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Endeavour Silver Corp. (NYSE:EXK)

Q1 2013 Earnings Call

May 7, 2013 1:00 pm ET

Executives

Meghan Brown – Director Investor Relations

Bradford Cooke – Chief Executive Officer

Dan Dickson – Chief Financial Officer

Godfrey Walton – President and Chief Operating Officer

Analysts

Heiko Ihle – Euro Pacific Capital Inc

Benjamin Asuncion – Haywood Securities Inc

Chris O. Thompson – Raymond James Ltd

Firas Abbasi – bcIMC

Operator

Hello, this is the conference operator. Welcome to the Endeavour Silver First Quarter 2013 Financial Results. As a reminder all participants are in a listen-only and the conference is being recorded, after the presentation there will an opportunity to ask questions. (Operator Instructions)

At this time, I would like to turn the conference over to Meg Brown. Director of Investor Relations. Please go ahead, Ms. Brown.

Meghan Brown

Thank you. Good morning and welcome everyone to the Endeavour Silver Corp first quarter earnings conference call. My name is Meghan Brown, and I'm the company’s Director of Investor Relations. In just a moment I’m going to turn the call over to Brad Cooke, our CEO will go through the highlights of the quarter before opening it up for questions. Also in the line today we have Dan Dickson, our CFO, Godfrey Walton who is our President and Chief Operating Officer and Terry Chandler, who is our VP, Corporate Development.

With that I’ll turn it over to Brad.

Bradford Cooke

Great. Thank you very much, Meghan, and welcome everybody to this conference call on our Q1 financial results. I would like to start the call by just reminding everybody that we did in fact post another record quarter in operations in Q1 with a solid production of 39% to 1.5 million ounces on the quarter. Gold production are actually up 138% to 15,000 ounces, silver equivalent 55:1 ratio came it around 2.3 million ounces up 63%, so pretty robust quarter all in all. It could have been a record financial quarter but for metal prices and (inaudible) but nonetheless we enjoyed a decent quarter on the financial front.

Net earnings were down 27% to $14.4 million, cash flow from operations were down only 8% to $24.3 million and revenues actually were sharply 43% to almost $70 million. Cash cost did jump as forecasted to $10, we guided $9 to $10 on the year and that’s net of gold credits and we were actually fairly pleased with that cash cost in Q1, especially El Cubo which obviously has been a focal point for the company since acquisition in July of last year, I’ll come back to El Cubo, but I’m surprised to say that we have, it appears during the quarter, in terms of our cash cost of production at El Cubo.

We finished off the quarter pretty much steady state working capital and cash, cash equivalents at $28.4 million, working cap at $42 million at quarter end. Obviously, since quarter end there’s been an earthquake in our sector vis-à-vis the sharp drop in gold and silver prices and as you saw from our new release a couple of weeks ago, we acted quickly to do a full company wide refuel of our costs and found ways to reduce costs on all front, so reduced our capital budget, reduced our exploration budget our G&A budget, we’ve introduced lay-offs across the board, we’ve had some (inaudible) in head office while actually just today did almost 200 lay-offs in Mexico and sorry yesterday, a good chunk of those were actually planned at El Cubo, but nonetheless that was absolutely critical for us to continue the trend of reducing cost by making these changes.

Moving to exploration, I will just touch briefly on it, even though, we’ve reduced our exploration budget, we still have a pretty healthy $12.3 million budget on the year, and we’ve maintained all of our, what we consider essential exploration project. So continuing to drill out Milache, the new discovery in Guanacevi continuing to drill out, specific targets at Bolanitos, close to the SARL mine and the Bolanitos mines continue to test new targets at El Cubo and attempt to make our first of what we hope will be several new discoveries, at El Cubo and last but not least continuing to push on extensive option drilling to delineate that new discovery from last year.

So pushing ahead on exploration, there is some potential game changer in our exploration portfolio we didn’t want to give up on them, and then last but not least before I open up the call, a quick outlook for the rest of the year. In Q2, we’d already guided that there could be a dip in production and certainly in revenues given the drop in mill prices, our guidance was that we are expecting and planned for some down days at the El Cubo operation, while we do the re-commissioning of the newly rebuilt El Cubo plants with certain facilities that re-commissioning gone underway well ahead of the scheduled time but two weeks early, and the budgeted to be complete and up and running full production at El Cubo by the end of May. So the re-commissioning process is now well underway because of that re-commissioning process and the budgeted down time in the plant, it will obviously have some impact, we don’t know we had much on our Q2 production at El Cubo and to a limited extent Bolanitos if you recall it for shipping, in Q1 it was an extra 260 tons per day at mine output from Bolanitos that was being trucked across the district for processing at the rented Las Torres plant at El Cubo and we actually, that excess production is planned out almost 400 tons per day and we’re continuing that trend continuing to process the extra mine output from Bolanitos over at El Cubo.

We are in the process of doing a return of the leased Las Torres plant to first nil, we’re still not sure how long that process will take, but certainly by the time the El Cubo plant is fully re-commissioned we’ll be in a position to hand back that leased Las Torres plant, that by the way should also help reduce cost because it is an expensive deal.

We do hope and plan for rebound of both production and financial performance in Q3 and look to set new records of these on the operating front in Q4. So that’s our outlook for the year and maybe I’ll just ask Dan, if he has anything to add before we turn to questions and answers.

Dan Dickson

I think you had everything there Brad, I mean the key stuff that we’re seeing in the, at our operations and it did have a drive up of our cost per ton. Bolanitos which have been our start in the last year and a half, we signed new agreements that will concentrate from Bolanitos that increased our cost per ton on a $7 on a cost per ton basis and then we also add additional concentrate inventory that we’ve seen there at year end that would have flowed through this quarter’s cost as well.

At Guanaceví our cost per ton creaked up, we had some additional cost relate to labor prior year bonuses for our staffing in targets that were higher than what we accrued for 2012. So, that drove up and we should see that coming down then obviously from a cash cost standpoint, the lower grade and gold both reflected in our cash costs, and again as he touched on El Cubo, maybe a little bit of ahead of the curve, where we expected it already. Going into Q2, hoping if we can maintain these cash costs, at the same time we do have downtime coming and that will be reflected in our production and with that over production, potentially the cash cost creep up again, but it is trending in the right way and we expected to continue to trend down as we get back into Q3, Q4.

Bradford Cooke

And we also have on the line Godfrey Walton our President and COO live from El Cubo. Godfrey do you want to anything before Q&A?

Godfrey Walton

Well, everything is going actually very well here in El Cubo and we are really testing all the different circuits and we hope to actually be running part of that material over the next few days so everything is going well, both on the operation side and also on the exploration side, we’ve got some very interesting drill results coming up soon. So rather than that I think everything is going well, probably Bolañitos is doing well, Guanaceví is doing extremely well and we are continuing to ship material from Bolañitos to Cubo to reprocess there.

Bradford Cooke

So, very good, thanks Godfrey, and just a reminder that we also have with us today Terry Chandler our VP of corporate development. So if any of you have questions about M&A activity in the sector, that Terry would be happy to respond.

So operator with that, let’s open up the call for questions-and-answers.

Questions-and-Answer Session

Operator

Thank you very much. (Operator Instructions). The first question is from Heiko Ihle of Euro Pacific. Please go ahead.

Heiko Ihle – Euro Pacific Capital Inc

Hi, Brad, thanks for taking my questions, it’s obviously been quite a challenging time here in the junior mining space. I know you guys put out the cost savings north of last week, can you maybe just qualify the financial details for lease savings, I know you’ve mentioned the 200% headcount reduction in Mexico that happened yesterday, but maybe a little bit more color and quantification or can you quantify the impact on the mine level whereas from the corporate level if you could?

Dan Dickson

Hey, Heiko, it’s Dan. Thanks for the question. On a cost standpoint for the (inaudible) we especially cut about 20% of our workforce at El Cubo, approximately 30% of our cost has been labor at El Cubo, cutting is notable $6 on a per ton basis, and we do have severance cost related to those individuals, amounted to about a $1 million we won’t see lot of cost savings closer in Q2, you will isolate that severance for our readers that in Q1 in our MD&A, but really, what we also expect from these cost savings result. Not to lose any productions with these lay-offs, at the year operation, our lay-offs at Guanacevi and Bolañitos were very minimal, guys where we thought we are a little thick out and we’ve spend out and even in Vancouver, we did some minor changes even to significant change there in our cost structure, but what we have done we’ve reduced various departments things that we are going on work on professional development investor relation, the amount of conferences we are attending et cetera. I believe our savings are there is somewhere between, $300 million to $500 million and then on exploration we got about $4.2 million from our budget income statement in budget exploration, expenditures so rather than having $16.3 million go through the income statement for 2013 we’re going to have about $12.3 as Brad eluded to. It’s like I say, it’s difficult to see what our productions and we actually expect almost an increase in production with the message that we’re sending through to the group.

Unidentified Company Representative

So, I could just reiterate, the biggest savings is actually deferring non-essential capital items and that works out to about $20 million net-net.

Heiko Ihle – Euro Pacific Capital Inc

Right.

Godfrey Walton

The next biggest savings was exploration at $4.17 million and again it was just we felt non-essential could differ it maybe to next year or just leave it. And the impacts on operating cost obviously a lot tougher to access than try to explain that we’ve made some savings in G&A through the layoffs clearly in Mexico, we’re trying to make a positive impact on our operating costs, but beyond that, Q2 is not great because the severance, but we do expect to recover loss ground in Q3 and Q4.

Heiko Ihle – Euro Pacific Capital Inc

It’s a three months worth of severance in Mexico, correct?

Godfrey Walton

That’s correct. Heiko, this is Godfrey. Plus those time for every year that they are with the company as well.

Heiko Ihle – Euro Pacific Capital Inc

Got it, got it. Well, how you guys have still make it call a conference on September 10.

Unidentified Company Representative

And I mean it’s somewhere actually as a compliment, Brad you’ve always known as the guy who is prudent in doing deals when everybody else is running the other way and obviously the current market environment gives you a lot of opportunities to do something for vice versa you just sort trying to survive (inaudible) methods and I mean obviously then the first choice would be the those three on board and say we have all those cash and can we maybe buyback some shares in the force. And my best feeling is that the thought would not go unanswered from the board or maybe it would, maybe just provide some color on that if you could?

Dan Dickson

Yeah, I’ll ask Terry actually to contribute to that, but before I hand, I just like to say that job number one, obviously is to get to this big spending period, we are almost done at El Cubo, and we didn’t really want to see our cash dip at all. So we have dipped into the line of credit instead, we have been able to keep our cash constant which is a good thing, so M&A is nowhere in that priority list, number two obviously is to continue and to deliver on operations and exploration according to our guidance, and only then we get to line item number three, which is opportunities, we do think this is a very opportunistic market, but in a very specific way. And on that I’ll hand this call over to Terry.

Terry Chandler

Yeah, Heiko on the opportunity side Endeavour’s focus is currently looking at opportunities and sort of mid to medium term or short-term development pipeline. So we are looking to add potentially projects to our pipeline for development and on the resource side. There are number of opportunities out there, I can’t go in any details obviously on this call. But we are advancing with several at the moment and you may expect to hear something along those lines in Q2 let’s go forward.

Heiko Ihle – Euro Pacific Capital, Inc

Fair enough. And then finally, I know, I have been taking up a lot of time on this call, in the past you guys have to sort of hang to metal markets or concentrate sales and sometimes even kept stuff over a quarter. Given the large increase in volatility which may work out quite well for you, are you guys continuing to do this in the future or is that sort of the volatility scares you away?

Unidentified Company Representative

We’ve got another two quarters to – we’re primarily concerned of our cash flow. So no. There’s no timing of sales for the time being. Once we get through the big spend which is basically the end of Q2 and then hopefully start paying down the line, then will feel the more comfortable, but recognizing and capturing some opportunities in the metal pricing.

Heiko Ihle – Euro Pacific Capital Inc

Great guys, that’s all I’ve got. I’ll go back in queue. Thank you very much.

Unidentified Company Representative

Thanks for your question.

Operator

The next question is from Benjamin Asuncion with Haywood Securities. Please go ahead sir.

Benjamin Asuncion – Haywood Securities Inc

Hey, thanks guys. I think some of the questions have already been answered. I just wanted to double check some figures. Dan, going back, the severance charges that you said we would look at for the second quarter basis and the 200 headcount reduction. You’re quantifying that in around a $1 million?

Dan Dickson

Yeah, $1.25 million.

Benjamin Asuncion – Haywood Securities Inc

Okay. And just touching on one of your comments earlier Brad, with respect to volume sort of running sort of an extra 400 tons per day over capacity running that through, I guess that would have been the loss towards the plan. What options do you have for managing the transition in terms of how does the revised capital budget impact the plant capacity at Cubo and what are the opportunities to cross the additional ore through there?

Bradford Cooke

We didn’t do any real big cuts for the El Cubo. One simple example, we were going to build a new admin building. But we found a way to put a second story on the new miners’ dry and change room. And so now we basically have engineering and geology in mine exploration all in the same building with the miners downstairs. So it was a bit of a capital savings there. That’s a type of thing that we said the capital to be deferred, just trying to make things work in a more efficiently.

Benjamin Asuncion – Haywood Securities Inc

Okay.

Unidentified Company Representative

And in terms of Bolanitos, the mine obviously has this capability to produce 2,000 tons a day or more and is one as we have the plant capacity, we don’t seen any reason why not even and of course up until we’ve had the lease class storage plants, with 1,800 tons produced capacity, but even the newly rebuilt, El Cubo plant operating at 1,200 tons per day, we’ve installed a 1,600 ton per day capacity there. And that should be fully commissioned this month, there is room for to continue processing Bolanitos at the El Cubo plant.

Benjamin Asuncion – Haywood Securities Inc

Okay, perfect. I think that answered my questions. Thank you very much guys.

Unidentified Company Representative

Thanks, Ben.

Operator

(Operator Instructions). Your next question is from Chris Thompson of Raymond James. Please go ahead.

Chris O. Thompson – Raymond James Ltd.

Good morning guys. Congratulations on a good quarter. Just focusing on the line of credit here, how much, I guess on the Q1 do you plan on this been drilling down?

Unidentified Company Representative

Thanks, Chris. At the end of Q1 we are 33 million we do expect to get into the mid 40s with the line of credit here in Q2, and then start producing that hopefully try at the end of Q2 or even into Q3.

Unidentified Company Representative

Just to remind that the total line of 75 million – close to limit on the line or to be honest any of covenants not even close.

Chris O. Thompson – Raymond James Ltd.

Right, excellent, just looking at the inventories, I noticed that you are booking about $40 million I guess in inventories, where do you see this going in the near term?

Unidentified Company Representative

Significantly reduced our inventories as we talked about quickly prior, we signed concentrate agreements with two different groups out of Bolanitos, those are signed late March, we are able to get most of our concentrates sold then and then shortly after quarter end the rest of the concentrates went out, so we significantly reduced it. We’ll carry always small amounts of inventory probably about 250 tons of concentrate at the end of Q2 and then roughly about 200,000 ounces of the Bullion silver, which would be sitting on another refineries at the end of Q2 as well, so we can significantly reduce it going forward which is what we are trying to do obviously improve our cash position at this time.

Chris O. Thompson – Raymond James Ltd.

Excellent. Okay, thanks for that. Just a final question, let me see the selling of (inaudible) from Bolanitos, it comes at a cost refining cost, can you quantify that in a ton per also a dollar per ton amount?

Unidentified Company Representative

Yeah, it was an additional $7 per ton, but if you recall we had another call about a month ago, talking about our sales concentrate and its on a net basis, it was breakeven. So with the additional metal that we are capturing through the concentrate sales, the cost to us was zero, but it’s also reflecting our top line and obviously reflecting on cost of sale and the reflection of cost of sales is about $7 a ton.

Chris O. Thompson – Raymond James Ltd.

Excellent, guys, congratulations again.

Unidentified Company Representative

Great, thanks, Chris.

Operator

The next question comes from Andy Schopick, a private investor. Please go ahead sir.

Unidentified Analyst

Hi, good morning, good afternoon to everyone. Brad, you’ve been in the business a while, you have been through so many cycles, view of the actions that you elected to take here, is it your opinion that you know difficult conditions in the mining business are going to be with us for while?

Bradford Cooke

What a question, thanks, Andy. Well, in terms of metal prices, obviously, we are looking at a new world order at least short-term and companies have to adjust quickly to these current metal prices, will they last for years?

No, no, I think gold and silver are so more than just commodities they respond to financial conditions worldwide and so I do believe that the half the investment demand that we enjoyed from 2008 to 2011 and has been duly departed in the last two years, we’ll actually come back into the precious metals, that is why they’re precious.

So, it’s just a question of when and that I can’t answer, I think we’re prepared to, and we have model $23 silver and $1400 gold for the rest of the year and we’re quite capable of producing profits at those metal prices, if you recall it was barely August of 2010 less than three years ago that silver was $18 and most of us dreamed at $23.

So, that’s the perspective that I have is that we’re one of the stronger companies in the sector and are quite capable of generating free cash flow in this market. Now, we did obviously do our big deal last year with El Cubo and our business model is basically buying old mines in historic districts and spending the time and money to fix them up and so they also can become future cash covenants, we’re not there (inaudible) El Cubo but it looks like return to corner.

Unidentified Analyst

So it is good to hear and certainly you’ve got a lot of work still to do?

Bradford Cooke

Yes indeed.

Unidentified Analyst

Dan, quick question for you, you have $30 some odd million of goodwill on your balance sheet and is that all in definite life that was no amortization of finite intangibles?

Dan Dickson

Yeah, no that is true. The goodwill relates to our acquisition of Cubo probably supported on the balance sheet by the inspiration of we’re doing that, we do believe there is potential to significantly increase reserves and resources there. Goodwill as we know or likely know you don’t amortize goodwill it’s either written off for it’s held forever, so the only way that goodwill will come off our balance sheet will be an impairment or as we, the end of the life of Cubo, so I won’t see changes there any time soon.

Unidentified Analyst

Okay. Thank you.

Bradford Cooke

Thanks, Andy.

Operator

The next question comes from Firas Abbasi of bcIMC. Please go ahead.

Firas Abbasi – bcIMC

Hi, guys. Question on reported revenues, I’m just trying to reconcile some numbers, page 11 on the MD&A it’s for gold sales and page 17 on, in financial statements I see that Guanaceví and El Cubo line up really nicely, but Bolanitos saw some discrepancy there. Can you please kind of guide me where – apologize a bit.

Bradford Cooke

No, that’s a very good question it was brought to my attention earlier this morning, on page 11 the reconciliation all worked out all the cash cost numbers are correct, inside that calculation the Bolanitos revenue number and the change in by-product inventories, it’s got $2,000 difference, so the revenue that you see in the financial segments in the segment, it’s correct.

Firas Abbasi – bcIMC

So, you are just adding up the $4 million and the $10 million that was not come up to the 17 almost that’s in financial statements, I just been, sorry…

Bradford Cooke

Yeah, I know, like I said, the financial statements are correct.

Firas Abbasi – bcIMC

Yeah.

Bradford Cooke

On page 11 all the cash cost final numbers are correct, but inside the change in by-product inventories and the by-product gold sales in Bolanitos.

Firas Abbasi – bcIMC

Okay.

Bradford Cooke

The others should reach 69.96 by-product gold sales.

Firas Abbasi – bcIMC

Okay, got you. Okay, thank you very much, there is no question.

Dan Dickson

Thanks, Firas.

Operator

There are no more questions at this time, I’ll turn the conference over to Brad Cooke for closing comments.

Bradford Cooke

Well thank you very much everybody. And I would like to finish off with another comment on El Cubo. We actually had a great turnaround in Q1 at El Cubo and as we try to indicate it’s probably not going to be quite as good in Q2, potentially due to all the changes, currently underway. The recommissioning of the plant and service infrastructure, the lay-offs in the mine, and certain return over the plant.

So I just want to caution people that it’s still work in progress but as Godfrey alluded to in addition to making these changes for the long-term which when we hope will start showing up in Q3, is very significant progress being made doubly with the year completion of the capital projects with the progress in our exploration of numerous targets in the mines. So look for more news on El Cubo in the next couple of quarters, and stay tuned. Thank you.

Operator

Ladies and gentlemen, the conference is now concluded. Thank you for joining and have a pleasant day. Goodbye.

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