Endeavour Silver Corp. (EXK) Q3 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Third Quarter 2020 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 Galina Meleger, Director, Investor Relations. Please, go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2020 third quarter financial results conference call. With me on the line today we have the company's Chief Executive Officer, Bradford Cooke; our Chief Financial Officer, Dan Dickson; our Chief Operating Officer Don Gray; and our President, Godfrey Walton. Before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2020 and future years, including revenue and cost figures, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines and mineralized zones. While 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'd like to thank you again for joining our call. And I will now turn it over to our CEO, Brad Cooke.

Thank you very much Galina. And again welcome everybody to this conference call on our third quarter financial results. I think, first of all, I'd like to welcome Don Gray to the group. This is his first earnings call as our new COO. And then, also, especially like to recognize Godfrey Walton, who was with me when we went to Mexico in 2003, looking for an asset we can build a company around. This was Godfrey's last earnings call and so kudos Godfrey. It was a great run. Moving on to our press release this morning. I'd just like to open with comments on the quarter. It was our best quarter in 18 months. In fact our best quarter in a long time, when you consider the changes of revenue cash flow and earnings, all sharply higher this year compared to the same quarter last year. Our cash costs and all-in sustaining costs were significantly lower year-on-year and this improved operating performance combined with the higher precious metal prices, generated a significant return to profitability again for the first time in six quarters. As a result our cash and working capital positions also increased substantially during the third quarter. So let's now drill down a little bit into the numbers. Our revenues were up 29% to just shy of $36 million in the quarter. And our cash flow jumped almost 400% to $10.3 million year-on-year. Net income or earnings came in at a positive $0.5 million compared to almost $7 million loss a year ago. And I should point out that, we did carry a significant increased metal inventory through the quarter end, largely because of the summer run-up in metal prices and then the significant correction at the end of September. So we chose not to sell a significant amount of silver and gold at the end of the quarter. We carried it in inventory. The cost of that inventory is about $6 million, but the mark-to-market of that inventory at the end of September was in the order of $15 million. What that implies is that if we had sold that metal, our earnings would actually be in the $10 million range, not the $0.5 billion range. Production on the quarter was just shy of 1 million ounces of silver and 10,000 ounces of gold per 1.8 million ounces of silver equivalents. And I mentioned already our balance sheet cash was up 47% to just shy of $45 million and working cap was up in the $54 million range, up 21% year-on-year. Moving to the operations. Guanacevi continued to outperform with both silver and gold grades well above plan. We were affected by significant rainfall in the rain season in Q3. And as a result throughput was only 911 tonnes per day in the quarter with a 1,200 tonne plant that implies that, as we bounce back here exiting the rain season in Q4, there's actually more production at lower costs in our future at Guanacevi. I should point out, however, that the improved grades are accompanied by higher royalty payments. We're mining a property at Guanacevi where there are very significant royalties paid. So our costs will slowly rise as the metal price rises, just due to the royalties. Bolañitos continue to improve. It's not quite on plan yet, but we achieved 1,075 tonnes per day into a 1,200 tonne plant. Again, implying that there's still room for improvement on throughputs. Gold grades were on plan Silver grades remain below plan, but costs were fine. And all three assets generated free cash flow in the quarter. Last but not least, El Compas is pretty much on plan. Throughput steady, gold grades on plan. Silver grades below plan, but we're doing fine there and making a little bit of money. It's our smallest mine. Guanacevi, our largest mine, has by far the biggest impact on our financial performance. So I think on that note, operator, let's wrap up my comments and open it up for Q&A.

Thank you. [Operator Instructions] Our first question is from Heiko Ihle with H.C. Wainwright. Please go ahead.

Hi, Brad. Thanks for taking my questions and congratulations on a very, very good quarter here.

Thank you.

Just going to the financials here I'm looking at the -- your deferred income tax asset has gone from $7.14 million at the beginning of the year to $5.3 million today. Going through that segment disclosures chart on page 15 of your financials, it looks like the improvement was almost exclusively related to Bolanitos. Should we expect further improvements for the company there? I mean because that's -- I don't want to say free money, but it's certainly good cash flow if it actually -- if you get paid back.

Yes. Heiko, Dan Dickson here. Thanks for the question. You did touch on -- our deferred tax actually went from $7 million to $5 million. Basically that's -- we're actually using up that deferred tax asset which is a non-cash item. And what's happening we've made significant profits in Bolanitos this year. But we've been offsetting those profits against previous year's losses. So we have lost care for as we used. And ultimately that reduces the value of that deferred income tax asset. So -- and we are benefiting. We will see more profits in Q4 likely from Bolanitos and Guanacevi. Guanacevi, we also have loss carry forwards there. So I don't expect to have an income tax a current income tax expense in Q4 other than for special mining duty, but we'll see us grind away from that asset and have an expense on a non-cash basis.

Got it. Perfect. Thank you. And then a completely different question. Can you just sort of walk us through how your plans in Mexico have changed since you restarted operations with safety related to COVID? Has there been meaningful changes? Are people adhering to the safety precautions properly? I mean it seems like your safety record there is pretty good. So just if you could provide some more color that would be great. Thanks.

Well let me -- thanks Heiko. Let me give you a very high-level comment then I'll turn it over to Godfrey and Don. We -- quite fortunately we're able to move very quickly to put our COVID precautions in place both our prevention plan and our urgency response plan. And then by and large it served us very well stopping COVID at the gates of the operations. Our actual workforce that is mine and plant that had minimal impacts from COVID. We've had some office workers impacted by Covid all eventually returned to work. But maybe I'll ask Godfrey and Don to give you a little more color on our plans since the first and second quarters.

Hi, Heiko. This is Godfrey. Yes, we actually have a pretty intense protocol -- protocols to make sure that we do stop the cohort of the gate as Brad mentioned. We make sure that every worker as they come in is the temperatures checked, they're sprayed down, everybody is wearing a mask 100% of the time. And you spray down body wise not for front and back and your vehicles are sprayed down as you come in. So it's pretty intense. And unless you're actually there Don and I went through the last month or so we've been in and out of different operations. And it's to me very, very good. I was very impressed with how far we're being. Yes, we've had a few cases. But typically we've got about 11 to 15 active cases at any one time. And nobody seriously infected. But it has been -- that has been done very effectively I think. Don, do you have anything else to add to that?

I think I'd just add that the screening is pretty comprehensive with temperature checks and checking symptoms and that sort of thing. So when there is somebody detected that could be coming in we do send them right out for testing. And the testing of our operations we can turn that around very quickly. So if we do identify somebody that does test positive we take the profit precautions for corn tuning and then also our medical response has been quite good. And so we have really good response, probably the response is just better as you get just about anywhere in the world. It actually is really good. So I think from that perspective, we're taking out precautions and measures to take care of our people as well as make sure that the operation can maintain continuity. Very informative.

Sorry. Just had one thing Heiko is, we've actually -- we have adopted at all our operations and we've increased the number of doctors just to help out with the screening and evaluation of people. So I would say, we probably triple the number of doctors we have on staff now just during this COVID. Just because it does take up quite a bit of time for them when shift changes on. So if you got a couple of hundred people coming through the gate it takes quite a bit to get them all checked out and evaluate it.

Very good. It's nice to hear the whole team chime in on an answer to a similar question. It's actually really good how you guys play off of one another. Thanks for taking my questions. I will get back in queue.

Thanks Heiko.

The next question is from Craig Hutchison with TD Bank. Please go ahead.

Hi, good morning. Good afternoon. I was wondering if you could give me some more clarity in terms of grades as how we should think about sort of Q4 here. In particular Guanacevi, should we assume similar grades to Q3 which are obviously very high?

Again high-level short answer yes. Godfrey?

Hi, Craig. This is Godfrey. Yes. I think you're going to see grades continue at Guanacevi. A lot of the grades that we're getting is coming from a property called Ocampo that we do pay a high royalty on. So the grade needs to be good. But it's also coming from third party ore that we're buying which is part of our sort of social license to continue operating at Guanacevi. So I think the grades you're seeing Guanacevi compass and at Bolanitos are going to be similar in Q4 as they were in Q3.

Okay. Very good. And then just in terms of accounting question depreciation was fairly high in the quarter. Should we expect similar levels in Q4 as well?

Yes Craig, Dan here. I mean ultimately our depreciation is high. We're very conservative in that standpoint. We depreciate on proven and probable. So I would expect very similar depletion and depreciation in Q4.

Okay. Thanks guys.

Thank you for your question.

The next question is from Joseph Reagor with Roth Capital Partners. Please go ahead.

Hey guys, thanks for taking the question. So I guess first thing Terronera what -- any update there on time line to making a construction decision?

Well of course it's subject to the feasibility study which is underway and expected next summer. But Don, do you want to comment?

Yes. We just -- we just as you know awarded the feasibility study work to win consultants and they're starting out. So we'll be working up a feasibility reporting sometime -- being completed sometime mid next year. And then we'll be able to go to the Board with the recommendation as to when to start construction. So right now the timeline it's what we have in the FS, but subject to any additional work we do in the FS in the feasibility study.

And the current pre-construction schedule once we break ground is I believe 18 months to the start of commercial production. So we've got lots of work to do but we're finally into the final feasibility process.

Okay. Fair enough. And then thinking about next year, I know it's a little early to provide guidance probably, but from a modeling standpoint should we be thinking about the Guanacevi and Bolanitos kind of returning to normal operating rates near their planned capacity? Or should we be thinking about a certain percentage of plant capacity for the next 12 months?

Yes. I think -- well I don't think we're going to average 1200 tonnes per day at either operation next year. We're certainly going to be bumping up against it on a regular basis. The reason why I'm cautious about talking about operating at full capacity is simply rainy seasons are a bit unpredictable. And COVID is still out there. So -- but yes it will be in our plan to operate close to capacity.

Okay. Thanks for that color. I will turn it over.

Thanks Joe.

Your next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Hey, good day everybody. I wanted to ask a question on the direct production costs per tonne. And there's been a lot of noise in that metric between COVID and then other challenges year-to-date? And kind of looking at the third quarter, they're very nice performance kind of across the board, but it's still $110 -- over $110 per tonne. And so do you think we can get below kind of $100 per tonne figure maybe back into the $80 to $90 range we really appreciate your thoughts and the various puts and takes here on that. Thank you very much.

Yes Lucas. Thanks for the question. Dan here again a very good question and it's hard to speak to it just on a consolidated basis and getting below $100 on a consolidated basis for probably will be difficult only because a significant driver to all this is Guanacevi and Godfrey touched on it. We've been buying a lot of toll ore out of Garnet. It was almost 11% of our production in Q3. And ultimately when that ore comes to us at these high prices we take it. It keeps ounces in the ground for us for another day. And ultimately, it's high-grade ore. So, we pay a significant portion for it. We roughly make about 30% to 35% profit off that ore on a cash basis and we expect that to continue because those prices and we go up more this or comes available. And it's got a lot of benefits to us. A, we get to go find out where that ore is coming from and gives us a little bit of exploration opportunity or -- and like I said ultimately, keeps it in the ground. The other aspect is the El Curso concessions that we lease from Ocampo. We pay a $12 processing fee per tonne on that material. And then we also pay a royalty cost on that material. So, we picked up Versal concessions effectively at no cost but we do pay a very high royalty on it. And over $20, we paid a 3% NSR on it. So effectively, in Q3, we paid about on across all our tonne we paid almost $28 of royalty per tonne in there. So, that's really driving up our cost per tonne. Guanacevi, and the reason why Guanacevi at $146 for Q3 when ultimately we operated around $100 per tonne. I'm just basic mining processing and indirect costs. Bolanitos were right in line with our cost per tonne in line with budget in line with historicals at $68. If we hit this throughput tonnage, we should be around that if not a little bit lower if we can get to 1,200 tonnes per day. And at Compass, it's just a high variability because of the size of the operation. So, it's only 250 tonnes per day. And ultimately we spent almost $1 million a little bit more than $1 million this quarter than what we had planned. But because it's such a low amount of throughput and scope of that operation, it really hits cost per tonne. It doesn't have a huge impact consolidated, but obviously, on an operations level we get big variability there. We do expect to come down. We put in a lot of training safety real safety program has been there trying to increase our level of safety commitment at Compass. We hope it's going to come down in Q4. We're monitoring it and we want to make sure that those costs come down and improve the free cash flow there. But I don't see it coming under $100 consolidated. I hope we get into $100 million to $105 million for Q4.

That's very helpful. I appreciate that color. And then as a second question. Just checking in on Chile, can you update us on where you're spending your time there? And what are some of the milestones that investors should be looking forward to over the coming call it next to two to three quarters? Thank you.

Who wants to take that one? Godfrey?

Sure. I can take that one here. In Chile, we are currently drilling at the Paloma property. And we're sort of following up on some intercepts -- interception and intersection that we got last year in a first hole. So, we've completed a couple of holes now. We have not got any assays at this point. But we expect to continue drilling until Christmas and then the season will pretty much close down because we're up at about 5,000 meters. Once we have our results early next year we'll be able to put those out. And so we're encouraged with what we see in the core, but we don't have any numbers yet and we won't until Q1 next year. It's going to be the time for that. On into the rest of the year because Chile is sort of in the Southern Hemisphere, most of the activity is happening now are in the fall. So, we're busy right now looking at other properties and evaluating what's happening up at Cerro Marquez and talking to a variety of people about that property. And then it will go quiet during our summer and could become active again in the fall and through Christmas.

And just if I could tip in for the rest of our estimates context of our portfolio in Chile is that these are all high-impact world-class targets. For instance Paloma, we consider to be able to be a multi-million ounce gold target and we're just getting into the drilling now. So, we're going to be patient. It's a big area to drill. But like Godfrey said, we're seeing all of the things that we want to see in the core silica, hydrothermal [Indiscernible], sulfides, and other related geological factors that indicate the presence of gold, but we don't have the assay yet.

Got it. Gentlemen, thank you very much for the information. And best of luck.

Thank you.

[Operator Instructions] Our next question is from Joseph Reagor with Roth Capital Partners. Please go ahead.

Hey guys. I just had one more. At El Cubo any update there? I mean with higher prices is there some let's call it mineralized material that was outside the resource that might come in? Or have you been able to get any further and talks for neighboring projects? Just any color you can give us.

Well, the good news is that, these ore prices we're getting a lot of inbound and inquiries about possible sale. The bad news is that, it doesn't really change. The higher prices don't really change the amount of ounces in the ground. And our decision to close is, because we exhaust reserves and the remaining resources we felt were just too small for us to restart a 1,500 ton plant. We have been as you know actively scouring the district for opportunities. And continue to do so. But there's no decisions been made, whether to buy something and restart or just sell the whole thing yet.

Okay. Thanks.

Sure.

The next question is from Chris Thompson with PI Financial. Please go ahead.

Hey. Good morning guys. Brad, I think it's just probably a question for you. It's a little bit maybe just broad. Obviously with higher margins, we're experiencing right now, on the back of good metal prices and obviously you reduce costs. That speaks to, higher cash flow. I wonder if you could just give us a sense of, how you would apportion this cash flow by way of preparation for Terronera. Obviously what's happening with Coral, and maybe the need for mine life expansion through drilling and discovery at your operating assets?

Yes. Good point and good question. Chris thanks for your question. Obviously with a rising cash balance and we've really only had one quarter of that. It gives us a lot more flexibility, in what to do. We've always historically balanced our capital spending from our cash flow model each year. And we spend, at least for the three mines, only out of our cash flow. Not only we've got lots of free cash flow, it opens up other possibilities. So for instance, we took two years off from drilling Terronera, while we focused on our economic studies. As of September, we've resumed drilling on a number of very interesting undrilled veins of tar in artery and continue boosting the resources there. Same thing at Parral, we took a one-year break from drilling Parral, which is intended to follow Terronera in our development pipeline. But I think it's safe to assume that, there will be aggressive drilling programs on both, Terronera and Parral next year. So in terms of allocating some of our free cash flow there's, two projects. We'll continue with our Brownfield exploration around Guanacevi and Bolañitos. And they're not going to grow. Those programs aren't going to grow or shrink. They're just steady on. Chile we're drilling Paloma now. And we hope to be drilling it next year, as well. So there's a kind of discretionary exploration expense that we'll consider and then, of course just building up our cash for the equity component of the $100 million CapEx to build Turner. So those are our considerations. No decisions made yet. We typically do year-end planning. But just to give you an idea of what we would do.

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Great. Brad, thanks a lot. Thank you.

Thank you.

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

Well, thank you all for tuning in for our third quarter call on our financial results. It's been a great quarter. We expect bigger and better, as we go forward. And we've got, I think one of the best outlooks in the sector with leverage to cash flow, not only from higher metal prices, but falling costs. Leverage to production growth through our own organic growth profile there is not one but two projects awaiting development. Terronera which is largely permitted and Parrel which even though, it's an advanced exploration project is -- looks like it has the potential to be in a new way, down the road. And last but not least, leverage to new discoveries potentially world-class with three drill-ready targets in Chile. So, very exciting times for us, so we're a catalyst-rich time for the company, and we've come through that transition phase, where we undertook in the last six quarters operational turnarounds to try and get out of the doldrums during the bear market. And we've succeeded. So, lots of catalysts to drive value for the shareholders over the next year. Thank you very much.

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