Coeur d’Alene Mines Corporation Q2 2010 Earnings Call Transcript

| About: Coeur Mining, (CDE)

Coeur d’Alene Mines Corporation (NYSE:CDE)

Q2 2010 Earnings Call Transcript

August 10, 2010 1:00 pm ET


Debbie Schubert – IR

Dennis Wheeler – Chairman, President and CEO

Leon Hardy – SVP, Operations

Mitchell Krebs – SVP and CFO

Don Birak – SVP, Exploration


James Puckle [ph] – Puckle Capital Management [ph]

John Tumazos – Very Independent Research

Daniel Greenspan – Macquarie Research Equities

Chris Lichtenheldt – UBS


Good afternoon, my name is Nutrias and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator instructions) Thank you. I would now like to turn the conference over to our host Debbie Schubert. Ms. Schubert, you may begin your conference.

Debbie Schubert

Thank you for joining us today to discuss the Company’s second quarter and six month results. This call is also being broadcast live on the Internet through our web site at, where we have posted slides to accompany our prepared remarks. Telephonic replay of the call will be available for one week following today’s call.

On the call today are Dennis Wheeler, Chairman, President and Chief Executive Officer; Mitchell Krebs, Senior Vice President and Chief Financial Officer; Leon Hardy, Senior Vice President of Operations; Don Birak, Senior Vice President of Exploration; and Humberto Rada, President of Coeur South America and Manquiri.

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 projections. Please see our full cautionary statement on slide two.

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

Dennis Wheeler

Thank you, Deborah. Welcome and thank you all for joining us today. With the company’s second quarter results we are beginning to see early stages of the impact of our significant investments in three new, long-life precious metals mine. Combined with continued strength in gold and silver markets during the past quarter, Coeur generated record metal sales of $101 million, 49% above last year’s second quarter, and more than any other quarter in the company’s history.

In total, Coeur produced 4.2 million ounces of silver and more than 23,000 ounces of gold during the quarter representing 7% and 68% increases respectively. The large new mines brought on line in the past two years, San Bartolomé and Bolivia and Palmarejo in Mexico were the main contributors to our quarter operating cash flow of $32.5 million, another company record.

Also in the second quarter, I am pleased to say that the third leg of our strategy came to fruition with the start up and successful commissioning of the Kensington gold mine in Alaska. We began processing North Kensington June 24, and as Leon Hardy will tell you in a few minutes, start-up and operations have been very smooth. In fact, the first two barges of containers of gold concentrate have already left the mine site.

We expect Kensington to produce approximately 50,000 ounces of sifted gold this year, which will help boost company wide gold production to 170,000 ounces, a 135% increase over last year’s level, and in line with prior guidance. In addition to the positive launch of mining operations, Kensington marks another company milestone. We have entered into an historical partnership with China National Gold Corporation, China’s largest gold producer for the sale of half of Kensington’s gold concentrate. This agreement not only establishes an important new relationship between Coeur and China but also represents the first of its kind between a state-owned China Corporation and a United States precious metals mining company.

The operation sites Rochester, Martha, and Endeavor are all performing ahead of budget, and we continue to see consistent silver production and declining cost at San Bartolomé. At Palmarejo, many important milestones were achieved as part of the company’s ongoing optimization program, which are expected to increase production and lower costs in the balance of 2010. On the exploration side of the business, the company’s strategy is largely focused on drilling activities on large land positions near our existing mines. This strategy continues to generate very cost-effective, near-term additions to the company’s substantial, existing reserve and resource base, and my colleague Don Birak will have more to say about these efforts in a bit.

This slide makes several key points about Coeur and your asset portfolio. First our mines are 100% precious metal, silver and gold with no base metal exposure. Silver production generates approximately 70% of our overall metal sales while gold contributes to the remaining 30%, which will continue to become a more significant part of our metals portfolio going forward now that Kensington has been in production.

Coeur has the leading precious metal reserve and resource base on repeating our portfolio of new mines. At the beginning of this year, silver reserves alone totaled 269 million ounces, and gold reserves totaled 2.9 million ounces at the end of last year. We are maintaining our full-year production guidance today of 17.3 million silver ounces and 170,000 ounces of gold.

Now, I will turn the call over to Leon Hardy for more details on our operations. Leon?

Leon Hardy

Thanks, Dennis. As mentioned, we are very pleased to report that production began ahead of schedule at Kensington. We have completed pre-commissioning of the plant and ramp-up is proceeding smoothly as scheduled. The mine is on track to produce approximately 50,000 ounces of gold this year. Production from the full 150 ton per day plant is expected to average 125,000 ounces annually in its initial 12.5 year mine line based on current reserves of 1.5 million ounces of gold.

Recovery rates during the initial months of ramp-up were consistent with our design plans and are expected to decline as the processing higher grade ore begins. On the metal sale side, we are already completing shipment of two concentrate loads to China National Gold. We expect our average life-of-mine cash operating costs at Kensington to be approximately $490 per ounce. Needless to say, Kensington marks the achievement of a major milestone for Coeur, it is our third of three new long-life mines, and we are very pleased with the smooth ramp-up over the past six weeks.

At Palmarejo, you will see on the next slide, we have completed a substantial amount of test work during the first half of the year and are now implementing key steps to improve silver recovery rates and further bolster the mine’s performance. We began seeing the impact of these initiatives with silver production up 50% compared to June and gold production up 58% marking the mine’s second highest month of gold production since inception.

Cash operating cost during July declined to negative $0.97 per silver ounce dramatically reduced from the second quarter average of $10.78 per ounce. These improvements are a direct result of recently commenced mining of higher-grade underground ore and improved ore blending procedures.

A number of important planned steps were accomplished during the second quarter, which we expect to result in higher production and normal cost at Palmarejo. These include, commissioning of the Merrill Crowe refining plant that are in June, transition to the mining of higher-grade ore from underground production scopes versus lower-grade developmental ore, improved ore sorting and blending procedures for the various ore types at Palmarejo.

July’s improved results are a direct outcome of these initiatives, which we expect will boost second half performance at Palmarejo. This past quarter silver production nearly doubled to 1.1 million ounces compared to 587,000 ounces last year in last year’s second quarter, the mine’s initial quarter of operations. Gold production more than doubled to 19,950,000 ounces compared to 9,730 ounces in the same quarter last year.

During the first half of this year, silver production totaled 2.4 million ounces while gold production was 42,527,000 ounces. Cash operating costs averaged $10.78 per ounce during the quarter and $7.83 for silver ounce during the first half versus $19.44 per silver ounce during the last year’s second quarter and first half.

First year 2010 production is expected to reach approximately 6.3 million ounces for silver and 190,000 ounces of gold at an average operating cost of approximately $3 per silver ounce.

At San Bartolomé on the next slide we continued seeing solid operating results with significantly higher production and significantly – significant reduced cost. This is the result of process handling improvement and the mining of higher-grade ores that began in mid March.

Production increased 79% to 1.9 million ounces compared to 1 million ounces during the first quarter. For the first six months of the year, average monthly production was approximately 483,000 ounces. In July, San Bartolomé produced just over 679,000 ounces which demonstrates the significant progress our team has made since the beginning of the year.

Cash operating costs dropped 22% at San Bartolomé to 778 per ounce in the second quarter down from 998 in the first quarter due to a 52% increase in tons mined and 34% increase in average graded mined. In July, cash operating costs decline further to 739 per ounces.

We are lifting our full-year 2010 silver production estimates to approximately 6.5 million ounces at an average cash operating costs of $8 per ounce.

Slide nine illustrates the former San Bartolomé so far this year with consistent increases in monthly silver production since January shown on the left and declining cash operating costs shown on the right.

I’d also like to discuss our Rochester mine in Nevada. On slide 10, you will see that we plan to resume our fixed mining next year leading to at least six additional years of incremental production averaging 30,000 ounces of gold and 2.5 million ounces of silver annually. This will be an addition to the silver and gold that continued of ongoing leaching activities.

Not only as this plan restarted acting mining and economically robust project, we also expected to make a significant contribution to Nevada’s economy creating nearly 200 new jobs. We are increasing our 2010 production forecast at Rochester to 2 million ounces of silver along with 10,000 ounces of gold and an average cash operating costs of approximately $3.50 per ounce.

I’ll now turn the call over to Mitch for the summary of second quarter financial results.

Mitchell Krebs

Thanks, Leon. Silver production increased 7% to 4.2 million ounces and gold production increased 68% to over 23,000 ounces in the second quarter. Together with healthy increases in both silver and gold prices compared to last year second quarter, we were able to post all-time company records for metal sales and operating cash flow.

On slide 13, you can see the 49% increase in metal sales to 101 million which was also 15% higher than the first quarter of this year. Our record operating cash flow of 32.5 million was 116% higher than last year second quarter and up from negative 9.2 million in the first quarter.

Gross profit were metal sales less cash production costs shown in the middle of the slide 13 also improved dramatically, 123% higher than last year second quarter. This profit as a percent of metal sales grew by 50% from 28% than last year second quarter to 42% during this year second quarter. As production growth continues from our new mines, we expect that the continued margin expansion as cash production costs continue to decline.

These record results represent the first of what we anticipate will be many quarters of strong operating cash flow as our three new large mines contributing production compared with continued strong metal to markets. We have stated (inaudible) to our strategy during the construction of these new mines and have reached the inflection point at which we began to deliver the planned operating cash flow profile.

If you’ll continue to slide 14, you’ll see a good illustration of the early stages of the impact of our new mines. This quarter, the company reported 1.9 million and operating income compared to an operating loss of 8.8 million during last year second quarter. For the first six months of 2010, the company reported operating income of $1 million versus an operating loss of $8.5 million during the first six months of 2009.

The next slide shows the percentages of gold and silver contribution to our metal sales over the past five quarters. With Kensington coming online and it’s expected production of 50,000 ounces this year, the percentage of our sales from gold is expected to increase at prevailing metal prices this would mean a full-year 2010 revenue mix of about 40% for gold and about 60% from silver.

I’ll turn the call now over to Don Birak for an overview of what’s happening on the exploration department.

Don Birak

Thank you, Mitch, and good morning everyone. This past quarter, our exploration program accelerated as rebuild over 27,000 meters at all of our properties versus approximately 16,000 in the prior quarter. Majority of this drilling in the second quarter was again at Palmarejo where we had up to seven drills running on surface and underground.

Strong gold and silver results were obtained from several zones for Clavos at Palmarejo, notably 108, 76 and Lazaro Norte and at Guadalupe Norte. We continue to be encouraged by our exploration results and these along with other targets will be the focus of drilling in the coming months. We also drilled that the walk-in property in Argentina and commenced drilling at both Kensington and Rochester.

At Palmarejo, the largest component of our exploration work was around the main mine areas shown here on this slide, comprised five zones at Clavos. All the Clavos remained open for expansion on strike inner depth and our results in the past quarter demonstrates that.

In particular, several new Clavos cut wide sections of high-grade gold and silver at the 108 Clavos which is situated to Southeast extension at the La Blanca structure and less than 80 meters from the south tunnel access to the mines at mill site.

Some of these results are shown on this image. As exciting as these results are, we also continue receiving good results from drilling at the other Clavos around the mine. Our program for the coming month will focus on 108, 76 and the belt from Tucson to Chapotillo whether a good potential to increase surface mine of reserves and investigate those on sight depths which have not been tested in the past.

Looking at the 108 Clavos little more closely now, we show here two long section images of that zone. First point is drilling at the end of June 2010 with drill wholes colored based up on composite gold and silver grades are shown on the right. You can see a cluster of good results in yellow, orange and red starting at about the 950 meter levels and extending down to the 800 meter level. The entire zone is nearly 300 meters on strike.

For comparison, drilling coverage prior to 2010 is shown on the upper left section. Drill results in 2010 drilling are shown in the appendix of this presentation. Shipping to Guadalupe now situates about 6 kilometer to the Southeast of the current Palmarejo surface and underground mine, you could see where our drilling was focused this past quarter, in the long section on the left and to the 3D model on the upper right.

This drilling is expanded a strike length at Guadalupe to over 2.4 kilometers from Southeast to Northwest and vein system is still open for further expansion. We’re especially pleased with the results at Guadalupe Norte with many of the drill wholes are encountering better than expected gold grades in addition to high grades of silver.

Metallization is being defined here is very close to the plant underground access and should contribute to reserves and resources as part of the continued growth potential of the Palmarejo District.

Moving north now to Kensington, we’re pleased to have commenced core drilling on the Horrible quartz-vein system which ships about 650 meters to the west of the main Kensington mine now in production. This slide shows a planned view at the 850 foot level with an outline of the Horrible Vein, drill stations, drill traces and the 850 access level from the Comet Beach side of the property.

This past quarter’s drilling is our first major campaign at Horrible. Many assays are still pending and drilling is still underway but at this point we’re encouraged with multiple cores and sulfide veins in each drill hole. As we continue to receive assays we’ll identify the best opportunities for further drilling at Horrible as well as other targets nearby like the Kimberly Vein to the south.

Lastly, we move to Sascha, Argentina and the Joaquin project where we made up – where we may run up to 71% managing joint venture interest. We completed nearly 4,500 meters of core drilling in the quarter on several different targets. Our best results continue to come from La Negra. We show particularly encouraging results here on slide 22.

Drilling continues to identify wide zones of silver and gold containing sections of much higher grades. La Negra is composed of a main Northwest Southeast striking zone flanked by up to seven parallel zones. The main zone is about 1,000 meters long and has been fine to a vertical extent about 170 meters below surface.

Here you can see a plan view on the left side and their current configuration and a new three-dimensional model on the drilling. Our plan for the remainder of the year is to define the main zone with more tightly space drilling with mining and metallurgical studies on the main zone and to continue to explore for new zones in this large property which sits at over 24,000 hectares – 24,000 hectares in size now.

I’ll turn the call back over to Dennis.

Dennis Wheeler

Thanks, Don, to you and the exploration group for today’s report.

With regard to the silver and gold trends and markets, we do expect to continue to see silver and gold markets to remain very bright, very vibrant. Gold prices are set to market for 11th year of gains in 2011 as investors continue to see revenues from continued uncertain global economic outlook.

There is no doubt at Coeur that we feel that gold and silver remains slight to quality as a hedge against sovereign debt risk and the dollar. Unfortunately, our US economy continues to struggle. And on top of this, the US budget office recently has raised its deficit production projects to $1.4 trillion. A low interest rate environment continues as well to benefit our metals.

Meanwhile, individual investors have continued to flock to gold and silver ETFs levels at which remains strong with the largest gold ETF despite some minor liquidation recently still above $50 billion in hard assets. China and India remain robust customers for our products. And analysts have noted China’s plant to develop its gold market indicating a further expansion and sharp increase in Chinese demand.

So what to look for Coeur for the balance of this year? In the second half, we'll be looking for a number of catalysts fall into place for strong financial results in this marketplace. First continued positive momentum at Kensington as we expect 50,000 additional gold ounces this year, next, continued technical and operational improvements at Palmarejo with sustained higher silver recovery rates, higher grades and reduced costs, in other words, growing production and cash flow.

We expect continued silver production and lower operating costs at San Bartolomé in molybdenum and positive results from our expanded 2010 exploration program ongoing at Palmarejo and Kensington as well as at the walk-in property at Argentina which continues to expand.

At Rochester in Nevada, we expect to complete the permitting activities to restart active mining operations in 2011. And in summary, we expect to realize increasing operating cash flow from all of our new mines.

We’re now ready for questions, operator.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of James Puckle [ph] with Puckle Capital Management [ph].

James Puckle – Puckle Capital Management

Yes. Thank you. What is the breakdown of CapEx going forward for 2010?

Dennis Wheeler


Mitchell Krebs

Hi, this is Mitch Krebs. The first half of the year, CapEx totaled about 92 million with the largest two component of that being Kensington at 63 million and Palmarejo at 27 million. As we look into the back half of the year, our guidance for the full year as a company is about 165 million. For full year 2010 CapEx remains in place. The largest buckets of that will be at the end of Palmarejo and Kensington was about 40 million to be spent in the second half at Kensington and about the same at Palmarejo, the rest is small amount at our other operations, but by far as a largest two buckets are Palmarejo and Kensington. So we’ll see a larger drop-off in the third quarter and then a more significant drop-off in the fourth quarter as construction activities drop-off in Kensington. Is that answer to your question?

James Puckle – Puckle Capital Management

Yeah. One other thing, this CapEx include exploratory activity?

Mitchell Krebs

It includes one component of exploration activity that also called category three exploration which is the exploration dollars spent at the mine to convert the existing resources into reserves.

James Puckle – Puckle Capital Management

Another few questions. As the – as your companies move from a heavily, I guess, development stage to now more of a final stage, when do you expect a company to turn free cash flow positive?

Mitchell Krebs

Well, I mentioned this, the phrase inflection point in my comments and we really are there now this quarter with construction now having largely been completed in Kensington and now being in production, I think the quarter where we now switch to being a net cash flow positive company. So operating cash flow plus CapEx is positive now going forward and we will be building cash from here forward throughout the rest of the year.

James Puckle – Puckle Capital Management

Right. You’re telling me that the cash from operations and then exceed all CapEx going forward?

Mitchell Krebs

That’s correct.

James Puckle – Puckle Capital Management

Okay. That’s a very positive development. I appreciate that. Thank you.

Mitchell Krebs

You’re welcome.


Your next question comes from the line of John Tumazos.

John Tumazos – Very Independent Research

Could you describe the items that are the uses of the CapEx at Palmarejo? I understand the mine already was largely built and started up. Is this underground development? Is it changes to the recovery circuit to improve recoveries or something else? And second, clearly the returns on Kensington aren’t ideal. I think the non-cash charge related to royalty is relevant. At what gold and silver price matrix would you put Palmarejo on care and maintenance? Or seek to renegotiate some of your agreements?

Mitchell Krebs

Oh! Hi John, it's Mitch. I’ll take the first question there. As far as Palmarejo CapEx – you’re right one of the three large components of CapEx that you see here is in the underground development. The largest component is completion of the final tailings scan, and then between those two I would put the cement rock fill plant as being the third largest expenditure item.

John Tumazos – Very Independent Research

I’m sorry; I didn’t hear the third item.

Mitchell Krebs

The cement rock fill plant, underground cement rock fill plant.

John Tumazos – Very Independent Research

Sort of a pace backfill, cemented backfill.

Mitchell Krebs

Yeah. That’s right. And so…

John Tumazos – Very Independent Research

These are all planned outlays and not like repairs or changes to the circuit?

Mitchell Krebs

That’s right. These are three things that we determine that it could be put-off until after production BBM last year and those are what we’re in the process of completing here in 2010. As far as your second question, that’s what I really, John, hesitate to step into I think with where we are at Palmarejo and the cash flow profile there and the trend that I think we’re on. I don’t think that’s the question that we really have on our radar screen as far as price decks for any sort of action like you would pose in your question, so I think I’ll pay the pass on that one.

John Tumazos – Very Independent Research

Thank you.


(Operator instructions) Your next question comes from the line of Daniel Greenspan.

Daniel Greenspan – Macquarie Research Equities

Yeah. Thanks for taking my question. Can you just give me a sense how much silver do you expect to produce at Palmarejo next year?

Dennis Wheeler

Yeah. We really haven’t given out any 2011 guidance, but I think it’s fair to say like we’ve said in the past that Palmarejo is an 8 billion ounce run rate, silver mine with 100,000 to 120,000 ounces gold production profile that we’re into. So that that’s what we’re working for but we haven’t put out any official guidance yet for 2011.

Daniel Greenspan – Macquarie Research Equities

Okay. And is that consistent throughout the life of mine or does that start to tail off towards the end?

Dennis Wheeler

Daniel it’s hard to say that just given the dynamic profile there of the measured and resourced development in growth and things like a lot of loop which is coming along nicely and when a company decides to bring that into the production profile so that it’s kind of hard to look out that far in the future and really give us a strong indication as to what the production profile will look like there.

Daniel Greenspan – Macquarie Research Equities

Okay. Fair enough. And then just my last question, can you sort of give me the same idea at San Bartolomé it sort of looks steady state production is like there?

Dennis Wheeler

Yeah. We have pointed out in this slide deck there that over the last four or five months we’ve seem to achieve the nice steady state run rate. There is a 600,000 ounce to 650,000 ounce per month rate. That will grow to on an annualized rate in 7.2 to 7.8 million ounces and that’s what we’d like to consider as a sort of a run rate going forward there at by Ptolemy.

Daniel Greenspan – Macquarie Research Equities

Great. Thanks very much.

Dennis Wheeler



Your next question comes from the line of Chris Lichtenheldt.

Chris Lichtenheldt – UBS

Good afternoon, guys. Just a quick question at Kensington. When you – you talk about life of mine cash cost I think around 490. When you ultimately hit sort of the quarterly production rate like the life of mine quarterly production rate, do you expect the cash cost to come in around there from that point, just based on grade profile and recoveries that you expect to see early on or will it be an upward slope in your downward sloping cash flows, can you talk about that just a little bit, maybe?

Mitchell Krebs

Yeah. If you look – it's Mitch here, Chris. Hi. As you look at the cash cost profile at Kensington going forward, we’re obviously in a ramp up fury here through the end of the year. But you look at 2011 and beyond that 490 doesn’t seem to vary a lot. So I think it’s one of the region that – so for the foreseeable future, as we see it its fair to say that that 490 is kind of a pretty good run rate number.

Chris Lichtenheldt – UBS

Okay, great. That’s all I needed. Thanks a lot.

Mitchell Krebs



There are no further questions at this time.

Dennis Wheeler

Thank you, operator. Again, thank you all for joining us on the second quarter conference call for Coeur. We look forward to reporting to you further increases in production and cash flow as we go through the year with steady improvement as the result of our optimization program at Palmarejo and to reporting to you the further startup and operation steady state at Kensington. So, thanks again and talk to you soon.


Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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