in the bank, so on and so forth? How is that continuing to look?

Yes, Bruce, we touched on it early on. We have $53 million of cash in the bank and that’s come down from December 31, 2016, as we invested into the long-term future of the company. But our working capital has only come down by $8 million. Today, we sit on $75 million of working capital. At the end of the quarter, we had $4 million in debt, $2.5 million and that’s going to be paid by September 30. So really on a net cash basis, we have $48 million. We are healthy, but we want to take some of that working capital and put into the long-term benefit of the company.

Yes. Well, that’s one of the pluses that we think you’ve got is that balance sheet. One last question, would a healthy balance sheet – I know, things have been rough in the first half, but if there’s an opportunity, you have your eyes on any other prize or potential mines or other companies that might fit into your situation, or is that off the table until things get better?

Well, Bruce, let’s look at three different timeframes. Short-term, I think, the most important things we can do on M&A is actually related to the three operating mines. And I’m working with Dale on additional strategic acquisitions in and around Guanaceví, Bolañitos and El Cubo. And what those acquisitions do is help to extend the mine lives. So that’s very much in the forefront of our thinking for short-term growth and sustainability. In terms of medium-term growth, you are well aware of our growth profile. We had acquired some projects last year plus our discovery of Terronera, they are all slated for future development. Two of them, El Compas and Terronera, are already in development. And so we do have, I think, one of the more aggressive growth profiles medium-term in the silver sector. Long-term, we are acting to look for even bigger and better projects to put into the development pipeline. We have to ask ourselves, what happens when Terronera is up and running? It has the potential to become our largest and certainly one of our lowest-cost mines by 2019. But what about after that? So Dale and I have been looking at a number of opportunities. It’s a process, obviously. We’ve turned over a lot of stones and kissed a lot of frogs, but none of them have turned into princesses yet. The process continues.

Okay. Well, that’s interesting and I appreciate that comment. And all the best you guys.

Thank you.

Thanks, Bruce.

The next question is from Stephen Epstein, a private investor. Please go ahead.

Yes. Hello, thank you. I just wanted to ask what your thoughts might be on, whatever the changes might be in the metals market going forward up or down, whether it’s significant or trending up or down. How much does that impact your decision to sell your reserves or process them and restore concentrates or sell? Are you able to – or do you want to even deal with that kind of issue, or is that something that you are not even affected by as much, you had process it to go forward with the cash flow? Does that make sense?

First on the metal prices, clearly, we are looking at the bear market of the last 5.5 years, 6 years in the rearview mirror. I think it’s also clear, based on last year’s balance that we are looking at a bull market out the front window. But it hasn’t arrived full bore yet. So we are kind of in an in-between period, a consolidation period, in the precious metal prices. We certainly are bulls. We think that the precious metals only have one way to go over the long-term and that’s upwards. In terms of how that affects our strategy and our cash flows, well, obviously with low metal prices, our revenues and cash flows and profits are lower than when metal prices are higher. And we, as a strategy every year develop our spending models based on our cash flow models. So we try to cover all of our spending by our cash flow. That is the sustainability spending, so that only growth spending comes out of cash. And if you recall, we did raise some cash last year that was specifically to fund our growth going forward. And El Compas is fully funded, Terronera is partly funded. But we are not yet breaking ground there and we fully expect to put a small debt facility in place, effectively a bank line of credit to talk up the Terronera financing for full production. So we typically manage our spending based on our anticipated cash flows and we expect those cash flows to rise. Certainly, next year, we are looking at a bump in production, and we certainly hope there will be a bump in metal prices.

Very good. Thank you. I do appreciate that. Thanks.

Thank you for your question.

This concludes the question-and-answer session. I would like to turn the conference back over to Bradford Cooke for any closing remarks.

Well, thank you very much, operator. And maybe I’ll ask Dan Dickson, our CFO to say something.

Thanks, Brad. Yes, I think, the general sense on the call has been obviously, the Guanaceví and some of the operational issues that we’ve had at Guanaceví, and we hope that we are coming out of that here in the second-half of the year and 2018 will get back to guidance. I think one of the key things that Brad touched on, on one of the caller’s questions was on restoring confidence in the market. I think one of the important things that we’ve got to realize is, over the last five years, we typically met our guidance. And in this case with Guanaceví having these operational issues is probably the first time in the last five years that we’ve actually had to come out and revise our guidance downwards. In 2016, we revised upwards. And we recognize that it’s not a great thing for the company to have to come out and revise guidance downwards. But I think it’s good for us to come out to the market and be honest for where we are with our production, and hopefully we can be there in the second-half of the year. So thanks a lot for, everyone, attending the call, and look forward to putting out news in the second-half of the year that will simulate the stock to move higher.

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