Endeavour Silver Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Endeavour Silver (EXK)

Endeavour Silver (NYSE:EXK)

Q2 2013 Earnings Call

August 07, 2013 1:00 pm ET

Executives

Meghan Brown - Director of Investor Relations

Bradford James Cooke - Chief Executive Officer and Director

Daniel W. Dickson - Chief Financial Officer and Principal Accounting Officer

Godfrey J. Walton - President, Chief Operating Officer and Director

Analysts

Heiko Ihle - Euro Pacific Capital, Inc., Research Division

Benjamin Asuncion - Haywood Securities Inc., Research Division

Scott Gryba - BMO Capital Markets Canada

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Chris Thompson - Raymond James Ltd., Research Division

Paul Renken - VSA Capital Limited, Research Division

Operator

Hello. This is the conference operator. Welcome to the Endeavour Silver Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Meghan Brown, Director of Investor Relations. Please go ahead.

Meghan Brown

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver Corp. second quarter conference call. On the phone today, we have the company's CEO, Brad Cooke; as well as our President and COO, Godfrey Walton; our CFO, Dan Dickson; and our VP of Corporate Development, Terry Chandler.

Before we get started, I'm required to remind you that certain statements on this call may contain forward-looking information within the meaning of the applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2013 and future years. The company does not intend to and does not assume any obligation to update these forward-looking statements, other than as required by applicable laws.

With that, I'm going to turn the call now over to Endeavour's CEO, Brad Cooke.

Bradford James Cooke

Well, thanks, Meghan, and welcome, everyone, to our Q2 financial results call. I'd like to start with a recap of our news release that went out yesterday. And in addition to coming off our performance in Q2, we'll take a look at some of the things that are going on here in Q3, and then open it up for Q&A.

So off the top, Endeavour had a very solid quarter on operations, pre-released in early July. On the financial side, we did see our net earnings and adjusted earnings drop sharply, largely as a result of the sharp fall in metal prices.

Net earnings came in at around -- a $400,000 loss on the quarter adjusted earnings $2.7 million loss. EBITDA was up slightly to $16.6 million. Cash flow from operations before working cap changes decreased 32% to $11.5 million.

Cash cost production, we were pleased to hold the line as best we could, but net of gold by-product credits, our cash cost in Q2 came in at $10.53 per ounce of silver produced. On a co-product basis, the cash cost numbers were $14.75 per ounce of silver produced, and $8.54 per ounce of gold produced.

We finished the quarter with cash and equivalents of about $22 million, and we did point out in our news release that we're through now the bulk of our spending for the year, not only capital but exploration as well. And so we do see significant changes in Q3, not only on the spending front, but on the operating front as well.

We initiated a number of layoffs in Q2. Obviously, those severance costs hits the bottom line on our financial performance in Q2. They won't be there in Q3 unless we do more layoffs, which we are looking at. And we initiated a number of cost-cutting initiatives and revenue-enhancement initiatives in the quarter, which only got under way in May and so it didn't really give us any positive impact on our operational performance, financial performance in Q2. We should see the results of those cost-cutting measures in Q3. And we'd be happy to address the details of those cost-cutting measures in the Q&A.

But just touching briefly on exploration. We have enjoyed a good first half of the year in exploration. We've announced stellar results at our San Sebastian discovery in the Terronera vein. We announced 3 new pods in and around the mines at Bolañitos. 1 rig continued to test the Milache property, delineating that high-grade silver-gold mineralized zone.

And at El Cubo, we haven't yet released any results, but there should be some coming -- forthcoming here in the next month with regard to our activities, not only in and around the mines at El Cubo, but on the primary targets moving to the south.

In terms of our outlook for Q3 and for the rest of the year, we do expect to see significant reduction in operating costs at all 3 operations, actually, in Q3, as a result of our cost-cutting measures. And we are in the middle of another cost-cutting review to see what more we can do to tighten up these operations, not only short-term, but long-term. And that may include more layoffs, it may include some high-grading, vis-à-vis, getting out of low-grade stopes and just leaving them for the future when metal prices are higher.

I already touched on the fact that our capital exploration and administrative spending is basically going to a significant low for the rest of the year.

So I think with that recap, let's open it up for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Heiko Ihle of Euro Pacific.

Heiko Ihle - Euro Pacific Capital, Inc., Research Division

Can you sort of walk me through the $6.5 million to $7.5 million worth of capital, just sort of give it like a rough breakdown?

Bradford James Cooke

Sure. Actually, that's a better question for Godfrey and Dan.

Daniel W. Dickson

Yes, I'll take that, Heiko. I hope everything is well. What we're focused on over the next 6 months at all operations is ensuring that we maximize our cash flow, and that really comes down to -- Guanacevi, we have about 2 years of mine development that we're ahead of schedule, so we're cutting that down. And we're not going to develop. We are going to focus on mining ore out of there. So really, it's going to be minimal there, under $1 million, closer to 0. At Bolañitos, of the $6.5 million, $7.5 million, $2.5 million to $3 million is mine development at Bolañitos. And then the remaining mine development is really at El Cubo. It's fixing off some of the plant stuff, but primarily mine development for Cubo. There's only about 3 to 6 months of development that we're ahead at Cubo. We would like to be a lot more ahead there. I'd say we're about 1.5 years ahead at Bolañitos. So we have a lot of room at Bolañitos. And as everyone knows, Bolañitos is performing extensively. We've had great production out of there. So we're happy to keep development going, and we have a long future there.

Heiko Ihle - Euro Pacific Capital, Inc., Research Division

Got it. Now last year's average direct cost per tonne was just under $93. You were at $96.5 in Q2. Obviously, that's primarily due to El Cubo. But at what point in time should we expect that cost to head back towards the low 90s once the El Cubo integration is finalized? Or should that ever happen? Or how do you guys sort of internally model that out? Can you just sort of walk me through that, if you could, please?

Daniel W. Dickson

Yes, sure. No problem. Heiko, it's Dan again. It's really, the rubber is going to hit the road here in Q3. We had severance costs that ran through Cubo. We had additional payments go through Cubo that were kind of onetime in Q2. So we need to see that come back down to about $100 per tonne. Same thing with Guanacevi. We're looking at a lot of different optimization things for Guanacevi right now. Again, that's run at $113 in Q1, $111 in Q2. We think we can get that below $105 here going forward. Whether that's Q3 or Q4 is yet to be determined, but it's something that we're focusing on. So with that, and keeping Bolañitos where it's at from production standpoint, we'll see -- we'll hopefully see that drop through below $95 here in the third quarter and hopefully towards $90 by the end of the year or into next year. So it's something that we're definitely focused on. We understand with this price environment that we have to look at our operations and see where we can cut costs as much as possible to make it through if these prices sustain here at $20 or below $20.

Heiko Ihle - Euro Pacific Capital, Inc., Research Division

Right, right. Now you guys keep talking about the severance cost. Can you quantify how much was paid out during Q2?

Daniel W. Dickson

Yes. We paid out just over $1 million in Q2. $900,000 of that was at Cubo and $200,000 was at Guanacevi.

Heiko Ihle - Euro Pacific Capital, Inc., Research Division

Nothing for corporate or anything like that?

Daniel W. Dickson

Minimal at corporate. It would be under -- our costs for severance at corporate would have been under $100,000.

Operator

The next question is from Benjamin Asuncion of Haywood Securities.

Benjamin Asuncion - Haywood Securities Inc., Research Division

I just wanted to drill into costs a little bit deeper here. First and foremost, at Guanacevi, so the op cost of $111 per tonne, how much -- was this at all negatively affected by the repairs that were done? And if it was, what would be kind of the normalized level assuming the 1,200 tonnes per day?

Daniel W. Dickson

Ben, it's Dan again. Yes, we obviously averaged just under 1,200 tonnes per day because of those repairs that were required in the plant. As far as maintenance costs that ran through the plant related to those repairs, they weren't largely significant. I would say they're under $300,000, so specifically to that one project. So I mean, from a cost per tonne, that's less than $3, almost $2.50. And then it goes to how much tonnes that we could put through the plant. And it just goes to economies of scale. I mean, we have that stockpile of about 100,000 tonnes sitting beside the plant. So we could have spread a little bit more cost, but not a large balance. So if we -- when we ran at $111, in reality, if we were able to run 1,200 tonnes per day, maybe we could have seen $109 or $108. But it's not that significant, the economies of scale, at that point. I mean, the extra 100 tonnes would have been great, but it's only really the plant cost that we're saving on.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. And then just going into Bolañitos, so we saw a drop on a per-tonne basis for direct production costs. I think it was around $76 for the quarter. Obviously, this was helped by the fact that you averaged over 2,200 tonnes per day during the quarter. If we go back to the 1,900 tonnes per day level, how many of these savings due to the switch in mining methods and flexibility of the contract mining, what's the go-forward implication for savings? Are we going to see levels this low or are they going to go back towards kind of where it was in Q1?

Daniel W. Dickson

Q1 at $85 was high. My expectations is always to be in the high 70s, kind of around $78 to $80. So the $76 was a little lower than expected and rightly so because of the higher throughput through Las Torres, So a little higher than here at $76, $78 to $80 is a good number to model at. But I wouldn't expect lower. And $85, if you recall in Q1, we signed those concentrate agreements. So we had a lot of concentrate that was sold -- that was actually produced in 2012. And about $5 of that $85 related to costs related to that changeover, so to speak, from dore to concentrate.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. And maybe just a question, just with respect to El Cubo, and this is maybe something for Brad. What's your sense -- at what point in time -- you had some wording in the press release with respect to really needing to negotiate with the unions, obviously, to get some headcount down further. At what point do you then take that step to put it on care and maintenance? And can you kind of walk me through what your options are here in terms of scaling back Cubo to overproduce, I guess, from Bolañitos again, and what kind of flexibility you have there?

Bradford James Cooke

Sure. So thanks for your question, Ben. El Cubo, clearly, is still our biggest challenge and our biggest opportunity. If we can make the headway we think we're making at El Cubo in July and looking forward, then the operation will make it at these prices. However, that's assuming that we can continue to make progress on our operational improvements and that also presumes another round of layoffs. We absolutely need to pare back the workforce as best we can to better match the scale of the operation. When we took over the operation last year, there was 965 employees. That's not including contractors. And we really need to continue the trend here of improving efficiencies and productivities by not only improving how ore bodies are accessed in mine and reducing dilution, but in terms of the number of personnel and the productivity of those personnel. So that's kind of a broad overview. And specifically, we would like to get the cost down on a per-tonne basis at El Cubo to $100 range, maybe even lower. We think that's doable. We haven't seen much evidence of it. We had good progress Q4, Q1. Obviously, the numbers in Q2 weren't as good as Q1 because of the CapEx program, primarily. But we do think that we can get our cost down, and we are seeing it already. And I mentioned that we had a good number, a good month in July. July was actually a record month in terms of ounces produced and cost. And so, that's a trend that we'd like to see continue. It absolutely has to continue if we're going to put up with these metal prices. And to answer your question about care and maintenance, and I tried to express that in the news release, if we don't see prices better than $20, if they stay below $20 long-term and if we don't make more improvements, then we do, ultimately, between now and year end, perhaps sooner rather than later, have to consider care and maintenance. It's just a fact of life. We're not going to continue taking profits from Bolañitos to feed the losses at El Cubo, and that's what I was trying to express in the news release. El Cubo is on a short leash. We've seen good progress in July. It has to continue.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. And just following up on that. Can you quantify the headcount reduction in Q2 and what your targeted headcount reduction would be assuming 1,200 tonnes per day at El Cubo?

Bradford James Cooke

Perhaps Godfrey can handle that question.

Godfrey J. Walton

Sure. Ben, this is Godfrey. Thanks for the question. We -- in Q2, we had a reduction of about 176 people, and we are looking for something a little similar or a little deeper for Q3. But we're just in the process of talking through this with the union, as I've mentioned in the press release. And we're also looking at our contractors to just see where we can get the best efficiencies from. We've done a bit of adjusting on some of the mine plan. And so we're looking at better stopes, better grades, better tonnes. So I think you'll start seeing some differences in Q3, but if we can get the reductions that we're looking for in personnel, I think it is going to make a big difference.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. So we should see the improvement in terms of -- the mine plan improvements with respect to grades in the third quarter, then?

Godfrey J. Walton

Yes. I mean, as Brad has already mentioned, July looked very promising. It was very good. Grade was up. Tonnes were up. And we've had some actually pretty good days even here in August. So I'm optimistic that we're starting to see nice turn.

Operator

The next question is from Scott Gryba of BMO Capital Markets.

Scott Gryba - BMO Capital Markets Canada

In terms of your exploration budget for H2, how much are you looking at spending there, and what's your focus going to be?

Bradford James Cooke

The exploration budget in Q2 is around $2 million, and it's really just the -- our wish list at El Cubo and perhaps, San Sebastian. We don't see any more exploration at Bolañitos, Guanacevi for the rest of the year.

Scott Gryba - BMO Capital Markets Canada

Okay. And then in terms of Guanacevi, the grade has been coming down there for the last few quarters. Do you think you have high-grade potential there? Do you think you'll be able to turn that trend around?

Bradford James Cooke

Certainly, Milache, the newly discovered ore pod, ore body that's awaiting development would improve our production grades when developed. However, with the current environment, we're not proposing to spend any money on development on Milache, certainly not this year. We'll take another look at it later in the year, vis-à-vis, short- and long-term metal price outlook.

Operator

The next question is from Chris Lichtenheldt of Dundee Capital Markets.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

First, just to go back to El Cubo for a minute. If in the event that you were to move forward with care and maintenance, can you give us some sense of what would be involved there in terms of costs initially and also going forward, just to hold that asset?

Bradford James Cooke

Dan, would you like to handle that one?

Godfrey J. Walton

It may be best if I handle it. This is Godfrey. Thanks for the question, Chris. We anticipate if we had to go in care and maintenance, we'd end up having to pay severance costs for all the employees. If we did that, that's approximately $3.5 million. And then we've got security around the site and we're estimating that at around $300,000 to $400,000 a month.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

$300,000, $400,000 a month, and that would be roughly it to just hold it at that point, after care and maintenance has been initiated? Just security?

Godfrey J. Walton

That's correct. We would have to pay costs for concessions and things like that. But other than that, there wouldn't be an additional cost.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Okay. I guess sort of a follow-up on that. Even if you don't go into care and maintenance, does this whole contemplation at El Cubo trigger the necessity to consider a write-down of that asset?

Daniel W. Dickson

That's a fair question, Chris. It's something that we discuss internally on indicators of impairment through IFRS rules. It's something that we looked at. Something we discussed at the audit committee level. Whether there is an indicator there or not, a couple of things that we pointed to for this quarter was whether these prices are temporary or not. We look at long-term price curves, long-term consensus prices. And then first and foremost with Cubo, it comes down to the idea that we have a 2-year turnaround process there, we're less than 1 year of turnaround process through June 30. Now we're through 1 year of that turnaround. But if these prices persist and we don't see improvement over at Cubo, it's something that we could be talking about again either in Q3 or at year end. We're not the only company, silver company in the space that's probably looking at this stuff. But at the same time, we don't think we have an impairment there as of today and -- but it's something we're looking at, we'll have to look at quarterly because of IFRS rules.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Okay. I appreciate that. That's helpful. And then just lastly on Guanacevi. You noted that you're probably -- you've got about 2 years of development. So is it safe for -- let's assume that you could go without really spending any CapEx there for 2 years before, I guess, having to either do substantial spend or potentially close that mine depending on prices? Or how do you think about Guanacevi given -- I guess, it's probably not generating that much cash, but it's still better than breakeven without development. Is that a fair assessment? Can you just describe that a bit?

Godfrey J. Walton

Chris, this is Godfrey. I can answer that, actually. We're not quite 2 years' development ahead. We're a little bit back of that. But we do have some flexibility there. We are looking at doing a little bit of development to keep ourselves ahead, as Dan had mentioned before. We're doing a little bit on the tailings pond as well to make sure that's progressing well. So for the next few years, we don't need to spend much in the way of capital. But I don't expect us to have to have a big capital spend after 2 years either. So I think if we have a steady progression, we should be fine.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

So we can assume for the next couple few years, I guess, less than $1 per ounce of production in capital spend. Is that sort of safe?

Daniel W. Dickson

We haven't provided any guidance yet for 2014. But for the next 6 months, we can -- that would be a very fair assessment.

Operator

[Operator Instructions] Next question is from Chris Thompson of Raymond James.

Chris Thompson - Raymond James Ltd., Research Division

I guess the common theme here is sustaining capital. What are the expectations, I guess, for 2014? Are you privy to talk about that for each operation? Just a sense, what should we be modeling for each operation as far as sustaining capital?

Bradford James Cooke

Chris, it's Brad, thanks for your question. I'll just take a high-level view of that, and then maybe Dan can chip in. We're not providing guidance yet on 2014, as you know. But looking forward, we know we can go 1 year to 1.5 years at Guanacevi with minimal mine development. We do need some mine development to provide fill for the cut-and-fill stopes, but we just put a long-hole rig there, so hopefully that will help to reduce our cut-and-fill requirements. At El Cubo, I think it's pretty much steady as she goes on mine development, no major changes, reductions, for instance, simply because the mine went for almost 8 years without any mine development, and it really is the main issue holding us back from gaining access to higher-grade areas. And so we don't expect to slam the breaks on mine development at El Cubo. At Bolañitos, we are privileged to have 5 ore bodies accessible by 1 mine ramp. So we get real high-value mining out of that mine development, and we're well ahead of our mine plan on development at Bolañitos. So we have relaxed, to a certain extent, our mine development at Bolañitos, and there's no urgency to pick it up anytime soon. In terms of capital spending outside of mine development, Godfrey alluded to some small spending continuing at the tailings pond at Guanacevi. We have loose ends to be wrapped up at El Cubo between now and year end, and virtually nothing else at Bolañitos. I think there's power coming into the plant over the course of the next 12 months at Bolañitos, but that CapEx is not a big spend. Godfrey or Dan, do you want to add anything to our capital spending for 2014?

Daniel W. Dickson

Yes. I mean, I would reiterate that we haven't finished our budgets for 2014. We're readjusting all our mine plans, even for the back of 2013. But historically, what we've seen, Chris, is Guanacevi, like I say, we're 2 years ahead. It's depending on how much mine development we want to do next year. Godfrey is giving me the hand. It's not -- we're almost 2 years ahead on mine development, just short of it. But if we do the size there, historically, we've averaged about $2 million to $2.5 million of mine development a quarter at Guanacevi and Bolañitos. So you're looking at $8 million to $10 million a year. It's what we've provided. Again, we haven't budgeted this yet for 2014, and we need our new mine plan for 2014. And then Cubo, we're not ahead like we are at the other operations. So it'd be consistent to what we're seeing. We are -- we will see a drop, because we've put a big push in for the last few quarters to get ahead in mine development where we can, but nonetheless, it'll still need some. So you can look at, at least $3 million to $3.5 million at Cubo going forward per quarter.

Chris Thompson - Raymond James Ltd., Research Division

Dan, just probably this next question is for you. What are your inventory levels at the moment? And do you see this as pretty much steady-state, or is there anything in inventory to sell?

Daniel W. Dickson

No. We are pretty much at steady-state. We could have sold our bullion. We had 200 -- just over 200,000 ounces of silver. And I couldn't tell you the gold bullion that we had. It was 900 -- 886, it's in the Note 7 of the financial statements. And then we also had concentrate inventory, which ran about 400,000 ounces of silver. So we had 600,000, but it's kind of steady-state with the concentrate as we ship it out. It gets priced the following month from when we fix it. Then with the dore, we could choose to do offtake agreements if we wanted to or if we had to, but we've left it and it just rolls out over 5 weeks, I think, that 200,000 would roll out.

Chris Thompson - Raymond James Ltd., Research Division

Great. The next question relates to grades at Bolañitos. Obviously, good grades in Q2. Is that sustainable?

Godfrey J. Walton

This is Godfrey. I think in the production conference call, we addressed that. It looks like it is for a while. And certainly, this next -- the rest of this year. It just depends on where you are in the ore body. We -- when we were drilling it, we actually hit some spectacular gold grades. So we're just in part of that, that part of the ore body at this point.

Chris Thompson - Raymond James Ltd., Research Division

Great. What should we be modeling? Obviously, this is a significant question, I guess. As far as head grades for El Cubo, what's in the budget for the remainder of this year?

Godfrey J. Walton

We are looking at a head grade of between 200 and 220 silver equivalent. Because there's a fairly large gold component to Cubo, we are looking at it as a silver equivalent basis. You're looking at somewhere in the 120 silver and about 1.5 to 1.6 grams gold.

Operator

The next question is from Paul Renken of VSA Capital.

Paul Renken - VSA Capital Limited, Research Division

I was wondering what the impact of currency exchange rates between now and the end of the year might have, given the change in prices and also the change in probable grades that you'll be implementing as far as your stopes for the coming 6-month period?

Daniel W. Dickson

Paul, it's Dan. Foreign exchange, for us, is big with the Mexican peso, about 65% of our costs are held in pesos, half of that is in labor. We've seen kind of a 6% movement up and down in -- to have it relatively unchanged for 6 months. But in Q1, it appreciated, and in Q2, the peso depreciated. And it amounts to about 6% of our total costs. So you're looking at $6 per tonne roughly on a consolidated basis. So not large. And we expect over the next 6 months for the peso to stay relatively flat, if not depreciate a little bit. But we're going with the assumption that will be flat. So about 6% of our total costs.

Operator

There are no more questions at this time. I'll now hand the call back over to Brad Cooke for closing comments.

Bradford James Cooke

Well, thank you, operator, and thanks to everybody for listening in. I'd just like to finish off by taking a look forward at the rest of Q3 on an operating and financial basis. We did initiate a number of cost-cutting initiatives in Q2, including layoffs. We're looking at a few more cost-cutting initiatives and more layoffs. In fact, we view layoffs as being critical at El Cubo and to a lesser extent, at Guanacevi. These are necessary measures to ensure that the operations can contribute to cash flow instead of taking losses.

We are optimistic that given our performance in July, all 3 mines are contributing to cash flow at this time, at these prices. And while it's too early to say whether or not that's sustainable, we are -- our intent is certainly not only to continue our performance based on how we did in July, but to see if we can even better it with additional measures.

So we're quite optimistic that Q3 will show the fruits of our labors, vis-à-vis, introducing greater efficiencies into the operations. And even with the proposed reduction in output at Bolañitos, we see our consolidated costs coming down.

Our target at each of the higher-cost operations, Guanacevi and El Cubo, is to ultimately drive those cost per tonne down to the $100 range. And as Dan already pointed out, we are enjoying sub-$80 costs at Bolañitos. So I just want to reiterate that we've made some gains. They haven't shown up in the financials yet, but they should in Q3. And we're making more changes to try and improve the operations through year end. On that note, I'd like to thank everybody for attending, and we'll talk to you in Q3. Thanks, operator.

Operator

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

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