Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. First Quarter 2018 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. [Operation Instructions] I would now like to turn the conference over to Galina Meleger, Director of Investor Relations. Please go ahead.

Thank you, Kyle. Good morning, everyone, and welcome to the Endeavour Silver Corp. 2018 First Quarter Financial Results Conference Call. With me on the line today, we have: The Company's CEO, Brad Cooke; as well as our President and Chief Operating Officer, Godfrey Walton; and our Chief Financial Officer, Dan Dickson. 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 2018 and future years, including revenue and cost forecasts, silver and gold production, grades and recoveries and the timing and expenditures related, 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. On behalf of Endeavour Silver, I would like to thank you for joining our call and I'll now turn it over to our CEO, Bradford Cooke.

Thank you very much, Galina, and welcome, everybody, to our Q1 financial results call. I'd like to start, as usual, with a brief overview of the results released this morning. And then we can open it up for Q&A. So our first quarter this year, I think was certainly better than last year with revenue and cash flow and EBITDA all up year-on-year. Earnings did dip however due to higher depreciation and depletion, still positive, but lower than last year, Q1. We did prerelease our production. And obviously, we had a good quarter, a good start to the year in terms of rising production. So silver on Q1 was up 25% to 1.35 million ounces. Gold production was up 13% to 13,200 ounces. And silver equivalent production was up about 20% to 2.3 million ounces. With that did was drive slightly higher revenues, up 11% to $40.3 million. Mine operating cash flow, up 16% to $13.8 million. Cash flow from operations, up 30% to $11.6 million. EBITDA, up 24% to $11.1 million, and that resulted in a net earnings decrease of 61% to $2.3 million. On a per mine basis, Guanaceví continues to be our highest cost mine but we did see incremental improvement month-on-month during the quarter. We are expecting a similar quarter at Guanaceví in Q2 as we're in the middle of productivity optimization program launched in January. But we are obviously still optimistic that Guanaceví will come out of that program in Q3 and Q4 with significantly better performance. El Cubo contributed to our lower costs, thanks primarily to its higher production and higher grades. And Bolañitos continues to be our lowest cost line, notwithstanding slightly lower grades in Q1. In fact, on a per mine basis, Bolañitos and Cubo were obviously -- silver production was up year-on-year. The only holdback was Guanaceví's slightly lower in the first quarter this year compared to the first quarter last year. On the gold production side, again Guanaceví and Cubo were the outperformers and it was actually Bolañitos due to lower grades, lower gold grades that slightly underperformed the first quarter of last year. How that drove revenue? We saw Guanaceví revenues slightly down year-on-year. But Bolañitos and Cubo revenues were both up sharply. And how that translated into our costs? We saw a slight increase in Guanaceví cash cost but a dip in Guanaceví all-in sustaining costs. Whereas both Bolañitos and Cubo on both a cash basis and an all-in sustaining basis were significantly lower cost in Q1 2018 compared to Q1 '17. So that's the brief overview. And I think operator, let's open it up for Q&A.

[Operator Instructions] Our first question comes from Mark Reichman of NOBLE Financial.

First on Guanaceví, beyond the improvement in plant throughput to 1,050 tons per day in Q4, I think you've said an average of 1,000 tons per day in 2018 and then access to the new orebodies in Q4. What specific enhancements are being made there? And I think you've said second quarter, kind of expect the same performance as Q1. But what can we expect over the next several quarters in terms of grades, recoveries and just overall improved financial performance?

Well, I'll give a general answer and Godfrey can give you some specifics. Basically, there's two initiatives to turn the quarter at Guanaceví. One is this productivity optimization program which isn't really retraining people how to do their jobs, it's retraining them on how to understand the management systems that make their jobs better and easier. So maintenance schedules and equipment availability schedules, personnel availability schedules, supervision, all these types of management systems are what's getting a full scrutiny at this time. The other main driver, to return Guanaceví to profitability is the development of two new orebodies previously discovered and now under development. Milache will the first to come on later this year. We've already extended the mine access ramp out above the orebody and we're now ramping down towards the orebody at Milache. So developing two new orebodies really refreshes the outlook at Guanaceví for several years because typically in these epithermal vein systems, the tops of the orebodies are obviously shallower. But also typically higher grade whereas the bottoms are deeper and lower grade, and so obviously, you drive lower cost at the tops of the ore bodies and higher costs at the bottom. The current operations at Guanaceví are literally at the bottoms of the Porvenir Norte and Santa Cruz orebodies. So opening up two new orebodies does refresh the operations for years to come. Godfrey, do you want to comment on productivity?

The expectation is that we will be driving into Milache on four different levels starting in August. We're in the process of just finishing off the water on the plateau for any potential water that we're going to hit in the mine. We are also finishing off the ventilation. So that's having four accesses open into Milache will provide the extra tons that we need to fill the plant and allow us to actually drop our cost quite a bit more. We are already cutting our costs with some of these efficiencies that we are doing, in both in the mine and in the maintenance area. And so we expect Guanaceví to do actually quite well. And then we will be starting on Santa Cruz Sur within the next month or so and that will also bring us a lot more mineral and a lot higher grade than we're currently processing.

Okay. And then just second on Terronera, could you just walk us through the expected permit and Board approvals and the tranches of expected financings. I mean, is the Board expected to approve a production decision at its May meeting pending permit approvals or will a separate call be arranged once the permits are on hand?

We already had this discussion at the Board level at our March meeting. And what they've asked us to do is go and finish the optimization of the prefis, get the final two permits from the government, arrange the first tranche of financing and come back to the Board for a production decision. So we are still expecting all of that to happen this quarter. So quite a to-do list at Terronera, we always luck will break ground by the end of the quarter. But I can't actually forecast which months, for instance, the government's going to give us the permits. They've indicated that they're getting close and we'll take them at their word for that. So we are hoping this quarter to finish all that off and get going on Terronera.

Our next question comes from Heiko Ihle with H.C. Wainwright.

So you ended the quarter with $36.6 million. It's not a little bit from year-end 2017 and essentially offset by lower accounts payable and other current liabilities, right? So just sort of walk me through your cash plans for the rest of the year. I mean, obviously, you have some expenses in Mexico coming up with El Compas. And maybe if you just sort of walk us through quarter by quarter, if that's possible?

Hey, Heiko. Dan, hopeful as well. I don't have the quarter by quarter breakdown. We actually don't release that in our guidance. But I can tell you for Compas, I mean, the specific question on that. We had a projected capital expenditure of $7 million for the year. We spent $3 million of that in Q1. Right now with Terronera, we're waiting on permits and waiting on Board approval to move ahead with that and timing. That's going to greatly affect our cash flows and obviously we need financing to help move that forward. So until we have that Terronera finalized, I would be a little bit wary talking about each specific quarter in such manner. But we -- you know that Bolañitos added $3 million of cash to our balance sheet. Cubo added $3.5 million to our balance sheet and Guanaceví was actually negative free cash flow in the quarter. We expect that to continue and we expect Guanaceví to actually start to contribute to the cash balance. So it really comes down to the capital expenditures planned for the year with our exploration expenditures. We spend about $2 million in Q1 on the exploration. We had the plan of $11.1 million for the year. So effectively, what we saw in this quarter is going to be continued through the year, but then you've got the curveball coming in of Terronera. And then with Compas coming off line, we are done spending that here at the end of April. It should improve and we should hover where we are.

Given the -- go ahead.

Heiko, I was just going to say that, with regard to our capital spending program and cash balance, we clearly intended to use our cash to build El Compas and we're through the bulk of that spend now. There's still some sustaining CapEx, sorry, to spend through the rest of this year. But all of the development CapEx has pretty much been spent. And we are in commissioning now. So we think that Compas is going to be significantly accretive to our production in the second half. The other part of the production growth formula for us was getting Guanaceví back on track. And again, we're forecasting a significantly better second half for Guanaceví compared to the first half, so that will also help our cash balance. With regard to the capital spend at Terronera, we are diligently working on our first phase of debt financing which we hope to have in place this quarter. And that will completely fund this year's Terronera CapEx and actually spill into next year's CapEx. We would need -- we will need a second debt tranche later this year to fund the bigger budget next year. So in terms of the overall financing package to build Terronera, we're looking at about $25 million Phase I debt, $25 million Phase II debt and about $20 million of cash, cash flow and or equity if the stock is better. So that's how we're financing Terronera.

Okay. $25 million debt, $25 million debt, $20 million debt equity cash flow, we will see?

Right. And we still are optimizing the prefis. So the CapEx is not set in concrete yet. It may go up a bit, it may go down a bit. We're still working on that. And we hope to have that definitive optimized prefeasibility study out this quarter.

Okay, fair enough. You've got some pretty meaningful inventories there, in both gold bullion and in concentrates. I mean, I calculated earlier today, it was 2.7 million in silver, then about 2 million in gold. At what price -- and the answer might be never, would you ever consider hedging some of that?

Hey, Heiko. Yes, that's just our quarter end typical inventory balance that we have. So we ship out almost on a weekly basis. We don't -- the payback time on when we sell that inventory, we'd sell it shortly after quarter end or month ends and we get paid within a month. We typically wouldn't think about hedging our inventories. At that point, we could do off-take agreements if we felt prices are going to fall and sell it all. But we see that just being consistent and no point putting a hedge on that.

Our next question comes from Ryan Thompson with BMO Capital Markets.

Most of my questions have already been asked. But I just have a few sort of housekeeping things for my model. First of all, could you just address the higher depreciation expense and how we should think about that going forward?

Yes, thanks, Ryan. At Guanaceví, we had a big jump in depreciation and depletion. That's just a function of -- we put $18 million of development into Guanaceví last year. We didn't have a significant bump in reserves, partly with the challenges that we had experienced in the beginning of the year and partly because we went with a more conservative reserve calculation last year. And a lot of people probably on this call is familiar with, that we have very conservative reserve parameters that are within 10 meters of a working phase for proven and 25 more meters from that on probable ounces. So with Guanaceví, we'll effectively be depleting most of that mine development that we put in last year in 2018. That's the biggest driver. If you'd recall, in 2015 and 2016, we put very little capital when prices were low into those mines and we've depleted all that stuff, which were a lot smaller numerators than what we're dealing with now. So we'll expect that to come through in Q2 and Q3 to be very similar at Guanaceví for a depreciation rate.

And just to augment that, obviously developing two new orebodies means that we'll be moving significant resources into reserves this year. So that formula should change.

Okay. And Cubo? Cubo, should we expect similar run rates as well?

Yes, I'd expect similar run rates into Q2 and Q3, from Q1.

Okay, that's helpful. And then just another one, I noticed that the royalty payment at Bolañitos sort of ticked up a bit. Is that just a one-time event or is there higher royalty going forward?

There's two things that flow through royalties in -- under cost sales for Bolañitos. That's the Special Mining Duty that's paid to government and then the 0.5% royalty for the government. In Q1, the tick up was just Special Mining Duty, just -- I would say similar -- you would expect similar for Q2 and Q3, Q4. Compared to last year, it was just at the beginning of last year, we had an adjustment for taxes paid in Q1.

So just to be clear, that's all government taxation.

Yes.

And that's the 7.5% EBITDA tax or is that ...?

Exactly.

Exactly.

Our next question comes from Dalton Baretto with Cannacord Genuity.

Brad, I'd like to circle back to this efficiency program that you have going at Guanaceví. What's the intent there? Is it higher production, is it lower cost or is it both?

It's both. And so again coming back to the theme of analyzing and improving our systems, we hired an international consulting firm called Jameson and they've embedded four senior mining people into our workforce. So that during the seven months productivity program, they will actually meet and discuss with every single employee and contractor, the purpose of the program and how to achieve the goals of the program, we call the program, or they call the program enfoque 2018, focus 2018. And it's a way to revive the -- not only the efficiency of the workforce but the attitude of the workforce. We recognized last year we had an operating problem there. So which system? I, we're obviously, equipment maintenance, personnel maintenance, supervision techniques, leadership techniques. Godfrey, anything you want to add?

Yes, I mean, we're looking -- the program is looking at -- give it time for dilution, mining methods and so it's a complete revamp of how we approach the mine maintenance and getting the guys -- aimed down at getting the guys in and out of a mine. Just making everything far more efficient so that during a shift, instead of taking one hour to get to the phase there, they're at the phase in 30 minutes, and so those kind of efficiencies -- how you'd -- them to spend more time actually mining what they need to mine. And making sure the equipment, we used to bring all our equipment out on surface for maintenance at the end of each shift. Now that's all done at the phase underground. And again, you're getting far more better utilization of equipment, better utilization of people in the operation.

And so what's next in the program -- let me just finish on this one. Q1 was basically focused on equipment and personnel availability. So Q2 is focused primarily on pushing the waste development. That is the access to more stopes, because that's the key to increasing the production and driving cost down.

Yes, I guess, what I'm trying to understand though is, how this actually impacts your financials. So you talked about personnel utilization, equipment utilization. Does that mean you're going to have less people, like is there labor savings there? Are you going to have less equipment, is there an equipment savings there? That's the part I'm trying to understand.

Well, I'm looking at the equipment. For example, before we started this, I got the request, well we need three new scoops. And I said, okay, are you sure? And this doesn't sound quite right. Having gone through the process, we recognize that we've got extra scoops. And so, A, we don't need three new scoops. And, B, we actually have more scoops than we need. And so that's part of the efficiency. That's -- we've already seen costs coming down on a cost per ton basis. By having people spend more time with them phase, they can actually mine more. So our tons are going to go up in the production side. The focus on where we are going to be mining waste and where we're going to be accessing new zones is all getting reorganized. And so that -- costs are coming down, tons are going up.

And Dalton, this is Dan Dickson here. And you're looking at it probably from a modeling standpoint. If you look back at the history of Guanaceví, I mean we historically run our cost per ton in the low 90s, high 80s some quarters. And right now and then last year, we were at $110 per tonne, $112 per ton in this quarter, $120 per tonne, and that's a function of the lower throughput that's going through. I mean, Guanaceví used to run at 1,200 tons per day and now we've obviously dipped into the high 800s, and low 900s, some quarters. With the increase in tons, obviously we're going to drive down our cost per tonne. But also with the efficiencies, we're going to drive out some of the costs through that. So I would expect that we can get back into the low 90s when we get those tons back up and that's the plan going forward. In that $120 cost per tonne, some of the external consultants right now, that $6 of the $120. So when Jameson's off-site, that $6 should come out, then obviously gaining the efficiencies from a labor standpoint, less diesel going through, et cetera, et cetera, that will help. But the biggest driver to our cost per ton is getting those tons from 800, 900 tons per day up to the 1,100, 1,200 tons per day that we know this mine's historically done.

Okay. And you think you'll get there by Q3 this year?

That is what we are expecting, yes.

Okay, perfect. And then just maybe, just switching gears to Terronera a little bit. You've put out new guidance on kind of what you're thinking in terms of a production rate. And I know that you have feasibilities coming up this quarter. Can you give us some early guidance in terms of what you're thinking directionally on CapEx and OpEx, as a trade-off to that lower production rate?

Yes, so we were at 2,000 tons per day in the initial prefis one year ago. We're now targeting 1,500 tons per day in the soon to be published optimized prefis. And we did a, quite an extensive analysis based on the existing reserve base of what the optimal throughput would be. And 1,500 tons was the answer. So we've already got two mines at that rate, Bolañitos and Cubo. And these orebodies are all very similar. I guess what's different about Terronera is that we modeled a seven year mine life last year. But through infill drilling of the inferred resource this year, we can get, I think much close to a 10 year life with -- not for release in June, but certainly by year-end when we finish the drilling program. And that obviously helps the economics of Terronera as well. It also naturally breaks into two phases, that's why we broke the CapEx into two phases. During the first year of operations of Terronera, we're -- it's totally focused on underground development and opening up new areas for stoping. And so the average for the first year was only going to be 750 tons per day anyway. So we targeted a two-phase CapEx program, 750 tons followed by another 750 tons. And that's why we are able to break our debt facility into two pieces as well.

Okay, great. And just maybe one last one, back on Guanaceví. I noticed that the sustaining CapEx this quarter was, it was only about 10% to 12% of the overall guidance for the year. So is it heavily back half weighted?

Not heavily back half weighted. We should see that pickup in Q2. As Brad said, part of the Jameson program here is going to be driving mine development and waste development specifically, so we can open up more stopes. So I'd expect more of that to pick up in Q2 and Q3.

[Operator Instructions] We have a follow-up question from Mark Reichman with NOBLE Financial.

Just a quick clarification. I think the last time we spoke you had expected kind of on the financing of Terronera, the debt financing was going to be $20 million to $25 million during the second quarter, kind of followed by $30 million of debt, then $20 million of equity and that could be cash from cash flow. And so the numbers you've just provided aren't too far off the mark, but I was just curious is if that last piece, you had mentioned debt. So do you think that last portion, that $20 million, that a portion of that could be debt or is your expectation still equity?

No. It's still a formula of $25 million debt, $25 million debt, and $20 million of cash, cash flow and/or equity. But instead of having to split the equity here, in terms of putting up the equity, we're pretty sure we can put first debt tranche in place this quarter and that funds all of this year's expenditures. So really, the need for cash, cash flow and equity comes at year-end to fund next year's completion of the CapEx program. We will take a decision on whether we use our cash or cash flow or equity later in the year. Where there's obviously, that second debt tranche to be put in place by the fourth quarter. So I'm not -- our thinking hasn't changed. We're still -- we'll hang our definitive thinking on the optimized prefis. But I think $70 million is pretty close to what we expect in terms of CapEx.

Okay. And then lastly, with respect to exploration, kind of where are you seeing the most promise and could you kind of provide an update on how your kind of thinking about Parral?

Well, I think that, at the three operating mine sites, the low hanging fruit was obviously picked some time ago. So we're just adding incremental ounces at Guanaceví, extending existing stopes. We've had a very good track record of replacing reserves at Bolañitos and we fully expect to do that again this year. Cubo, we've got some brownfields targets we're testing this year. Moving on to Compas, we haven't said much this year about the exploration upside, but we did finish last year with a couple of discoveries on the Calicanto property and we've got numerous other targets, both at Calicanto and El Compas to drill this year. So across the board, you're going to see kind of incremental ounces added to the three operations. And then hopefully some significant growth of resources at El Compas and possibly even Terronera. We are drilling Parral, it's actually our biggest drill program again this year and it's the area that we think has perhaps the fastest resource growth potential.

Okay. And then I guess, that was really the penultimate question. The last question is, on a prior conference call, you got a question regarding the M&A environment. And I was just wondering if you could update, Dan, your thoughts on the M&A environment and then, Endeavour's criteria for acquisitions, whether it be minimum resource and reserve requirements, annual production profile, geographic preference or even return requirement?

Well, I think, in any environment it's fantastic and the reason is that asset prices are still seriously depressed. So just a quick reflection, we are able to use the bear market to acquire El Compas and Parral and to put them to our pipeline and we're still at it. We're still working hard on trying to flesh it --

But the last call, you weren't as enthusiastic. You had mentioned that…

Well, let me say that in terms of opportunities, there's few and far between. So you just have to have a scorched earth policy in looking at everything. So that hasn't changed. It's really -- there's not a whole lot of good quality projects out there. But assets, the prices are depressed. So we're still optimistic that we'll be adding to our pipeline this year.

But you say, okay, lack of good quality projects. I mean, one man's trash is another man's treasure. So could you kind of define kind of your criteria in terms of what would meet your criteria? Because I think on the last call, you did say you were kind of redoubling your internal efforts to try to build internally identify and source acquisition candidates.

Yes, well our philosophy is, if you can't buy it, you had to find it. So the best example of that is Terronera. And our other philosophy is that anything we buy, we had to have, as a basic principle, the ability to make it bigger and better. If you can't add value to it, there's not a whole lot of interest in doing M&A. So that's why Endeavour has this track record of getting into small mines of historic districts that were unloved and for sale, and it is our ability to recognize and unfold potential of each of the four mines that we have now that has been our secret sauce. There may be some more of that. But again, the low-hanging fruit was picked years ago, so you really have to look wide and -- far and wide to find more opportunities like that. And beyond that, I -- we love discoveries and you'll hear later this year, our Chilean portfolio is coming right along. We haven't talked about it. It's not on the website. But we're hoping that we'll have something to talk about in terms of homerun projects later this year.

But I mean, are you seeing more opportunities in one country versus another? And in terms of when you're looking at potential acquisitions, does it not have to be in production already? I mean, you're looking at it from the standpoint, if you feel like you can invest the capital and beef up the resources and reserves. Just specifically, I'm just trying to get specifically, kind of what your criteria is, I mean, is there a minimum in terms of the size, in terms of being able to make a meaningful impact on your portfolio and production profile? Anything would be helpful in that regard.

Sure. So just in terms of our M&A strategy, principle #1, we're focused primarily on silver, gold, or silver plus anything. Principle #2, we'll look anywhere in the Americas with the exception of certain no-go countries like Venezuela, Bolivia, et cetera. Principle #3, we are looking across the spectrum of projects, from production to preproduction to advanced exploration to early exploration. That's what I mean by scorched earth. We'll look at almost anything, because it's really the ability to form a unique opinion on what you can do with at an asset that is the difference maker. Everybody's looking at everything. So it's really your ability to recognize potential and how to unfold it. So to get more specific on, in terms of where we're going with our M&A strategy, we'd like to grow the business by double over the next five years. That is, double our production and reduce our costs to the lowest quartile over the next five years. And a combination of M&A plus organic growth will get us there. Our current pipeline gets us halfway there. So there's still a need to continue adding projects to the pipeline. If, for instance, we were to acquire a producer, where could we add value? Well, maybe they have some resources that are not in the mine plan and just investing the money to move the resources into the mine plan gives you a much more robust project. If it's a preproduction or development stage project, then we have the diversified management group, the skill sets to build and operate. So get plants permitted, built and commissioned. And of course, our exploration group has a great track record. So we love the exploration side as well. Thank you for your question, Mark. And actually, everybody. I think that's it.

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

Thanks, operator. And again, thank you, all, for attending today's call. A good start to the year. I think you'll see a somewhat similar second quarter and then the production growth that we've guided for the year will show up primarily in Q3 and Q4. So thanks for attending, and stay tuned.

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