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Endeavour Silver Corp. (NYSE:EXK)

Q1 2014 Results Earnings Conference Call

May 13, 2014 03:00 PM ET

Executives

Meg Brown - Director of Investor Relations

Dan Dickson - Chief Financial Officer

Analysts

Chris Thompson - Raymond James

Chris Lichtenheldt - Dundee Capital Markets

Benjamin Asuncion - Haywood Securities

Joan Lappin - Gramercy Capital

Operator

Thank you for standing by. This is the Chorus Call Conference operator. Welcome to the Endeavour Silver's First Quarter 2014 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

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

Meg Brown

Thank you, operator and good morning, everyone. Welcome to the Endeavour Silver Corp. first quarter conference call. With me on the call today is, Dan Dickson, Endeavour’s Chief Financial Officer, unfortunately due to travel schedules in flight delays Brad, is not able to make the call at time today. But I am confident you have a good hand with Dan to respond to all of your questions at our Q1 results.

Before we get started, I'm required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2014 and future years, including revenue and cost forecasts, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines in mineralized zones. The company does not intend to, and does not assume any obligation to update such forward-looking statements or information, other than as required by law.

So, thank you for your patience. With that and I'll now turn the call over to Dan Dickson.

Dan Dickson

Thanks Meg. I think the format for today's call is similar to what we've done in the past so, I'll touch all the highlights for the quarter results, touch on a couple of other matters and then open it up for questions, which is what we feel the most valuable from these calls.

So silver production that we announced early in April was 1.9 million ounces of silver, up 27% from Q1, 2013. Gold production was 23%, up from Q1, 2013 to 18,500 ounces, putting us on a silver equivalent basis was 3 million ounces of production in Q1. Strong production profile primarily from Guanaceví had significantly higher grade than the reserves and resources and get output from both Bolanitos and Cubo.

From an earnings standpoint, that translates to $4 million of income in Q1, 2014 that's $0.04 per share. On an adjusted earnings basis, that's $0.05 per share, $5.5 million of income and EBITDA of $19.3 million.

The decrease of 38% is primarily on margins as everyone is well aware, precious metals space, we've seen a shrinkage in prices on gold and silver over the last year, realized price for silver fell 30% to $20.50 and realized gold price fell 19%, year-over-year to $1,306.

That generated revenue of $53 million, which is a decrease of 24%, translating cash flow from operations before working capital changes of $18.3 million and mine operating cash flow before taxes to $25.4 million. A very strong quarter for Endeavour; our guidance for 2014, 6.8 million ounces of silver, 70,000 ounces of gold, so we made well ahead -- on track and even ahead at this point. But nonetheless, we did have some fatalities at the end of the quarter. And no matter how good our production is, what come first is our employees and the safety of our employees. We did press release the fatalities at March 31st and April 7th. And again it's important for us to make sure our employees are safe. We operate in safe manner and continue to make sure that safety comes before production.

Subsequent to those fatalities, we developed three-pronged approach: One, we shutdown the mines for two days each, operation for two days for re-induction of our training program; two, we brought in a consulting group to evaluate our safety program so that brings together report now; and three, we've hired experienced staff to work at the pace training on a data basis for continuous time to make sure that our employees are looking for the risks that are out of face of a mine at all time. And it's not again -- it's not about production, it's about employees’ safety.

So with that, I'll open it up to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question is from Chris Thompson of Raymond James. Please go ahead.

Chris Thompson - Raymond James

Hi, Dan. Congratulations on a good quarter. Couple of quick questions here, looking at Bolañitos at the moment, as far as the plant recovery is a concern, what’s the chance of increasing those recoveries I guess on the silver and maintaining gold of ton levels?

Dan Dickson

Yes, thanks Chris. For Bolañitos, we did 87, just under 87% on silver. We expect that to line up closer to 90%. It’s just a timing basically of when we go through, we have some filter presses issues at the end of Q1 that delayed the push out some of the silver and gold at the end of the quarter, not a lot but enough to affect the recoveries there for Bolañitos. And El Cubo, it’s actually opposite effect. At the end of December 31st we had some stuff sitting in circuit that we were able to push out. And we run these numbers on a per ton basis directly that put into the front of [appliances] during the quarter.

Chris Thompson - Raymond James

Great, thanks. And then I guess I wanted to see I mean just remind us again I mean what does the mine plan look like for the remainder of this year, I guess I mean those were incredible grades I guess in the Q1?

Dan Dickson

Yes. The grades were fantastic, they came from Porvenir Cuatro. We were well aware that we had a pocket of high grade silver and gold; I mean it was running up in the 380 gram silver, 0.8 -- 0.88 gram gold in Porvenir Cuatro. The pocket was a little bigger than expected. There is obviously [variants] in drilling, but nonetheless we’ve seen that come back down to 43-101 reserve grades; it’s about 250 gram per ton silver. We’ve already seen that here in April and May, so expect that to come back down in Q2.

Chris Thompson - Raymond James

Great, thanks for that. Just very quickly on El Cubo, are we still on track for 1,500 ton a day by year-end you think?

Dan Dickson

That’s a good question. No, we do think we’re on track for 1,500 by year-end, I mean that’s the goal. As a lot of people are well aware, we start processing ore combined at El Cubo, so El Cubo to ramp up 1,500 tons per day out of the mine. We’re basically seven quarters of the eight quarters into our turnaround program from the mine operation standpoint. We still see it’s going to be a little bit lumpy going forward, but nonetheless we do see the potential to get 1,500 by the end of the year and we’re not changing our guidance on that at this point.

Chris Thompson - Raymond James

Great, thanks. And then finally I guess obviously with your cash generating ability, what’s the strategy with regards to have the balance sheet now? Are you going to be paying off some of that debt? What should we model?

Dan Dickson

Yes, it’s a good question. Our balance sheet we’ve added $9 million of cash from December 31st and actually reduced our debt by $1 million from $33 million to $32 million. The plan is to push that credit facility down to around $25 million, low 20s for the year. So we’re going to focus on strengthening our balance sheet and ensuring that we increase our reserves and resources going forward; that was the plan for 2014.

Chris Thompson - Raymond James

Great. Dan thanks a lot.

Dan Dickson

No problem Chris. Thank you.

Operator

(Operator Instructions). The next question is from (inaudible) of Euro Pacific Capital. Please go ahead.

Unidentified Analyst

Hi Dan.

Dan Dickson

Hey [Bharti].

Unidentified Analyst

Just quarter a quick question; in the press release you did mention that you will be increasing the exploration and mine development expenditure in the second and the third quarter. Could you provide some color on where those, I mean which mine are you focusing more at the moment?

Dan Dickson

Yes. We spent about just under $2 million in Q1 on exploration and our budget for the year was just over $10 million for all of 2014. The primary focuses are primarily at Bolañitos and El Cubo. Evenly split also another $2 million of San Sebastian. We just spud rigs on, rigs on site late April and start turning last week. So there is $2.5 million at San Sebastian and the rest between Bolañitos and Cubo of the remaining $8.5 million.

Unidentified Analyst

Okay. And just to walk you on, I mean, outlaid the [metal prices] are quite -- have been under pressure quite a bit. How are you going to start on any kind of new strategies also the production going forward?

Dan Dickson

Yes, there is no doubt the prices have been under pressure in Q2, which is pretty normal from a seasonal pattern and Q2 is always a suppress quarter for the precious metals. Our hedge program is knocking over quarter ended. We see prices run or drop to that matter will enter in certain things at under 90 days, but we don’t do anything that’s long-term or over quarter-end particularly looking at hedge programs if we do something 30 days to maximum 60 days and I was just trying to be opportunistic on the price front, but other than that we don’t hedge long-term.

Unidentified Analyst

Okay. Thank you very much. That’s it from my side.

Operator

The next question is from Chris Lichtenheldt Dundee Capital Markets. Please go ahead.

Chris Lichtenheldt - Dundee Capital Markets

Good afternoon guys. Spent a lot -- you still got the $44 million of CapEx and you spent a lot in the quarter, in first quarter. What’s your timing about (inaudible) sort of back-end heavy this year?

Dan Dickson

Q2, Q3 heavy Chris; the plants always kind of like we started -- we always take a little longer to ramp up in January come out of Christmas space in Mexico. We do hope to try to beat our $43.9 million capital expenditure, but can’t say that until we get further deeper into the year. But Q2, Q3 was the big plan in most of that and it’s curtailed back in Q4. The big part of that $43.9 million is mine development, that's pretty (inaudible) throughout the year, so that was $21 million of that $43 million. If you see that kind of, on quarter, the equipment purchases or changes in the plant that we're making that we're going to primarily happy in Q2 and Q3.

Chris Lichtenheldt - Dundee Capital Markets

Okay, great. And then just secondly, you got little more high-grade at the Guanaceví and you expected in turn a little more cash. Have you even thought to increasing that exploration budget?

Dan Dickson

Not at Guanaceví at this time. We are happy to spend our money that we have available on Bolanitos, Cubo and San Sebastián. We would see the better potential there for significant growth in our reserves going forward for 2014 than at Guanaceví. We still have plans of exploration at Guanaceví, but at this point of time where prices are been below $20, we are not allocating any extra funds to Guanaceví, other than what we allocate at the beginning of the year, which is about $1 million.

Chris Lichtenheldt - Dundee Capital Markets

Okay. But would you consider spending more at Cubo and Bolanitos, given that you produced more cash now, like increasing the budget overall I guess is no question.

Dan Dickson

Yes. No, it's something that we look at all the time. I mean if silver moves up to $22, $23, we'd be happy to put another drill on the ground to do some work. But at this point of time, I know we've pushed some exploration forward to happen in Q2 rather than Q3, which will give us room to do more exploration later in the year, but again at today's prices, it is something that we're going to guide out to the market.

Chris Lichtenheldt - Dundee Capital Markets

Okay, I got you. Thanks a lot.

Dan Dickson

No problem.

Operator

(Operator Instructions). The next question is from Benjamin Asuncion of Haywood Securities. Please go ahead.

Benjamin Asuncion - Haywood Securities

Hey Dan. Just a couple of kind of housekeeping questions here. Out of that 21 in development CapEx for 2014, can you break apart what development CapEx was spent in Q1? And then perhaps also if you can itemize it by operation.

Dan Dickson

Yes, I actually can. The 21 was spent I believe -- just give me a second, let me make sure I give you the absolute right number. So we’ve spent 9.3 total in capital in Q2; of that 9.3, approximately 6.5 million was at mine development, 3.5 million was at El Cubo, 1.5 million was at Bolañitos and 1.6 million at Guanaceví.

Benjamin Asuncion - Haywood Securities

Okay. So I guess were development rates kind of in line with what your expectations are in terms of being able to kind of track your internal estimates?

Dan Dickson

They are; they actually were. In the MD&A, we put the closure with regard to how many kilometers each of that represents, so I don't have in front of me right now; I can't recall in my mind. But as far as we want to see as a little bit behind and Bolañitos and El Cubo were on track, in fact El Cubo was ahead of track up until our accidents in April.

Benjamin Asuncion - Haywood Securities

Okay. And can you give us a sense of what throughput rates have looked like post quarter end either in April or kind of what you're seeing now in terms of your current run rate?

Dan Dickson

Yes, I’ll answer very fair question. Bolañitos has been pretty standard with what we saw in Q1 with the two day shutdown, At Guanaceví it took little longer to get up and going after the shutdown of (inaudible) for the investigation in the two days, but it's now running to expectations the 1,200 tons per day. And Cubo has taken probably a little bit longer to get up and going after the investigation. There is a lot to go on there. It’s really a culture changing, some of the preliminary stuff that we’re getting out the report, so our safety programs are fantastic. It’s the connection with the employees to make sure they are following this protocol. So, we’ve tried to do more training and tried to unlock what’s going to connect with those employees to make sure that safety comes before production. So it’s been a little bit slower going on and not all just because of safety, you regular day-to-day complexes with it. But in general the mines are doing what we’d expect them to do at this point.

Benjamin Asuncion - Haywood Securities

Okay, perfect. Well thank you very much.

Dan Dickson

Thanks Ben.

Operator

There are no more questions at this time. I’ll now hand the call back over to Dan Dickson for closing comments. Pardon me; there is one more question now from Joan Lappin of Gramercy Capital. Please go ahead.

Joan Lappin - Gramercy Capital

Hi. I was a little late getting on the call. What assumptions are you using for silver prices for the rest of this year and next year?

Dan Dickson

For reserve and resource which is kind of the underlying price assumptions for us in our 43-101 report we used $22 silver and at least $1,300 gold or thereabout. As far as prices for 2014, we used $20 in our budgets at the beginning of the year and for 2015, we would just use $20 as well, not that we’re considering what really the prices are in 2015 at this point, we go through that budget process in Q4 for the company.

Joan Lappin - Gramercy Capital

So, what are the past dues that you’re seeing in terms of reality?

Dan Dickson

Well the reality is there in the spot market right now silver is trading just below $19.50, it’s probably around $19.40 or $19.44. For the quarter, we sold our silver at $20.50, so we’re a little ahead on that standpoint. But we’ve built in to volatility where we’ve got cushions in our budget to make sure that we can do our capital programs and our exploration program.

If silver gets lower, we are okay and if silver even gets lower than let’s say $18, we have got other measures we can take at the operations to reduce cost if we have to we can reduce tons increasing grade things of that nature. But for Bolañitos, our main stay operation in Guanajuato it’s really what we call price proof if silver got dropped to $12, $13 then we would have an issue and that we’d start considering changes there.

At Guanacevi we think to operate it around $16, $17 price at grades that are closer to 43 101. And then at Cubo same thing about $16, $17 at this point kind of the breakeven we get nervous about having to adjust capital programs or ramp up to 1,500 tons per day et cetera, ct cetera.

So we think we have got good protection from silver price and gold price at this point. Where it’s going to go from here Joann, unfortunately I don’t have the crystal ball. But we do see Q2 kind of being stagnant where it’s going to be here until the end of June then hopefully it picks up in the third quarter going into the fall.

Joan Lappin - Gramercy Capital

What would you -- would make it up?

Dan Dickson

Joanne I’d kind of size about $75 or $100 of silver. Now in reality I don’t get overly concerned with where the silver price...

Joan Lappin - Gramercy Capital

I think it would be good, we think…

Dan Dickson

Absolutely that would be great, even 30 is good and even 25 is better than 20, I mean higher price is always better for sure. I just like to keep these calls more inline with what we can control as a company and discuss our cost and our capital structure and our exploration spend so our investors and our analysts understand where the company is going and what we are trying to do.

Joan Lappin - Gramercy Capital

All right, well thank you.

Dan Dickson

Thanks a lot Joanne.

Operator

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

Dan Dickson

Thank you. And want to thank everybody for coming; I think one of the key things for the quarter on Endeavour was our strong production that’s translated into our income statement. I think our cash cost are going to be very favorable of guide amongst our peer group $4.87 for Q1. All in sustaining cost which is the metric that we are all kind of using in the peer group is $12.15 which is very favorable, significantly down from Q1, 2013 down 15%.

So I think the company is doing what it has to do in the market like that we’re in. We hope to continue to do that. We do expect Q2 and Q3’s exploration spend and capital spend to increase. We will see the sustaining cost come up a little bit. And then the last few thing is our very strong numbers and happy to report it to our shareholders. Thank you.

Operator

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

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