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Coeur d’Alene Mines Corporation (NYSE:CDE)

Q1 2009 Earnings Call

May 11, 2009, 1:00 pm ET


Karli Anderson - Director of Investor Relations

Dennis E. Wheeler - Chairman of the Board, President, Chief Executive Officer

Mitchell J. Krebs - Chief Financial Officer, Senior Vice President

Richard Weston - Senior Vice President of Operations

Donald P. Gray – Senior Vice President of Latin American Operations

K. Leon Hardy - Senior Vice President, North American Operations

Donald J. Birak - Coeur's Senior Vice President of Exploration


[Ancorsure Augural] - J.P. Morgan

Andrea Cheung - Cormark Securities

Chris [Lichtenheld] - UBS


Good afternoon, ladies and gentlemen my name is Valerie and I will be your conference operator today. At this time I would like to welcome everyone to the Coeur d’Alene First Quarter Earnings Conference Call. (Operator Instructions) At this time I would like to turn the call over to Miss Karli Anderson, Director of Investor Relations. Ma’am you may begin your conference.

Karli Anderson

Thank you. Thank you for joining us today to discuss the Company’s results for the first quarter 2009. This call is also being broadcast live on the internet through our website at where we have also posted the slides that accompany our prepared remarks. Telephonic replay of the call will be available for one week afterward on our website.

On the call today here in Coeur d’ Alene are Dennis Wheeler, Chairman of the Board, President, and Chief Executive Officer; Mitchell Krebs, Senior Vice President, and Chief Financial Officer; Richard Weston, Senior Vice President for Operations; Don Gray, Senior Vice President of Latin American Operations; Leon Hardy, Senior Vice President of North American Operations; and Don Birak, Senior Vice President of Exploration.

Any forward-looking statements made today by management come under securities legislation of the United States, Canada, and Australia and involve a number of risks that could cause actual results to differ from our projections. Please see our full cautionary statement on Slide 2.

With that, I would like to turn the call over to Dennis.

Dennis Wheeler

Welcome and thank you for joining us on today’s call. 2009 is off to a roaring start here at Coeur. We produced an all time first quarter company record for silver. We bought Palmarejo, the world’s newest large silver and gold mine in production, on time and on budget. We achieved significantly improved results at San Bartolomé in Bolivia in terms of both cost management and production. We have got two new silver mines at Coeur, explosive growth, a rock solid balance sheet and enjoy great silver and gold fundamentals. Each one of Coeur’s mines and its employees contributed to this quarter’s success. As a company, we are all united in meeting our commitments to you, our shareholders.

We have set some aggressive goals for this year. It includes increasing our 2009 production by 66% with the ramping up of production at our two new silver mines. Lowering our cash costs, and strengthening our balance sheet. Today’s results indicate that we are well on our way to meeting these commitments.

Over the last nine months Coeur has commenced production at two of the world’s largest silver mines. Coeur’s period of heavy capital spending is now behind us. As Palmarejo ramps up and San Bartolomé performs consistently, we are poised to deliver positive and significant cash flow generation and growth for our shareholders.

While our production grows and margins expand Coeur continues to enjoy an industry leading production and reserve profile among North American’s filled with producers. Our company growth strategy is coming together at a time when market conditions for precious metals are particularly favorable. We are seeing an escalating demand for silver as an investment vehicle as evidenced by the continued strong performance of the silver ETFs, which are at record levels. Meanwhile, we are seeing new and exciting silver applications continually emerging. The most recent being silver applications to be used in the popular iPod to improve high-speed memory and faster communications between chips. It seems our growth in production could not have come at a better time.

In the first quarter we produced 3.9 million silver ounces, a 65% increase year-over-year, and an all time first quarter company record. While San Bartolomé was our largest contributor, we saw good results from all of our operating mines.

I would also like to point out that since Palmarejo began production in late March, its contribution to Coeur’s financial results is yet to come. We will begin to see Palmarejo contribute to financial results and production in the second quarter.

Our production results help under pin our 2009 outlook. We are certainly confident that 2009 will look very different from 2008. Specifically, we expect to increase our silver and gold production by 66% and 85% respectively. Our focus on cost management has produced concrete, measurable results over the past few quarters. We are looking to drive cash operating costs down 11% for the year and operating costs down 37%.

Margin expansion is the name of the game here and we expect it to translate into better operating cash flow; $100 million for 2009, which would be a 733% increase over last year.

I would like to turn it over now to Richard Weston to talk about our operational results.

Richard Weston

Thank you, Dennis. Our Palmarejo silver and gold mine in Northern Mexico poured its first silver and gold in late March. It is on track to reach full capacity in July. We expect to produce 5.3 million ounces of silver and 72,000 ounces of gold in this partial year of production. We still expect to have cash operating costs of -$0.50 per ounce of silver. Due to its low cost of production we expect Palmarejo to have significantly lower cash operating costs company wide and to support the margin expansion Dennis touched on earlier.

I am also pleased to report that our Palmarejo mine exhibits the high standards of safety and social responsibility you have come to expect from Coeur. During the quarter Palmarejo earned the Socially Responsible Business Distinction Award for 2008 or the mine's demonstrated excellence in social responsibility during its development and construction. The award is a national recognition of Coeur Mexicana and its ongoing contributions to the community in this area.

Our contractors at Palmarejo are now demobilizing and our capital spending on the project continues to decline. We shipped our first silver and gold in mid April.

I will now turn the call over to Don Gray to discuss San Bartolomé.

Don Gray

At San Bartolomé we produced 2.1 million silver ounces in the first quarter. Our cash operating cost of $6.74 per ounce was very close to our full year guidance of $6.50. It is a terrific accomplishment to have our cash costs near guidance so soon after start up.

On Slide 10, we have shared with you the monthly production and cash operating costs per ounce at San Bartolomé. I think you will be impressed with the quality and consistency that our team is delivering there.

Dennis Wheeler

Thanks, Don. Now Mitch is going to talk about the financial results.

Mitch Krebs

Thanks, Dennis. Good morning. We are beginning to see the impact of the Company’s new mines in our first quarter financial results. We had operating cash flow of $6.8 million and net income of $6.1 million during the quarter. As Palmarejo ramps up through out the year and expands its contribution to our financial results, we expect an upward trend in operating cash flow towards our goal of $100 million for the full year based on current prices.

Coeur ended the first quarter with cash and equivalents of $38.1 million. During the quarter capital expenditures totaled $78.3 million, $65.5 million of that was spent at Palmarejo achieving production start-ups. CapEx will continue to trend downward throughout the remainder of the year company wide and into 2010.

As operating cash flow continues to increase and CapEx continues to decline, we expect to see our net cash flow turn positive in the third quarter.

As Dennis mentioned, we continue to focus on reducing our non-operating costs. In October of last year, Coeur announced its intentions to reduce non-operating expenses by $10 million or approximately 40% in 2009. We remain on track to achieve this objective. During the first quarter G&A expenses declined 11% year-over-year.

We have reduced $100 million of our debt so far in 2009. Slide 13 summarizes these reductions. This outstanding debt balance compares to a balance sheet totaling $3 billion in total assets and $1.9 billion of shareholders equity.

Since the beginning of 2007 Coeur has invested heavily in its two new silver mines; $240 million to complete construction at San Bartolomé and $250 million to date to build Palmarejo.

Slide 14 shows how the lions share of this strategic capital spending of these new assets is now behind the Company. We believe these investments position the Company to generate significant and sustainable net cash flows for shareholders going forward, which we are now just in the early stages of delivering.

I would now like to turn the call back over to Dennis.

Dennis Wheeler

Thanks, Mitch. Certainly precious metals markets remain very dynamic and we continue to believe this will mean further along term price appreciation. Silver has reestablished itself as a monetary metal and a clear store value separated from the base metals. As you can see on Slide 16, silver’s performance has vastly outperformed the base metals over the last six months.

Coeur’s production is 100% precious metals, which differentiates us materially from our competitors, all of whom have significant exposure to base metals.

As we said in our opening remarks, sliver has a unique mix of investment and industrial demand. Silver offers investors the opportunity to protect against inflation, while also retaining upside when we see global economic growth regain momentum.

Investment demand for silver continues to be heavily influenced by the International banking and credit markets, both of which seem to us to remain uncertain and in search of leadership. As governments continue to play an active role in banking and credit markets we have seen firm pricing in the precious metals markets and growing investor demand for safe haven investments.

We think silver is developing as a long-term asset class for investors. The most recent report by Goldfields Mineral Services reported that silver investment demand is expected to remain strong with projected silver prices remaining well into the double digits for the balance of this year.

It does seem like investors are moving capital into the growing investment vehicles such as ETFs, which added more than 63 million ounces in the first quarter and stand at record levels of over 270 million ounces; which by some estimates represents 3/5 of above ground stocks. Our industry contacts continue to report a shortage of silver coins, further indicating that demand for physical silver remains strong.

The outlook for industrial demand is equally compelling. Silver is the world’s most widely used metal. Exciting new applications such as radio identification tags, solar panels, laptop batteries, and the memory chips which are used in electronic devices like iPods are continuing to show themselves as new uses for silver.

As we touched on earlier, the supply dynamics for silver underpin the export price action in the metal. Today about 70% of silver is mined as a by-product of base metals. A significant research group recently noted that silver production among the top miners will be down an estimated 5% for the year, and we believe further reductions in production may be forthcoming unless base metal markets revive themselves.

This favorable precious metals environment comes as Coeur has achieved several important milestones in the first quarter. We completed two of the world’s largest silver mines in the last nine months: a real testament to the performance of our technical operational and financial teams.

We strengthened our liquidity position by retiring over $100 million of debt so far in 2009, and by lowering G&A costs. Fortunately all of the heavy capital spending is behind us, and we think, in summary, that we have positioned the Company to significantly grow its cash flow for our shareholders.

In the near term we can point to several catalysts that merit close attention. First of all we are going to continue to deliver strong and consistent production at both San Bartolomé and Palmarejo, which will support 66% of our silver production this year. Palmarejo will be in full production through the second half of 2009.

We will complete our internal review of the Cerro Bayo mine plan later this year as we target a new mine plan with the minimum three-year mine life and cost profile in line with historical production and costs.

The U.S. Supreme court should soon render its decision on our only gold development project, the Kensington mine in Alaska.

On the finance side we will continue to deleverage the balance sheet and strengthen our capital structure. We have got the major capital spending behind us, the cash flow in front of us, and along with the continued strength in silver and gold markets, we think a very bright future to come. We know the importance of following through on our commitments to you and we believe that our first quarter results are just the beginning.

Now we would like to open the meeting for our questions from you.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Bridges – J.P. Morgan.

Ancorsure Augural - J.P. Morgan

Yes, this is Ancorsure Augural on behalf of John Bridges. Congratulations on the successful start at Palmarejo and for achieving steady state at Bartolomé.

On Palmarejo could you give us some guidance, or some sense, as to how you expect the production pipeline to look over the quarters?

Richard Weston

We will be building up to full production levels by July of this year.

Mitch Krebs

Then just to follow on to Richard’s comment, that ramp up between now and July will then lead on to the full year estimate of 5.3 million ounces of silver and 72,000 ounces of gold.

Ancorsure Augural - J.P. Morgan

Now that Bartolomé has achieved a steady state and Palmarejo is up and running, the focus should be on Kensington. Could you tell us a little bit about this latest complimentary briefing, the questions that the Supreme Court has asked, and what are you alternates?

Dennis Wheeler

The Supreme Court did request some limited additional briefing. Frankly, we don’t see this as any indication one way or the other after the legal team has reviewed this matter as far as the eventual decision. We’re hopeful that it will come soon, and we don’t make projections for the quarter.

Ancorsure Augural - J.P. Morgan

Okay so these are regular procedural things, in your opinion?

Dennis Wheeler

We don’t see anything unusual about the questions that have been asked at all.

Ancorsure Augural - J.P. Morgan

Okay, that is helpful and finally, just a bookkeeping question. Could you please give us the post tax amounts for the gain on the debt extinguishments and the loss in derivatives?

Dennis Wheeler

Could you ask the question again? I didn’t quite catch everything. Just outstanding balance apparently on the different [interposing].

Ancorsure Augural - J.P. Morgan

I am talking about the two items in the income statement the gain on debt extinguishments, and the loss on derivatives? We are just looking for the post tax amounts on that?

Dennis Wheeler

Post tax amounts, we can get back to you on that offline. When the Q is filed later today you will see an abundance of detail in there and note the 10-K that should be helpful, but I am happy to follow up with you to walk through those details.

Ancorsure Augural - J.P. Morgan

Sure I will do that, thanks. Good luck with Kensington.


Your next question comes from Andrea Cheung of Cormark Securities.

Andrea Cheung - Cormark Securities

First of all at San Bartolomé if you look at the production that was reported this quarter it is a little bit less than what you are suggesting you might report for the year if you annualize the quarterly number. Could you give us a sense of where we might be able to see if there is an improvement over the year?

Dennis Wheeler

Let me say that as is the case with many mines when you are going through the start up and reaching the full production at the mines, you do encounter some quarter-by-quarter variances. I think our group has been approaching that question very well. We’ve upgraded the quality of our management at the mine site significantly; bolstered the training for our workforce there. I think we indicated to you this quarter that we are feeling reasonably well about the future direction of the mine. But, you will see quarterly variations in operations from time to time.

Andrea Cheung - Cormark Securities

Sure, but I mean would we see more variance in a throughput, or grade, or recovery? Where do you think that [interposing].

Dennis Wheeler

I don’t think you will see major variations in the type of metrics you’re talking about. I think the question really for us is to continue to improve on consistent performance with the workforce in general.

Andrea Cheung - Cormark Securities

Okay. I was on site at Palmarejo and things look to be coming along reasonably well. I am just wondering when we could see production reflected in the financials.

Mitch Krebs

Palmarejo will be reflected in the second quarter’s financial results. Commercial production will be pegged in the third week of April. We will determine that specifically during our second quarter review, but the financial impact of Palmarejo will begin to be seen in the current quarter.

Andrea Cheung - Cormark Securities

What is your CapEx profile going to look like for the remainder of the year? Are you still guiding towards I think it was $130 or $135 million?

Mitch Krebs

Yes, we really haven’t changed the full year. Obviously with the $78.3 million in the first quarter, that really represents over half of our entire years CapEx budget. So, we will continue to see the Company’s CapEx decline from there throughout the rest of the year.

Andrea Cheung - Cormark Securities

Okay, very good. Thank you very much.


Your final question comes from Chris Lichtenheld of UBS.

Chris Lichtenheld - UBS

My question relates to guidance. It looks like there hasn’t been any change to the 20 million ounces expected for ’09, is that right?

Mitch Krebs

That is correct, Chris.

Chris Lichtenheld - UBS

So if we look at the 20 and the 9 roughly expected from San Bart and the 5.3 I think you are looking for from Palmarejo, it looks like the remaining operations during the quarter at least tracked ahead of what they would have to, to fill in that gap. Are they just tracking ahead of expectations, or might we see a decline in their production profiles through out the year then?

Mitch Krebs

The remainder of when you take the 20 and back out what we expect from Palmarejo and San Bartolomé, I think that leaves something a little less than 6, and that is broken up really equally between Martha on one hand and the other chunk between Rochester and the two Australian interests.

Chris Lichtenheld - UBS

Right, okay and so I think during the quarter, if I look at it, they did around 1.8 million ounces, but sort of ¼ of that difference between 20 and the larger two operations would be sort of 1.4, so are they tracking ahead of expectations or is it a little early to say?

Mitch Krebs

I think it is a little early to say based on one quarter. Like Dennis mentioned in relation to San Bartolomé you will see variations from quarter-to-quarter, but we are still sticking with the 20 million in total as well as the 5.3 at Palmarejo and then the 9 at San Bart’s.

Chris Lichtenheld - UBS

Right, okay great. My second question relates to administrative and general costs. Q1 versus Q4 of last year is up a little bit. Can you just describe what causes that to increase?

Mitch Krebs

Yes. We get hit in the first quarter with some non-cash accrual items that make the first quarter G&A total higher than say the fourth quarter of 2008. Those are items that don’t recur in the remaining three quarters of the year. So, that is what you are seeing there between fourth quarter and the first quarter.

Chris Lichtenheld - UBS

Okay, so accounting for that you are likely a little bit lower?

Mitch Krebs

That’s right. If you looked at a cash G&A it would be lower than the total G&A reported on the income statement.

Chris Lichtenheld - UBS

Okay great. You have been pretty successful at converting debt with shares. Do you expect this may continue or at this moment do you expect to carry the majority of the balance, so 2011 $0.13 grams?

Mitch Krebs

I think Dennis said in his comments we will continue to be opportunistic there in continuing to reduce the leverage on the balance sheet throughout the remainder of the year as we add cash from operations beginning in the third quarter. So, I think those are the two big themes for the balance sheet throughout the remaining three quarters of ’09.

Chris Lichtenheld - UBS

Okay, that’s great. Thanks a lot.

Dennis Wheeler

We would like to thank everybody for attending today’s call. I can assure you we remain dedicated to delivering the results we have talked about here today for the balance of this year. We look forward to seeing you on our next call. Thanks very much.


This concludes today’s conference call. (Operator Instructions)

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