Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Wendy Yang – VP, IR

Mitchell Krebs – President CEO

Leon Hardy – SVP, Operations

Don Birak – SVP, Exploration

Analysts

Jeffrey Thorp – Sonoma Capital

Jorge Beristain – Deutsche Bank

John Bridges – JPMorgan

Andrew Kaip – BMO Capital Markets

Chris Lichtenheldt – UBS Securities

Benjamin Asuncion – Haywood Securities

Coeur d'Alene Mines Corporation (CDE) Q2 2011 Earnings Conference Call August 8, 2011 1:00 PM ET

Operator

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coeur d’Alene Mines second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator instructions) I will now turn the conference over to Wendy Yang to begin.

Wendy Yang

Thank you, Kelly. Welcome, everyone. I am Wendy Yang and I joined Coeur last month as Vice President of Investor Relations. Thank you for joining us today to discuss the company’s second quarter, six-month results. You will find Coeur listed CDE on the New York Stock Exchange and CDM on the Toronto Stock Exchange. This call is also being broadcast live on the Internet through our website at, www.coeur.com.

We have posted slides to accompany our remarks that you will find on the website. Telephonic replay of the call will be available from our website for one week following today’s call. We will be discussing forward-looking information today. So we caution our audience that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from projections.

Please review our cautionary statements shown here and review the risk factors including some that are specific to our industry described in our latest annual and quarterly financial reports filed with the U.S. SEC and Canadian regulators.

On the call today are Mitchell Krebs, our new President and CEO; Leon Hardy, Senior Vice President of Operations; and Don Birak, Senior Vice President of Exploration.

With that, I will turn it over to Mitch.

Mitchell Krebs

Thanks, Wendy. Hello and thank you for joining us today. I have been with on these calls many times in the past as the company’s CFO and this will be my first as Coeur’s new President as CEO. I look forward to saying a few words about the company’s priorities and direction going forward near the end of the call.

But first I want to tell you about the really solid second quarter Coeur just had. Our outstanding financial performance with large jumps in quarterly sales, in our earnings and operating cash flow, our operating costs per ounce were down 58% to $3.39 per silver ounce. Palmarejo had record a second quarter, all time best with 2.4 million ounces of silver and over 333,300 ounces of gold, with operating cost at Palmarejo negative $3.68 per silver ounce.

This consistent performance out of San Bartolomé with 1.7 million ounces of silver produced almost identical to the first quarter of the year, and our operating cost there were about $8.73 an ounce in the second quarter.

The expansion down underway at Rochester, our longest running mine is now back in production and stacking over on the newly constructed leach pad, like someone from Rochester said this morning, it’s good to hear that crushers are running again.

And there is a 67% increase in our second half exploration program which is intended to increase resources and reserves near our existing operations and Don Birak will talk more about that in a few minutes.

We expect to produce 19.5 million to 20.5 million ounces of silver and 240,000 to 250,000 ounces of gold, and we anticipate continued strong silver and gold prices during the second half of the year, particularly with the unfolding EU issues and our relative events and challenges here in the U.S.

We have many initiatives underway at several of our operations, but we expect to leave the higher second half production and lower cost and even stronger financial performance which Leon will describe in greater detail in a couple of minutes.

On slide five, these improved second quarter results were due to the contributions from having all three of our core mines on line, most significantly a very strong performance from our Palmarejo silver and gold mine in Mexico.

Before I go into further details, there are two specific items I want to mention regarding our second quarter financials. The first is, on the income statement, there is about $11 expense for pre-development costs, this relates to Rochester pre-stripping activities. Normally, you see that capitalized in the CapEx line on the cash flow statement, but because Rochester’s existing operations were required to expense that, so there is $11 million expense on the P&L that is worth about $20 million [ph] now and that’s something won’t be there in the third quarter as we progress into that, mining and operations there.

The second is the difference between the ounces we produced in the second quarter and the ounces we actually sold. We produced 4.8 million ounces of silver and sold 4.1 million. We produced 60,000 ounces of gold and sold about 50,000. This is nearly timing related, just a function when we shift metal from our operations and it is now all of that metal is sold here in the third quarter, but that had a significant impact in terms of sales and our earnings about $45 million of sales that didn’t take place in the second quarter, that will show up in third, so that’s worth mentioning as well.

Getting back to the slide, there on slide 5, starting with the top left chart, we continue to see quarterly increases in our realized silver and gold prices. Our average realized prices were $39.11 per silver ounce and $1504 per gold ounce. This is an increase of 111% for silver and 28% for gold compared to last year’s second quarter. And as you’ve probably seen this morning, we are above $17,000 on gold and silver is again close to the $40 an ounce mark.

Moving to the chart on the right, metal sales reached a record $231 million in the second quarter, which is up 16% over the first quarter and $129% higher than the second quarter of last year. Silver contributed about 69% of the company’s total metal sales, while the remainder was derived from the sale of gold. For the first six months, metal sales were a record $431 million, up 128% compared to the first six months of last year.

For the full year of 2011, we expect to generate approximately $1 billion in net metal sales and over $0.5 billion in operating cash flow based on our expected full-year production guidance and assuming that we have the same precious metals prices in the second half of the year that we averaged during the first half of the year which are about $35 an ounce for silver and about $1450 an ounce for gold.

Looking at the chart on the lower left, we generated operating cash flow of $116 million in the second quarter, that’s a 29% jump over the first quarter and about five-fold increase over the last year’s second quarter.

Also, adjusted earnings totaled $58 million during the second quarter, which is up 55% over the prior quarter, and a significant improvement over last year’s second quarter when the company had an $8.9 million adjusted loss.

But we expected higher production and lower unit costs in the second half of the year especially at Palmarejo, Rochester, Martha and Kensington, we expect our second half metal sales, operating cash flow and adjusted earnings to exceed first half levels.

On slide six, it shows improving financial metrics being driven by our higher production, metal sales and cash flow.

Starting again at the top left hand chart, cash and equivalents stood at $107 million as of June 30th, which is about 66% increase over the end of the prior quarter and more than one-and-a-half times higher than 12 months ago. This obviously does not take into account the ounces produced, but not sold during the quarter that I mentioned earlier.

Turning to our CapEx on the top right, we expect to show a year-over-year decline in CapEx once again. We have slightly raised our 2011 full-year CapEx guidance from $120 million to $130 to $140 million. This additional capital will fund several capital projects at Kensington that are designed to increase productivity and reduce cost.

Kensington is slowly but steadily settling into light as an operating mine, but we still have work to do there. Production for 2011 is going to end up being a little bit over 100,000 ounces. This reduced production level for 2011 is mostly due to lower than expected grades, which in turn is keeping cost per ounce as much too high levels.

The additional CapEx being invested at Kensington in the second half of the year and into 2012 is designed to increase production and reduce costs by accelerating underground development activity in higher grade areas, getting the underground (inaudible) plant operational, so the mine can have more flexibility in where it mines and completing several surface facilities in order to better support the operation.

As throughput increases and the average grade rises, cost per ounce should trend downwards during the remainder of the year and as we head into 2012. Our total shares outstanding remain constant as we seek to increase our per share value for shareholders, and the bottom right reflects the company’s growing balance sheet strength as cash rises due to free cash flow from our operations.

Leon Hardy

Thanks, Mitch. Leon Hardy This is Leon Hardy. Let’s take a closer look at second production in the charts at the top of the slide. Our second quarter production of 4.8 million ounces of silver was up about 16% over the second quarter of 2010. Palmarejo accounted for approximately 50% of the silver production in the second quarter. Pulp production was a record 600700 ounces. 40% or 26,000 gold ounces came from Kensington which began operations a year ago and over 33,000 ounces were produced at Palmarejo. Pulp production was up 14% over the prior quarter and 162% compared to last year’s second quarter. Our consolidated cash operating costs were $3.39 per ounce of silver in the second quarter which was a 58% reduction from the year-ago quarter. Our full year company-wide forecast for cash operating costs are $5.75 per silver ounce and $8.50 per gold ounce at Kensington. As Mitch said, Palmarejo had a record second quarter and is hitting its stride. Palmarejo produced 2.4 million ounces of silver and 33,400 of ounces of gold at cash operating cost of negative $3.68 per ounce after the gold buy product credit [ph]

Metal sales at Palmarejo were $124 million during the quarter; operating cash flow was $79 million; capital expenditures were $10 million. The excellent results are attributable to higher silver and gold grades and an increase of nearly 6% in silver recovery rates to a 78% average in the quarter. This is due to less oxide material as the open pit gets deeper and continued blending improvements.

During the second quarter, increased throughput and sustained silver recovery rates are expected to drive increased production and continue to lower cost. San Bartolomé continued the form consistently. The mine produced 1.7 million ounces of silver at a cash operating cost of $8.73 per ounce. Metal sales were $56 million with operating cash flow of $41 million. Capital expenditures during the second quarter were $3 million. Kensington has now completed one year of operation.

For the second quarter, 25,800 ounces of gold was produced at a cash operating cost of $924 per ounce. Quarterly metal sales were $26 million. Operating cash flow totaled $11 million. Capital expenditures were $7 million. As Mitch mentioned, we will increase the number of tons milled throughout the remainder of the year in order to maximize full-year production, which we expect will be approximately 100,000 ounces. As we increase throughput and see improvements in the average grade, costs per ounce are expected to trend downward during the remainder of the year.

The Rochester expansion in on schedule. We began holing and stacking ore on the new leach pad in late July which will lead to higher silver and gold production at Rochester in the fourth quarter. During the second quarter, residual leaching activities at Rochester produced 333,400 silver ounces and 1,400 gold ounces.

Cash operating costs were $4.34 per ounce of silver, net of gold by product credit. Metal sales in the quarter were $14.4 million. Operating cash flow was negative $2.3 million which is a reflection of the fact that all pre-stripping costs related to the expansion at Rochester are expensed rather than capitalized. And capital expenditures totaled $4.2 million during the quarter.

Considerable upside potential remains at Rochester as we begin to see the impact of this initial 50 million ton leach pad. We will begin to focus our efforts on recovering additional economic material from further exploration and development of large mineral resource based at the mine. Don will highlight the exploration potential out of our Rochester property, including the adjacent Nevada Packard Bay.

Don Birak

This is Don Birak. The pace of our drilling ramped up considerably in the second quarter and will continue into the second half of the year with over 66,000 meters of drilling plan as compared to 43,000 meters in the first half of the year, a 50% increase in our exploration drilling for the second half of the year. To support the accelerated drilling, we have increased our second half exploration budget by 67% or $40 million for our total 2011 budget of $23 million, 29% increase over 2010 levels. This invest expected to continue into 2012 reflects the prospective nature of our property and will help extend mine life by adding to mineral resources and reserves. Adding new ounces near our existing infrastructure represents an excellent way to deploy the company’s cash flow and generate value for the shareholders.

Starting with Palmarejo, we drilled now 27,000 meters during the first half of the year largely around immediate Palmarejo mine area, followed by Guadalupe and La Patria. Together these three historical deposits represent just 10% of the total Palmarejo land holdings. Palmarejo mine itself spans an area over 2,000 meters by 1,500 meters in size and includes both surface and underground mine operations.

Mineralization at all five of this, indefinite strike and the next months and into 2012, we will continue drilling at these areas and on new zone veins and stackwork discovered in the hanging of the 76 ore zone.

In more detail, this image shows the location, image on 16 shows the location of the drilling completed this year at Palmarejo and some key results. Results from drilling at Tucson and Chapotillo, two of five zones that make up the Palmarejo mine area, bode well for expansion of surface mining activities. In the second quarter, we recommenced drilling at Guadalupe in the east central part of the district and started drilling on La Patria which is located about three kilometers to the west of Guadalupe. This La Patria drilling is the first such program conducted by COEUR since acquiring Palmarejo in 2007.

Thus far our drilling there has encountered multiple near-surface closer silver mineralized vein. We are pleased with this initial core drilling and results suggest the potential for both surface and underground mining operations at La Patria.

Now let’s shift to Rochester, a world-class silver and gold mine in Nevada where we have produced over 128 million ounces and over 1.4 million gold ounces since production commenced in 1986. This image shows the Rochester and Nevada Packard deposits, some key production infrastructure and several promising exploration targets.

In the second quarter, we commenced drilling on the LM and NWR targets at the northwest and the Rochester and also at Nevada Packard. These areas have good potential to grow our resources reserves and will be prime areas for drilling in the coming months. Current now reserves at 48 million short tons are all slated for processing in the new stage three leach pad. However, Rochester’s additional measured and indicated mineral resources stand at nearly 250 million short ton and over 21 million tons of inferred modeled using $1300 per ounce of gold and $20 per ounce of silver. This large robust mineral resource and our new exploration targets are strong opportunities to expand reserves and the mine life further and we are currently conducting engineering and environmental studies towards that end.

Moving south, I’m pleased to report that Coeur completed the first mineral resource estimate for the Joaquin silver and gold property in Argentina, and while the technical report on sedar are discussed on the results. The report finds – indicated a third mineral resources on two deposits, La Negra and La Morocha at Joaquin. We commenced destination drilling and other studies which are expected to lead to a feasibility study; old deposits, we may open for expansion.

Joaquin property is twice the size of our Palmarejo property. We only really explored a small part of this large 24,000 acre hectare property. And with our (inaudible) efforts on both feasibility and the exploration funds.

To close now with some results in the Raven-style at Kensington. The results from four new core holes were recently received, shown on this long section, slide 20 and related foot wall and hanging wall have potential to add meaningful, high-grade tonnage to the Kensington mine plan. In addition to more drilling at Raven in the coming months, we will be testing some new targets which have potential for mineralization similar in style to the main Kensington deposit.

Mitchell Krebs

Thanks, Don. Slide 21 shows the map of our operations as well as a handful of silver exploration companies in North and South America in which Coeur has made strategic investments. Year to date, Coeur has made $17.9 million of these investments in five exploration companies. This junior silver exploration companies have primary silver projects in Canada, Mexico, Chile, Peru and Bolivia.

We’ll continue to evaluate other opportunities like these and make similar investments from time to time as we seek to build out a balanced pipeline of growth opportunities for the future. And we remain bullish on the precious metals markets. Both silver and gold remain among the best performing asset classes and the expectation by most experts is that this trend will continue; we share that view. Investment demand through ETFs remain very strong for both metals. Total ETF demand for silver is above 450 million ounces worldwide.

Industrial demand remains strong and the economy has continued to recover and emerging market is robust. There continued to be strong investor demand for silver coming from both China and India. And new uses for silver, the most widely used industrial metal in applications for solar energy to wider electrical components within automobiles continues to grow.

The drivers behind gold’s record run are similar to silver. Obviously, the S&P downgrade of the US credit rating will be key driver for gold as concerns about the US dollar, sovereign credit issues, both here in the US and in Europe and inflation. This is driving investors to safe haven of gold and silver. In July, investors added a net $13.2 billion to the gold ETFs and we expect August ETF close to be even stronger. In addition, central banks continue to add to their holdings. Year to date, net purchases by the world’s central banks totaled 203.5 metric tons which is already 168% increase from 76 metric tons for all of 2010, Mexico, Russia, Thailand and South Korea.

So we believe that the fundamentals underline these strong metals prices will continue to support the market. With these underlined strong metals markets and with our core lines all operating together in their first full year together, we are looking forward to a record year for Coeur in terms of silver and gold production, metal sales and adjusted earnings and cash flow. We expect full year net metal sales approximately $1 billion and operating cash flow in excess of $500 million. Our 2011 full year production forecast is unchanged at 19.5 million to 20.5 million ounces of silver and 240,000 to 250,000 ounces of gold. And as we have mentioned, we forecast full year average operating cost of about $5.75 per ounce of silver and Kensington’s cash cost per ounce of gold should average about $850 an ounce for the full year.

Our confidence in these full–year targets are based on five main drivers. Palmarejo was operating stride with the mine plan calling for increased mill throughput and the silver recovery rate remaining high during the second half of the year. Like Palmarejo, San Bartolomé lives to be operating at full stride and on track for a solid consistent year.

And Rochester is expected to product additional silver and gold ounces from the leach pad started in the fourth quarter. Although we have work to do at Kensington, we expect higher production levels in the second half of the year, and as cash operating costs continue to decline through the remainder of 2011 as we increase production and aggressively pursue opportunities to reduce costs at all of our mines.

As many of you are aware, July – the company announced last (inaudible) its President and CEO and the appointment of our recent Lead Director Rob Mellor as the new non-Executive Chairman of the Board. On behalf of our company, we extend our gratitude and well wishes to Dennis Wheeler who we hired after 25 years of service as our CEO and 33 years as the Director at Coeur.

In my new role, I see the company continuing on a trajectory we had put in place over the past few years. That said, there are things that we’ll change, enhance, and build upon with the objective of creating a true value creating primary silver company. I’ve been dedicated professionally to Coeur for 16 years and I have seen it evolve from a small company to a $2.5 billion market cap company. With the level of cash flow we are now generating, I see tremendous upside potential for our shareholders. We have a great set of assets and we will continue to build a balanced pipeline of new growth opportunities. We have great people who are dedicated to the company’s success and are constantly working to team in bringing the best talent possible.

We have a great middle environment. We are working hard to exploit that in every way possible. That said, we will always be mindful that we operate in a cyclical commodity business and we will strive to develop positions flexible and opportunistic.

We are on bit of a role here at Coeur and the company’s performance is improving with each quarter, but that’s no reason to sit still. I believe we can make Coeur into the premier company in this sector. We need to sharpen our focus on delivering consistent performance at our existing mines while reducing cost everywhere we can.

We have talented General Managers at our properties who need large teams of dedicated employees, as these people and these assets that are the engines that make this company run and outlook so promising. We’re going to work hand in hand with these teams to extract as much value as possible from these operations. So we have invested such significant resources over the past few years. At the same time, environmental stewardship, safety and community relations are priorities for us. We need to be a leader in these important aspects of our business if we want to truly be the premier company in our sector. Although these aspects of the business don’t get a lot of attention from quarter to quarter, this company will not succeed in creating value for its shareholders if it doesn’t get it right in these critical areas.

And our current operations begin to perform as consistently as we are beginning to see and as we expect, and we are all already seeing this kind of performance at Palmarejo and San Bartolomé. We must start to look forward and outward to grow. We will grow in a disciplined, accretive fashion that will always place value creation and return on capital as the main criteria when evaluating opportunities. We will pursue organic opportunities, like Rochester and the accelerated exploration program Don mentioned and we will pursue external opportunities that make sense and that we feel will create long-term value for our shareholders. As our cash flow accumulates over time and cash position becomes more than sufficient to support these objectives, the company and its Board will evaluate and implement a rational policy on how best to return capital to the company’s shareholders.

I’m very excited about the opportunity and our company’s bright future, so is our management, employees and Board of Directors. We hope you, our shareholders and stakeholders, around the world share that excitement as we work hard to build a truly great company here. Thank you for your time. And operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jeffrey Thorp with Sonoma Capital.

Jeffrey Thorp – Sonoma Capital

Hi, Mitch. Congratulations on another excellent quarter.

Mitchell Krebs

Hi, Jeff. Thanks a lot.

Jeffrey Thorp – Sonoma Capital

Just a couple of quick questions. First is, you are producing a lot of cash, probably even more significant if you include the inventory build. And so, my questions with respect to that are, can you give me a little bit of information with respect to when the inventory will be converted to cash, if it’s not already been done? And what you’re going to do with the cash that you’ve been producing? Are you considering paying down debt or paying a dividend?

Mitchell Krebs

Yes, first question there that you asked, all that milled, that built-up in the second quarter and silver in the third quarter has now been sold, so that will show up in our third quarter results which will then, as you point out, lead to a significant bump in our cash. We highlighted a few priorities here on our call and for us it’s all about deploying that cash to the highest return opportunity available to us. Exploration is probably at the top of that list, that’s why we are increasing exploration as aggressively as we are in the second half of the year. Right behind that, I think the close second is organic opportunities like we have at Rochester, not only this existing expansion with this new leach pad that’s now underway, but future opportunities there that really represent high return, relative risk, growth opportunities for the company. Those opportunities, though, Jeff, I think this is where your question is pointing, we can do all of those things and we are still going to be generating cash flow in excess of those priorities. We will seek to reduce debt opportunistically, but I think overall, what you’ll see from us is a balanced approach, some of the growth opportunities that we mentioned, reductions in our debt and we want to maintain a sufficient cash balance so that we can withstand any potential hiccup in metals prices and any potential operational unanticipated hiccup. Above and beyond that, the dividend question, return of capital question, I think is where we next in line and that’s something that the Board will be evaluating here as the cash does accumulate in the second half of the year and as we enter 2012. And I think returning capital to the shareholders is a 2012 event, not a 2011 event, but it is something that we are all very calm conduct and we will be on the front burner as we end the year and start 2012 with what should be a pretty significant cash balance. Does that help you?

Jeffrey Thorp – Sonoma Capital

And just one more question if it’s okay, could you talk a little bit more about your guidance and the breakdown by mine, and if you can, and you may not want to, or can’t be that specific with respect to Kensington, I’m just curious what your cash flow guidance for that would be, if you can make it?

Mitchell Krebs

Yes, just directionally, Jeff, walk through the production, if you look at through the first six months of the year results, and just eyeball those and compare those with the second half expectations, at Palmarejo, we did have a slow start to the year if you recall. So production through first six months of the year was 4.1 million ounces, will be well in excess of that in the second half of the year, mostly on the silver, and that maybe because silver recoveries in the first quarter were pretty slow. We think this kind of cracked that nut and with that continuing to be consistent in the second half, that silver production will be quite a bit higher in the second half. Gold will be about the same in the second half as it was in the first half at Palmarejo. San Bartolomé, we’ll increase throughput a little bit and we will see a slightly higher second half, first half was 3.5 million ounces; we will see that, plus probably another couple of hundred ounces out of San Bartolomé in the second half. The big ramp-ups for us are at Martha and at Rochester in the second half. And the second half at Martha is really based on two – three things really. One is they’ve now gotten into the Betty and Betty [ph] zones which will begin to contribute ore to Martha. They’ve also expanded the mill capacity there from 240 tons a day to 480 tons a day. That will allow them to process not only with the ore but also they are going to start reprocessing there at the site. And so, you see Martha through the first six months of the year, 280,000 ounces of silver production is going to be a material increase there in the second half. And at Rochester for obvious reasons with respect to the new leach pad, the ongoing residual leaching generated 670,000 of silver in the first half of the year through the first half, especially with fourth quarter there materially higher and that’s where we kind of break down our 19.5 million, 20.5 million. And on the gold side, it’s much more straightforward story; we got about a little over 100,000 ounces. At Kensington, like we mentioned, we’ve got – if you take the first half of Palmarejo, of 61,000 ounces, that gives you up to a little over a 120,000 ounces there, so that’s 220,000. And then you’ve got Rochester making up the bulk of the difference on the gold side. So that’s sort of how our guidance breaks out.

Jeffrey Thorp – Sonoma Capital

Thanks very much and continued success.

Mitchell Krebs

Thanks, Jeff.

Operator

Your next question is from Jorge Beristain with Deutsche Bank.

Jorge Beristain – Deutsche Bank

Good afternoon or good morning over there, gentlemen. Mitch, just following up a little bit on your opportunities at Rochester, could you talk to the point as to the cycle time for – between the stacking and when you are going to see first silver out of that leach pad? And then you mentioned in your press release that there could be about 200 million tons of additional mineral resources, whereas you are indicating above 48 million of mineral resources in your presentation, so if you could just kind of scope out how big you think Rochester could be and what the timing would be to put in more leach pads into services?

Mitchell Krebs

Yes, sure. Hi, Jorge. I’ll take the second question; Leon will handle the first question. Like you said, Jorge and like we said in our comments, this additional leach pad that’s been completed as the capacity for about 50 million tons of ore lease stack down there and that’s the material that is currently listed as reserves at Rochester of about 28 million ounces of silver and about 250,000 ounces of gold and too that will be mined over the next seven years or so, off of this new pad. Where things I get really interesting Rochester is that in the resource categories, measured and indicated and inferred, if you add those off together, you’ve got over 225 million tons of additional mineralization there at Rochester primarily in the vault of the exiting pit that has been created since 1986. And so, yes, you compare the 50 million ton capacity of this initial pad to that total size of material. We’ve got another four of these things that we can feasibly get into underleach and into production. There is a wide time there as we seek the permitting required for additional leach pads, and there is probably about a three-year lag associated with that. But you can kind of see how this steer step back into becoming a real significant asset for us and that said, not are we enthusiastic about what we’ve got going on there and now and the impact that’s going to have in the fourth quarter and over the next few years, but really the bigger potential there is what still remains. Leon, do you want to handle the other question about when that ore goes on to the pad and when metal comes out?

Leon Hardy

Yes, that’s bit of a complicated question, but get an initial – from the minute you stack it and you put it under leach, you get an initial spike of grade, usually your gold comes out first and then your silver, but your initial spike can earn up to 50% over the first three months. And then over time which may require one to two years, you will get the rest of your recovery up to 65%, 70% both metals, gold and silver.

Mitchell Krebs

Jorge, just to add to that, the leach cycle at Rochester to get all gold and silver out of the ore, historically, it’s a five to 10-year process, but ultimately recover all that metal. So, it’s a relatively long leach curve, but like Leon said, there is the short-term dynamic that make up the bulk of that recovery.

Leon Hardy

Yes, the 30% to 50% of the short term.

Jorge Beristain – Deutsche Bank

And for the permitting, you mentioned there was a three-year lag or lead time, would that be per leach pad, or would be able to essentially apply simultaneously for all four with one permit within three years?

Mitchell Krebs

Yes, it kind of depends on the approach we take. We don’t necessarily have to go down the same path as far as each pad being the same size as this initial one. So, to the extent that we could get a larger, one larger pad permitted at once, that would be probably the most advantageous way it can about it, but we are still making it look what makes most sense there. I wouldn’t think about it in terms of each new pad being the same size.

Jorge Beristain – Deutsche Bank

Great. Thanks very much.

Mitchell Krebs

Sure.

Operator

Your next question is from John Bridges with JPMorgan.

John Bridges – JPMorgan

Morning, everybody. Congratulations on the new appointment.

Mitchell Krebs

Thanks, John.

John Bridges – JPMorgan

And just wondered at Kensington, the capital you’re spending now, where is that going and how much more capital does need to spent? Also, what’s the sort of maintaining capital level for the mine?

Mitchell Krebs

Yeah, just take the second part of your question. The sustained for non-growth, non-start up related CapEx there on year-in, year-out basis would be in the $10 million, $12 million and that includes obviously underground development and everything else that goes into sustaining an underground operation in a location like that.

The funds that we mentioned in our comments are related really, the first and the foremost, Leon, I mean, you – or have anything else to add, but it’s underground development, we really need to get ahead of the game on underground development, especially in the higher grade areas so that the mine has a bit more flexibility and more sources of higher grade material contributing to the mill. There is along with that underground development, the need for some additional equipment. And then there is a series surface facilities, for example, an expanded man camp [ph] expanded warehouse, things of that nature that would better support the operation there given where it fits and the logistics associated with operating there at Kensington. Leon, do you have anything to add on that?

Leon Hardy

No, that pretty well covers it. We haven’t had a much higher mining rate than our nameplate which was 1250 tons per day which is even average 1430 tons; all that requires more manpower, more equipment and that’s the mode we are in for the second half of this year.

John Bridges – JPMorgan

I’m afraid that, (inaudible) development is going to interfere with production in the second half?

Leon Hardy

No, we try to keep our development two years ahead of the mining and we want to keep it there.

John Bridges – JPMorgan

Okay. And then, another bigger picture question. With this cash that was referred to earlier, you’ve got a tremendous opportunity or Don has got a tremendous opportunity to go off and find things, but also a very big responsibility. And I was just wondering how you were sort of thinking about the longer term and how you are going to direct these funds in exploration, development, M&A, how you’re thinking about taking the company forward?

Mitchell Krebs

I’ll start and then Don can chime in. I think we are blessed to have three mines with long mine lives. So we are not in a situation where we are living hand to mouth in terms of reserves to support the next year or two or three in terms of mine life, but the focus of the company from an exploration standpoint going forward, I see it on two tracks. One is, helping connect the dots and then in the eyes of the investment community on the extent to which Palmarejo can be become a true long-life operation. We, ever since we made that acquisition, have been talking about Palmarejo, the large land position and the potential there to be mining for a very long time. And obviously new reserves and new sources don’t pop up overnight, it takes time.

We are getting now to the point where Don can take some increased exploration money and in addition to supporting sort of the in-line drilling, to support active operations, can step out and really start to provide us and shareholders with some visibility on the long-term potential of the larger district. And one area that is perfect example on that is the La Patria that Don mentioned where we haven’t – Coeur has done a lot of drilling there. We’ve been busy drilling in other areas since we acquired Palmarejo in ’07. Guadalupe was the first initial example of a new deposit that will begin to contribute to ounces, to Palmarejo probably the end of next year. Now, with La Patria with its near surface potential to be an additional source of open pit mining, and those are the kinds of things that represent one avenue of opportunity. And then the second is, we – and I am looking at this, I guess with the financial perspective and on a depreciation, depletion and amortization per ounce basis, with all of our mines now up and running, that’s a high number. And in order to really drive earnings, we need to spread that DD&A out over as many ounces as possible, and that’s something that’s important for us to do with the dollars as well as to add to reserves. It’s going to make our income statement and our earnings all the more attractive and hopefully drive, generate some additional value more for shareholders. Don, do you have anything to add to that?

Don Birak

Yeah. Thanks John for the comment. You’re right. We – over the years, we tended to be fairly careful about the way we manage our exploration money. We watched our dollars closely. We put programs forth and kept our spending in line with budget. This year, we are seeing a lot of opportunity to really expand what we’ve been doing at the operating mines, not just Palmarejo, which is going to receive the biggest increase of the money that we talked about here earlier today. We are going to ramp up our drilling at Rochester, do more drilling in South America. And hopefully, get this and drill starting again on some new targets that I mentioned at Kensington. And these are all just kind of – I would like to see these just roll right into next year at the same phase. And you’re actually right, we have to make sure we continue to manage the money properly, but part of that increase is going to be working with our exploration senior people to lay out good targets and follow up on them diligently.

Mitchell Krebs

John, just one follow-up there on Rochester. I know you’ve always been a frequent follower of our activities and Don’s activities at Rochester. There are two distinct growth opportunities there at Rochester, one is, just what we talked about, the expansion through the – and getting additional funds under leach. And then there is the second which is really the renewed drilling program that Don now got underway there. And we have a large land package there and (inaudible) metals prices, in this environment, Don’s drilling in the second half especially is going to be really geared towards bringing as many of those new ounces into resource and ultimately reserves that makes sense in a $40 silver price environment and there is a lot of material that makes a cut at those prices.

Don Birak

It really does, Mitch and I think what our responsibility is, is to use the money that we’ve been given by you and the Board and go after the best targets so that we can get the highest grade ounces to come forward into mine plan rather than looking strictly at just conversion of resources into reserves with no first job, and lots of opportunities to go after. They are really high-grade things and increase the grade and the ton accordingly.

John Bridges – JPMorgan

Okay. Great, guys. Good luck.

Mitchell Krebs

Thanks, John.

Don Birak

Thanks.

Operator

(Operator instructions) Your next question is from Andrew Kaip with BMO Capital Markets.

Andrew Kaip – BMO Capital Markets

Hi guys, congratulations.

Mitchell Krebs

Hey, Andrew, thanks.

Andrew Kaip – BMO Capital Markets

Hi. Look, I’ve got a couple of questions. The first one is, just with respect to Rochester, can you give us an indication of how much capital is remaining to be spent on the project?

Mitchell Krebs

Yes. Full-year CapEx at Rochester this year altogether is about $30 million. And through the first six months of the year, it has been about $16 or $17 million.

Andrew Kaip – BMO Capital Markets

Okay.

Mitchell Krebs

And that includes, Andrew, just to be clear, back to the expense versus capitalized account that, pre-stripping cost that we are expecting at $30 million.

Andrew Kaip – BMO Capital Markets

And just to confirm, we are unlikely to see any of that additional expense related to Rochester show up on – to be capitalized and nothing to show up on the – in the P&L?

Mitchell Krebs

There’ll be a little bit in July in this third quarter, but then that will go away and those costs then will give – into inventory, so we won’t, in the third quarter, see nearly as large of a line item there on the income statement.

Andrew Kaip – BMO Capital Markets

Okay. And then just regarding that, what you expect your ongoing reclamation expenses to be, can you give us some guidance there?

Mitchell Krebs

At Rochester?

Andrew Kaip – BMO Capital Markets

Just company-wide, those that you are expensing.

Mitchell Krebs

Yeah. Let me get back to you on that. Andrew, I don’t have that off the top of my head.

Andrew Kaip – BMO Capital Markets

Okay. All right. And then, you spent approximately $17.9 million investing in five exploration companies. Do you have an internal budget that you’re working towards an annual basis on making these kinds of investments or are these just as you go and you identify opportunities?

Mitchell Krebs

Yeah, that’s more the latter. We don’t have a specific target in mind, , dollars or number of opportunities, it’s just as we identify companies that have projects of interest and locations of interest to us that we’ll dig deeper and pursue this strategy a bit more.

Andrew Kaip – BMO Capital Markets

Okay. And then finally just on the lag between production and sales, what kind of lag should we expect or was this really an isolated incidence at – with respect to the production and the sales being so different this quarter?

Mitchell Krebs

It – kind of the – the two products, right, the door A [ph] that we ship and then there is a concentrate that we ship in Kensington. The door A [ph] at Palmarejo and San Bartolomé was really function of just when it shipped and then when brings out [ph] with the refinery and we were able to recognize with the sales. And so that’s about 28 day to 30 day lag and it just happened this quarter to be a fair number of ounces that straddled at the date of June 30.

Andrew Kaip – BMO Capital Markets

Yeah.

Mitchell Krebs

But that’s sort of one-timer. The Kensington concentrate, especially the half that get shipped to – a little bit over in Germany that more of a typical, concentrate and smelting, refining contract that’s where you will see the typical delay of 60 to 80s or so on 90% of the value of the shipment. And I think first quarter, it is the other way around more sales than produced and now this quarter about 10,000, 6,000 ounces, 7,000 ounces at Kensington, other direction.

Andrew Kaip – BMO Capital Markets

Okay. All right. Thanks very much.

Mitchell Krebs

Okay. Thanks, Andrew.

Operator

Our next question is from Chris Lichtenheldt with UBS Securities.

Chris Lichtenheldt – UBS Securities

Hi, everyone. Just a couple of questions I wanted to elaborate, on Kensington, the grade that you experienced, it’s a bit lower than what’s expected, what’s causing that?

Mitchell Krebs

Leon you want to take that?

Leon Hardy

Firstly, our mining areas, we started the property pretty much in the center of the deposit and extremities are where we have the higher grade that’s why we’re going to escalate the development plan.

Chris Lichtenheldt – UBS Securities

Okay. So it should pick up throughout the latter half of this year though you will see some improvement and then into next year that what we would expect at this point?

Leon Hardy

That’s correct.

Chris Lichtenheldt – UBS Securities

Okay. The recovery that was at Palmarejo that was significantly improved over past quarters, what has changed there? What gives you comfort that that should stay wise now and there has been some – various experimentation over past quarters and it dipped and then spiked a bit, should we expect this to level off and if so, maybe you can just a little bit about that?

Leon Hardy

No, primarily it’s because the open pit is getting deeper; we are getting out of the oxide zones and the leads to much higher recovery. We are getting very good recovery on the underground ores. And we have a pretty intense blending program that everybody is getting confidence in and implementing very well outside, and I think all those factors together have put us in this high 70 range.

Chris Lichtenheldt – UBS Securities

Okay. That’s great. And this may be a question that we follow up after, but I just want to – just through the disclosure, the cost disclosure at Palmarejo, obviously very good cash costs. But when I try to back out the gold revenue, sort of proxy for what the costs are to run that site? It almost looks like the costs in millions of dollar have come down versus last quarter to run Palmarejo, is that accurate? Do you know (inaudible) if so, you can talk about what they might be?

Mitchell Krebs

Yeah. I will circle back in, make sure I’m a fact, straight, but my immediate reaction is that that could be the takes [ph] I know in the first quarter we had a lot of maintenance expense, equipment maintenance, rebuilds that we get hard in the first quarter that aren’t there, weren’t there in the second quarter. That would be my – I know that’s actually a fairly large dollar amount in the first quarter. So with that gone out of the second quarter, I think you’re right, Chris.

Chris Lichtenheldt – UBS Securities

Okay. That’s great. And then actually just finally on Kensington, the maintenance CapEx you talked about like that won’t be expense going forward, right, I mean you’ve hit the development expense this quarter, but that should be sort of one-off?

Mitchell Krebs

Yes, Kensington sustained CapEx going forward of $10-ish million, that’ capitalized, not on the P&L.

Chris Lichtenheldt – UBS Securities

Do you expect any significant cost development work to be expensed over the rest of this year?

Mitchell Krebs

Say that again, Chris. You said again the second half of this year?

Chris Lichtenheldt – UBS Securities

Yeah. I mean you have the largest development expense at – related to Kensington in this quarter? Do you expect any more of that in this quarter?

Mitchell Krebs

Well, the development will increase in the fourth quarter as far as this increased CapEx plans that we have to help increase production and reduce costs. And so, I think the beginning of the year, we were targeting just under $30 million in total CapEx at Kensington and now that number is closer to 45. And to the first six months of the year, I think the CapEx at Kensington was around – after a follow-up, but, yeah, I don’t have my hands on it right now, but...

Chris Lichtenheldt – UBS Securities

Yep. Not a problem, that helps. Okay. Thanks a lot.

Mitchell Krebs

Okay. Thanks.

Operator

Our final question comes from Benjamin Asuncion with Haywood Securities.

Benjamin Asuncion – Haywood Securities

Hi, good afternoon, guys and congratulations on the quarter.

Mitchell Krebs

Hi.

Benjamin Asuncion – Haywood Securities

I just want to follow up on some previous comments that you made exploration. So I guess the 2011 full year exploration budget has been expanded to $23 million. Could you give me a breakdown for how much of that’s going to be spent, I think, sort of mine side exploration versus let’s call it a Greenfield exploration?

Don Birak

Hi, thanks. It is Don Birak. Most of our exploration is really organic growth, so that’s the existing operations. We do have some early stage properties in our portfolio that we are going to be testing principally in South America. Right now, we’re in sort of the winter season down there, and though it’s difficult to get out to some of these places, but by and large, we put over 80%, 85% historically at our operating properties for organic growth. That will continue this year and probably into next year. One thing that might change that is some success on some of the properties, Greenfield properties that we have; we see success there we would ramp it up accordingly.

Benjamin Asuncion – Haywood Securities

Okay. And I guess maybe within that, what’s going to account for the largest, I guess, organic growth projects here? And actually, if you can comment on which sort of Greenfield project in going to be the largest within that budget?

Don Birak

Palmarejo is by far the biggest, and that’s things that we’re doing around the current mine area as well as these other targets that we mentioned, while the Guadalupe, La Patria for testing new targets in that district. We’re putting the biggest, the biggest being a portion of the increase towards Palmarejo. Following that, it becomes Rochester and also Argentina. So the other one is really pay on [ph] comparison. I am hoping that’s going to – we will continue to see good strong exploration at Palmarejo in the future and then going to ramp on the Greenfield side as we speak of the results.

Benjamin Asuncion – Haywood Securities

Okay. Perfect. Thanks guys.

Mitchell Krebs

Thank you. Okay. There will be no further questions. Just one thank you again for taking the time. And we are looking forward to reporting future results that are consistent with the things and the priorities that we laid out to you today. And appreciate your time and we will talk to you at the end of the third quarter. Thanks.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Coeur d'Alene Mines CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts