Good afternoon my name is Erona and I'll be your conference operator today. At this time I would like to welcome everyone to the Coeur d'Alene Mines Third Quarter Earnings Conference Call. (Operator Instructions). Thank you.
I will now turn the call over to Ms. Debby Schubert. Ma'am, you may begin your conference.
Thank for joining us today to discuss the company's third quarter and nine months result. This call is being broadcast live through our website at www.coeur.com where we posted slides to accompany our prepared remarks. Telephonic replay will be available for one week following today's call. On the call today are Mitchell Krebs, Senior Vice President and Chief Financial Officer, Leon Hardy, Senior Vice President of Operations and Don Birak, Senior Vice President of Exploration.
Any forward-looking statements made today by management come under the securities legislation of United States, Canada and Australia and involve a number of risks that could cause actual results to differ materially from projections. Please see our full cautionary statement on slide two. With that, I'd like turn the call over to Mitch.
Thanks, Deborah. Welcome everyone and thank you for joining us. With the company's third quarter results released today, we are very pleased to report very strong quarterly and nine-month financial and operational results driven by our three new long-lived precious metals mines, as well as the very strong metals markets.
As you've probably seen, silver reached a new 30-year high today trading north of $25 an ounce and gold at near $1,400 and ounce. The third quarter mark the first full quarter, with all three of the company's new mines in production, leading to accelerated metal sales and cash flow, while operating costs and capital expenditures declined significantly.
Over the past three years, Coeur has been executing its strategic plan to transition the company to three new long-life silver and gold mines. The results from the third quarter demonstrate the momentum being created by these new operations. The most recent quarter delivered a doubling in quarterly gold production from the prior quarter at a 4% increase in silver production from the prior quarter. A 40% decline in cash operating costs of $4.87 per silver ounce, record metal sales of $118 million, up 17% from the previous quarter and nearly $30 million higher than last year's third quarter. A 58% increase in our operating cash flow to $34.7 million, compared to last quarter.
Operating income jumped to $10.5 million, from $1.9 million last quarter. Our cash position is strong, with nearly $52 million in cash equivalent and short-term investments at the end of the October and rising up from the $33 million at the end of September due to a rising cash flow.
Kensington, which began commercial production at the beginning of the third quarter, produced 15,155 ounces of gold during its initial quarter of operations.
Palmarejo silver production increased 41% from the second quarter and gold production increased 49%. With the higher production at Palmarejo, cash operating costs dropped to just $0.15 per silver ounce versus $10.78 per ounce during the second quarter.
At San Bartolome silver production of 1.8 million ounces was consistent with the prior quarter. While cash operating costs drop to 9% to $7.05 per silver ounce. In addition, we're enthusiastic about the progress made to expand production and Rochester silver and gold mine in Nevada. Just last week, this expansion in plant received a positive decision record – Nevada bureau land management represented the major milestone. This clears the lag for additional mining to commence with additional production for a new leach pad beginning in the fourth quarter of 2011.
This new production will lift average annual production at Rochester to approximately 2.4 million ounces of silver and 35,000 ounces of gold and make Rochester a fourth important component to the company's portfolio of operations. Rochester remains one of the great silver mines of the world, already having produced 127 million ounces of silver and 1.5 million ounces of gold over its 25 years of operations.
With exploration efforts underway, we're hoping to extend its mine life even further. We expect our growing cash balance to be sufficient to fund the related capital investment at Rochester next year. So third-quarter was a very good quarter for us both operationally and with strong financial metrics.
We expect this year to expand gold production by 535% over last year's levels to approximately 170,000 ounces. Thanks to the additional production from Kensington and Palmarejo and we expect to exceed 17 million ounces October production at an average full year cash cost of approximately $5.50 per ounce of silver.
I will now turn the call over to Leon to go over the progress at our individual operations in the quarter.
Thanks, Mitch. In the third quarter, the company produced 4.3 million ounces of silver, compared to 4.2 million ounces in the second quarter and 3.4 million ounces in the first quarter of the year.
On slide six, you can see the substantial increase in quarterly gold production to 47,000 ounces versus 23,000 ounces in the second quarter. The 105% increase in gold production was primarily a result of 15,000 gold ounces produced in Kensington mine during its initial quarter of operation and also a 50% increase in gold production at Palmarejo to a little over 29,000 ounces.
At Kensington, commercial production commenced on July 3 and the ramp up has gone very smoothly and as planned. The mine produced 15,155 total ounces and we sold a little over 7,000 ounces during the quarter, as the mine ran up to its shipments of concentrates. We have reached nine points throughput capacity of 12,000 basic ounce per day.
Kensington is the newest purable mine in the world and as we approach the year end, we expect to produce at the level of a 125,000 ounces annually, which is the run rate for the current license mine plant based on our current reserves of 1.5 million ounces.
Total downward target of the exploration initiatives at Kensington including some new products with growing results in the quarter.
The next few slides, give an overview of the progress we've been achieving in Palmarejo. This recent third quarter was Palmarejo's strongest quarter ever. We saw our highest production levels for both silver and gold, since the April 2009 start up.
Silver production increased 41% to 1.5 million ounces, compared to the previous quarter. Gold production increased 49% compared to the second quarter through the total of 29,823 ounces. Year-to-date, we produced 3.9 million ounces of silver and 72,350 ounces of gold at the mine.
Quarterly metal sales were up 37%, compared to the previous quarter. And cash operating costs have declined 99%, compared to the second quarter to just over $0.15 per silver ounce. This dramatic decline in cash cost from 10.78 per ounce in the second quarter was a result of significantly higher grade material from both service and underground operations and from a larger gold by-product credit due to increase in gold production and higher gold prices.
As planned, we began mining higher-grade ore during the third quarter. On slide 12, you can see the open-pit silver and gold rates were up 156% and 133% respectively in the third quarter. And we expect these higher grades to be mind throughout the reminder of 2010 and into next year.
During the third quarter, underground silver and gold rates increased by 10% and 11% respectively, the third consecutive quarter of increasing grades. We expect these levels to be sustained throughout the remainder of 2010 and into next year.
The processing plant achieved stability during quarter, with gold recoveries averaging 94% and silver recoveries remaining at about 70%.
Implementation of a series of enhancements in the third quarter including installation of a new pumping capacity system, enhanced focus on grind size, optimization of chemical levels and improved blending of ores are now beginning to make an impact. Several other capital improvements focused on additional oxygen plant and enhanced carbon stripping and regeneration, which are now underway and expected to lead to further gains this quarter.
We expected to produce approximately 6.1 million ounces of silver and 109,000 ounces of gold this year at Palmarejo, at an average cash operating cost of approximately 2.50 per silver ounce.
San Bartolomé is coming off with a good quarter. Production at San Bartolomé was up 73% from the first quarter of this year and basically flat with the prior quarter. In addition, we had a 14% increase in average grade and 5% increase in the recovery rate, offsetting a decline in tons milled during the third quarter.
Slide 16 further shows the favorable trends we are seeing in San Bartolomé, with an average up trend in quarterly silver production and with declining cash costs, which is about 9% to $7.05 per ounce. We are also seeing an increase in average silver grades mine, which was mostly the result of mining activities in the (inaudible) area which has been a major reason why gross margins continue to climb each quarter.
For the full-year in San Bartolomé, we expected to produce an excess of 6.5 million per ounce silver at an average cash operating cost of approximately $8 per ounce. As Mitch mentioned, we reached a major milestone and opening up a new production at Rochester. Just last week Bureau of Land Management issued a positive decision of record along – for an extended mining operation and additional silver and gold production beginning in the fourth quarter. This expansion will lift annual average production rates to approximately 2.4 million silver ounces and 35,000 gold ounces. Our current reserves there are 27.6 million ounces of silver and 247,000 ounces of gold.
We also have a substantial amount of major indicative resources, which provides gold production potential ongoing exploration activities, which again Don will talk about shortly. Already this year, we are expected to produce 2 million ounces of silver and 10,000 ounces of gold in 2010 at an average cash operating costs of $3 per ounce.
As Mitch previously mentioned, in this 25 years of operation the mine has produced 127 million ounces of silver and 1.5 million ounces of gold.
So this recent decision at Rocheseter will extend production in all of the gold, silver project. We're also pleased to report that our market will continue to producing over through 2011. We began 2010 with 1.2 million of silver reserves and 1.8 million of mineral resources. We expect there will be a larger year-end reserve that was part of 2011 operations, while we continue to line extensions with existing bank system, ore blocks and other available work. This year mine Martha has already produced 1.4 million ounces of silver and almost 1700 ounces of gold.
I will now turn the call back over to Mitchell.
Thanks, Leon. We have very strong quarter financially. The combination of the operating performance of our three mines and strong metal markets. The third quarter metal sales jumped here with 30 million to a quarterly record of 118.6 million. There was a 31% increase over the last year's third quarter and a 17% increase over the prior quarter. The company's average realized silver and gold prices during the third quarter were $18.87 per ounce and $1229 per ounce respectively representing increases of 30% and 29% over the prior year quarter.
Sales of silver contributed 62% of the company's total metal sales compared to 75% during last year's third quarter. As the company's gold production from Kensington continues to rise.
Slide 24 shows the improvement in gross mine margin over the last five quarters as we've seen production in metal sales increase and production costs remained essentially flat. To the quarter, cash operating cost declined 40% to $4.87 per silver ounce, compared to the prior year quarter, mostly due to Palmarejo cash operating costs of $0.15 per silver ounce.
Our quarterly operating income has really turned the quarter. Operating income in the third quarter increased to 10.5 million versus the 4.1 million operating loss during last year's third quarter. Compared to the second quarter, operating income increased 453% from 1.9 million. We continue to point to investors the operating cash flow as one of the most important financial metrics for the company.
Operating cash flow increased 58% in the third quarter over a strong second quarter. In last year's third quarter, the company posted negative operating cash flow of $1 million. Consistent with our strategic plan, this cash flow growth from operations is accelerating as the company's CapEx continues to decline now that our three new lines are in production. The recent quarter saw 19% decline in CapEx from the previous quarter to 36.8 million, which represents a 32% drop from the same period last year.
This represents the company's lowest level of quarterly CapEx in over four years, which is when we began construction at San Bartolomé, the first of course three new mines.
Our balance sheet remains strong with 32.8 million in cash equivalent for short-term investments at the end of the third quarter, which has grown to nearly 52 million at the end of October.
EBITDA in the recent quarter was 48.3 million and is a 106% increase from last year's third quarter and a 52% increase from the second quarter and here as our growth trends in operating cash flow. Our shares outstanding remain unchanged from the second quarter and we expect this trend to continue.
Total debt stands at just 186 million and the current debt-to-equity ratio was a little 9%. Also, the company received and monetized $10 million of Franco-Nevada Corporation of common shares in the third quarter in connection with an operational completion test tied to the January 2009 gold royalty financing at Palmarejo.
The company's silver and gold production is rising rapidly, with San Bartolomé beginning production in mid 2008, Palmarejo in 2009 and now Kensington in mid 2010. 2011 will represent the first full year of production from all three of these three mines.
Along with this production growth and higher metals prices, is dramatically higher cash flow. Looking back at 2008 for the full-year, quarter's EBITDA was negative 2 million versus the 48.3 million in just the third quarter of this year alone.
I'll turn the call over to Don Birak now for an overview of recent exploration activity.
Thank you, Mitch. Coeur's aggressive drilling program continue to outpace from the second quarter with nearly 30,500 meters completed in the third. Majority of our recent drilling was again at Palmarejo, where we continue to expect a strong gold and silver mineralization from several zones.
In Argentina, we commence the program to define the main part of La Negra at Joaquin, to our 50 meter grit to support mineral resource modeling and technical studies planned for the coming months. We also commenced new program of new mine drilling at Martha. At Kensington, Rochesters to the first phase of drilling on the Horrible and Norte Packard were completed. Excellent results were obtained from both.
Moving to slide 32, at Palmarejo we continue to expect strong gold and silver mineralization from several zones, notably 108, 76, Tucson, Chapotillo as the Palmarejo open-fit, an underground mine and at Guadalupe. The Guadalupe is situated about 6km to the southeast of the current Palmarejo operation. You can see on slide 33 where our drawing was focused this past quarter in the long section image on the upper left.
Two areas, Guadalupe and Las Animas received the most drilling this past quarter. Drilling at Guadalupe Norte extends the straight length of the mineralized zone to the north-west and we're especially pleased with the results here when many of drill holes continue to incur high gold rate in addition to silver.
The mineralization being defined here is very close to the plan underground access and should contribute to the mineral resources and reserves as part of the continued growth potential at Palmarejo district. At Las Animas, drilling was conducted to define the southern land to about 40 meters spinners and less optic expand, mineral resources and reserves at this near (inaudible) level.
All of the levels of Guadalupe remain open at debts. Our next program was conducted in the Santa Cruz province of Argentina on Joaquin and around our Martha mine is shown on slide 34.
Late in the quarter and near the end of the winter season, focus for Joaquin shifts to definition drilling of the La Negra zone shown here, with the gold to define the main La zone to a nominal 50 meter grit, invest for net estimation of the first mineral resource and technical evaluation.
Over 3200 meters in Coeur well drift – we drilled in this definition program. In addition, drilling at La Morocha to the west, intersected 30 meter of 408 grams per ton of silver at about 125 meters below the surface, which is one of the highest grid and one of widest drills at La Morocha today.
It’s also one of the deepest intersect – it is the deepest intersects so far at La Morocha. This still remains open at depth turning to the North East and La Negra infield drilling will continue to be focused for fourth-quarter drilling.
Shifting to Kensington on slide 35, we are pleased to present results from our completed Phase one drilling on the Horrible vein system. Total of 35 holes were completed on this large system this year, which is well positioned along the 850 foot excess depth and about 2000 feet west of Kensington. This is the first drilling conducted in Horrible by Coeur and mostly new drilling, multiple core holes.
The program for the remainder of 2010, we are focusing on the higher grade used to define to date followed by additional exploration in 2011 on this and another targets in the district. We're expecting this and follow-up work to continue, to contribute to new mineral resources and reserves.
Next slide 36, shows two of the two higher grade core intersections from Phase one drilling. You can see core from two drill holes, 31 and 16 both drilled to the new (inaudible) drift this year. Both core holes cut down the high grade gold mineralization containing in quartz, pyrite and carbonate mineralized which is the main ore hole of the Kensington mine to the east.
Finally, we are curious by the results from our latest drilling at Rochester. The main focus of this drilling was in the northeast trending stuctural belt, making the main Rochester mine with the Nevada Packard to the South.
Last exploration in this quarter was in late 1990s and our 2010 program was designed to test expenses of the mineralize structures from Packard.
2011, we planned to test the same area again and another untested zones on the large Rochester property. And we expect that will lead to further increases in resources and reserves. Mineral reserves in the Rochester district now stand at over 27 million and nearly 250,000 contain gold, ounces of gold and silver. Excuse me, silver and gold respectively as defined in the recently updated feasibility study to support new phase of mining and pressure recoveries.
Overall we continue to be encourage by our exploration and results from these and other targets, we will continue –this will continue be focus for drilling in the coming months.
I'll turn call back now to Mich.
Thanks, Don. This past quarter, we reaffirmed the vibrant dynamics that work in the precious metals market. And the positive impact they are having on our company. Both prices are up over 30% over the past year and now this morning increased – silver prices are up 50%, over that same time period.
Precious metals remain at preferred same payment around the world. In particular as we're seeing the declining dollar and increasing and growing uncertainty relative to international currencies. The current record low interest rate environment and the loosest monetary policy in decades should continue to benefit precious metals.
Meanwhile, in China and India with their large and growing economies, they are losing controls over the purchase of precious metals and buying remains vibrant. India is also experiencing a dramatic growth of fund into gold ETFs.
Higher assets in Gold and Silver ETFs for record levels. This has been the major driver of gold prices towards the $1400 ounce levels of gold.
Similarly on slide 41, the silver price that has now risen beyond $25 per ounce is being fueled by ETFs safe aided investments. The iShares Silver Trust, the largest of the silver ETFs, now has 329 million ounces of physical silver underlying this silver investment vehicle.
Silver has outperformed gold 2-1 this year. Investment demand is the main driver behind the 50% rise in price over the past year to its current level of over $25 an ounce. Worldwide ETF holdings in silver are now near 450 million ounces and investment in silver coins also remain strong. Silver has been driven by the same dynamic fiscal and it's also been benefiting from its role as the most widely used essential industrial metal.
The Coeur's three new mines set firmly in placed. We're well positioned to take advantage at this very strong pricing environment.
This past quarter, we demonstrated the beginning results of our strategic plan, investing in three new precious metals mines, which are now gaining momentum, delivering higher production in metal sales and cash flow and lower operating costs. This momentum will continue building through the remainder of 2010, with an expected 135% increase in full-year gold production over last year along with 17 million ounces of silver production at an average cash cost of about $5.50 per ounce of silver. All three of our new mines are now in production and 2011 will represent the first year, all three mines will contribute production in cash flow for a full year at the same time.
The reverse of the Rochester mine will add a fourth major contributor to the company’s three new mines. Our production, sales and cash flow are climbing rapidly, while out operating costs and CapEx are declining leading to a growing cash balance. With continued strength in metal prices, this should continue to generate very strong cash flow growth for our shareholders.
Operator, we are now ready for any questions.
(Operator Instructions) (inaudible) our line is open.
Hi, Thank you. Just a question on the Palmarejo, you seemed to be making that thing working out, can you remind us, what sort of reserves and resources there are at the moment and to what extent, which deposits do you think are going to deliver more resources and reserves in the year-end accounting?
John, I should always be prepared for your questions and I think you caught me a little bit – my numbers in my head are little old. The reserves and resources are really, largely at the Palmarejo open pit and underground mine and Guadalupe contributed to that this past year. So I am just trying blank on the numbers right now, but where I think, we see potential for expansion, of course, is still at Guadalupe, where there is a lot of drilling yet to be done and we'll be doing much of that from underground positions which will be more cost effective in the future. And also around Palmarejo, this drilling that we talked about in 108 and 76 (inaudible) which were still open. Drilling from Tucson and Chapotillo which we're going to be wrapping that up here this year and into next and on strike to the north, those are the areas primarily and then as we go forward in future shifting more of the exploration focused to new target. Tony, just brought some numbers. Thanks, Tony, I appreciate that. If you look at total PNT for Palmarejo, John we are looking at about 90.5 million, continued still around to the 1.1 million (inaudible) down. That was at the end of the year 2009.
Yeah, I seem to remember the exploration company – this from waving their arms around and talking about 20 million ounces and that's probably ways off, but which deposits do you think should you'll be able to get up to reserves take by this year end?
Well, I think, we'll see gains at Palmarejo and at Guadalupe, that's where we’ve focused our efforts today.
Okay. And on this projection in Argentina, – could you compare and contrast that with the Andean property that's just been sold?
Our property is near Martha, it’s more of a silver-gold system, probably more similar to Martha in that regard. We won't comment much about what the other company has, but that’s the main difference there. We're seeing, we're keen instead of just vein, we're seeing wide zones of veins, breaches, vein less, more of a bulk mineralization potential. There is at least three zones that we focused in on La Negra, La Morocha and La Morena. And La Negra zone at this stage it has seen some of the most encouraging results, the main zone at La Negra is about 800 – little over 800 meters long and in places up to 300 meters wide with multiple zones of mineralization, silver dominant with the gold subordinates.
If you are talking about a sort of dissemination deposit, is that really meaningful to the (inaudible)
Well, I don't know should I call it disseminated? I think I would call it more (inaudible) What we want to do this year is finish the infill drilling that we have going on right now at La Negra, model deposits and produce – evaluate the best opportunities for it. Currently, there is plenty of high grades in La Negra that would very easily be able to blend in with Martha, but we have to look at all these option. Is this standalone or is this Martha operations, all those things at this stage are still on the table.
Okay. Great. And then finally Rochester, you're doing some more exploration? Is that more sort of bulk tonnage for the heap leach or is that going to be something that is going to a high grade vein deposit?
Well, John, there is actually potential for both of those, but I think we've shifted our focus now to what we can do to find more mineralization that's similar to Rochester and Packard historical production. This belt between the two deposits really has seen very little exploration since the 1990s. And when we've taken a look at opportunities for expanding production that's one area where we really – because it doesn't wouldn't require anything new in terms of processing technology. So, that's an area that we're quite excited about debt, below Packard and strike up toward Rochester. It's a very large area that's really not received much exploration. This was our first quarry against since probably the mid-to-late 1990s.
Would there be a higher stake ratio?
Well, it just depends on the depth. We are seeing some of reserves being fairly shallow and then the several in-tolls coming up with from two to three different zones of mineralization and that would definitely need to be followed upon next year. I just envision this being sort of the same – more of the same style of mining and processing that we've seen so far.
Would it be within your existing permit there or do you have to get a re-permission?
Sorry, can you repeat that?
Would that require a new permit?
I don't know if I can comment on that, I mean that's – we just received another permit for the continuing operation and we'll cross those bridges as we have exploration success.
Many thanks, good luck.
Your next question will come from John Tumazos.
John Tumazos – John Tumazos Very Independent Research
Excuse me for the question, it might be a little bit complex, but roughly what level of gold and silver prices would be necessary next year 2011 for quarter to earn about a $1 a share?
It's Mitch. John, hi. Boy, that's a question that I really can't answer at the top of my head. We don't have any 2011 guidance out there yet. Net income is such a complicated accounting number by the time we factor in GAAP requirements on derivatives and things that factor into that. If you didn't have fair [ph] value adjustment line on our P&L that question is – it's really impacted to a large degree by that. But in this current price environment as we enter 2011, it would be depending really on what gold price we want to use, but if we assume no change in gold price 2011 the company – we've said publicly expect operating cash flow to be north of $250 million versus where we are so far this year in 2010. But that’s probably good as I can do, John for you.
John Tumazos – John Tumazos Very Independent Research
And I am sure there is a number of adjustments that I haven't taken enough time to figure out, but just sort of circling on one or two, the equity account year-to-date went up by $53 million, but the net income is minus AV1 and you didn't issue equity, but there appears to be $134 million increase in equity, could you explain that?
Yeah, I'm pretty sure, John as that relates to the first quarter especially and then in April, we extinguished – I don't know what the dollar amount was, but that dollar amount sounds right. Our convertible debt using shares, so we did accept for equity exchanges in the first quarter and in April. So the issuances of those new shares...
John Tumazos – John Tumazos Very Independent Research
Can you just kind of show it on the cash flows as a debt payments and stock offering – as a summary format?
Right. So if that offset the net loss on the P&L with the issuance of new equity to retire those (inaudible)?
John Tumazos – John Tumazos Very Independent Research
As we look at the cash flow, it looks like the payment on the gold production royalty, which I presume is a fact on Nevada, on Palmarejo assuming the fourth quarter is at least as much as the third, will be about $41 million versus the $75 million of cash, I guess, they've had last year. Is the mine performing well ahead of your budget this year?
Well, first, you write down on the treatment of that Palmarejo gold production royalty, Franco-Nevada, that picked up in the financing section of the cash flow statement and that sounds not right for the full-year. I think it was $11 million in the third quarter.
And you are right, that was a $75 million royalty financing in January of '09 plus the warrants that we exercised and monetized during the third quarter where about $10 million of additional proceeds. I would say the mine is performing in the second half of the year according to plan. In first half of the year, we discussed this on the second quarter call.
First half performance was impacted primarily by the silver recovery being lower than what we originally expected. They've been a little slower to come up but in the second half of the year, it's performing really now driven by the higher grades that have showed in the third quarter. That royalty was done when gold was about $800 an ounce. So that does have an impact – big impact with where gold is today in terms of the total dollar amount being paid out on that royalty.
John Tumazos – John Tumazos Very Independent Research
Thanks, John. See you next week.
John Tumazos – John Tumazos Very Independent Research
Of course. Thank you.
Your next question will come from Mike Curran.
Mike Curran – RBC Capital Markets
Good afternoon, guys. I had a question on Rochester. You have provided guidance on what the expansion or the continuation, I guess, the extension of the mine life would do in terms of production 2.4 million ounces of silver. I was wondering could you give us a little guidance. I don't think I've seen it anywhere as what actual throughput rate, how many million tons will you be mining each year?
Yeah. Hi, Mike. It's Mitch. We haven't given or put out anything in terms of tons, grades, recoveries. We've just given those ounce numbers. We are finalizing our feasibility study now. As that is completed and as the technical report that that press release triggers within 45 days, we need to have technical report on file. And there we'll have much greater detail in terms of tons, grades and recoveries.
Mike Curran – RBC Capital Markets
Okay. No, that's great. I just wondered if I had missed it.
Okay. Well, there's no other question. We'd like to thank you again for joining the call today and we look forward to reporting to you our fourth quarter and full year results early in 2011. Thanks.
And this concludes the conference call. You may disconnect.
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