Coeur Mining, Inc. (NYSE:CDE)
Q4 2015 Earnings Conference Call
February 11, 2016, 11:00 AM ET
Rebecca Hussey - Senior Analyst, Investor Relations
Mitchell Krebs - President and Chief Executive Officer
Frank Hanagarne - Senior Vice President and Chief Operating Officer
Peter Mitchell - Senior Vice President and Chief Financial Officer
Michael Dudas - Sterne Agee CRT
Jessica Fung - BMO Capital Markets
Chris Thompson - Raymond James
Craig Johnston - Scotiabank
Good day, and welcome to the Coeur Mining Incorporated fourth quarter and yearend 2015 financial results conference call and webcast. [Operator Instructions] I would now like to turn the conference over to Rebecca Hussey, Senior Analyst, Investor Relations. Please go ahead.
Welcome to our fourth quarter and full year 2015 earnings conference call. There are slides available on our website to go along with today's remarks. Please review the cautionary statements and the risk factors in our latest 10-K for risks and uncertainties that could cause actual results to differ from any forward-looking statements made today.
Mitch, please go ahead.
Thanks, Rebecca, and good morning, everybody. We appreciate the opportunity to talk to you about our 2015 results and give you a brief company update. I'll start with a few takeaways from our perspective, and then we can open it up for questions.
Probably the biggest takeaway we see is how we're delivering industry-leading cost reductions. Cost continued to decline by large percentages and at a very rapid rate.
Our full year 2015 all-in sustaining cost of $14.32 per realized silver equivalent ounce was down 22% compared to 2014 and down 30% compared to 2013. Third quarter and fourth quarter all-in sustaining costs were in the mid-$13s, that's a far cry from nearly $20 an ounce just a couple of years ago, and even more impressive when you consider the fact that we're not benefiting nearly as much from weaker foreign currencies like most of our non-U.S. peers are.
These cost reductions weren't just limited to operating costs. Our G&A was down 20% last year and over 40% compared to just two years ago. These lower costs together with higher production levels resulted in significantly higher cash flow last year. Overall, production was up due to the acquisition of the Wharf gold mine last year and due to quality production growth at our Rochester and Kensington mines.
The company's full year operating cash flow doubled to $114 million and full year EBITDA was $101 million, up 19% over 2014, despite significantly lower prices last year. Another takeaway from our perspective is how our liquidity remained at a very comfortable level through yearend, despite the heavy investments we're making to drive down cost even further.
Cash and equivalents remained right around $200 million, which is quite a bit higher than where I think many of you expected it to end the year and as a result of effective cost controls and working capital management.
Since 70% of 2016 estimated CapEx of $90 million to $100 million is expected to take place during the first half of this year, we expect our cash to decline before starting to build during the second half of the year. The main drivers of the expected positive free cash flow are the lower second half CapEx, rising production rates from the higher-grade, higher-margin Independencia deposits at Palmarejo and the end of the old Franco-Nevada gold royalty at Palmarejo.
With cost down, cash flow up, declining debt levels and cash holding steady, our leverage levels and ratios have come down a lot. Just nine months ago, our net debt to EBITDA ratio was 4.2x. It's now at 2.9x and following, as these trends all continue. What's driving this strong performance is the solid execution of the many important initiatives taking place at our five mines. I'll give you a quick update on a few of them.
The transition of Palmarejo is continuing as planned, thanks to solid planning and a great team. 2015 ended on a positive note, especially given all the moving parts, as we simultaneously transitioned to two new higher-grade underground mines and away from an open pit mine and an old underground mine.
We are now mining the Independencia deposit about 800 meters away from the Guadalupe mine, a littler sooner than expected. As you'll recall, we consolidated ownership of Independencia last year, when we acquired Paramount Gold and Silver, and we think it's going to be a terrific new source of ore for us at Palmarejo for many years to come.
Meanwhile, mining rates over at Guadalupe averaged about 1,700 tons per day during the fourth quarter and should average around 2,000 tons per day during 2016. Overall, production levels at Palmarejo are expected to decline throughout this year as we accelerate mining rates at Independencia up to about 1,000 tons per day by yearend.
Palmarejo's capital expenditures should total around $40 million this year, which is close to half the company's total expected CapEx. Most of this investment of Palmarejo was to facilitate the underground development at Guadalupe and Independencia that we need to achieve the targeted production levels that should allow us to drive costs down even further, and lead to strong free cash flow on the back of those higher grades.
They're still scraping a little bit of ore out of the pit here in February, but that should wrap up this quarter, and mining from the old Palmarejo underground should end by September. As we saw in the fourth quarter, with such a big drop in tons milled due to lower open pit mining rates, Palmarejo's production levels and unit costs are expected to improve during each quarter of 2016, as we build mining and milling rates back up from higher margin underground mining at Guadalupe and Independencia.
One last point on Palmarejo. It's worth pointing out what the team there has done in the processing area to boost recovery rates. A full 15% higher silver recovery rate and a full 10% higher gold recovery rate from a year ago, along with all the other changes to Palmarejo taking place, those higher recovery rates should make a big difference going forward.
Out in South Dakota, the Wharf acquisition has been a terrific addition to the company. We owned it for 10 months in 2015, after paying about $100 million in cash for it. The mine ended 2016 with a very solid fourth quarter. Gold production was up 38% to 32,000 ounces, costs were down 20% to $570 an ounce and free cash flow was $17 million just in the fourth quarter. In fact, free cash flow totaled $29 million during the 10 months of the year that we owned and operated the mine.
Wharf looks to be set up for a great 2016. Over 90,000 ounces of gold is expected to be produced at cost in the low-$700s and only $8 million of expected CapEx. It should be an important and steady source of cash flow for the company this year.
Up in Alaska, Kensington had a record year in 2015. It delivered consistent operating performance throughout the year, resulting in gold production of 126,000 ounces at cost of $798 per ounce. So far, we've spent $8 million on development of the Jualin deposit. And according to our PEA, we've put out in April of last year, we anticipate spending another $20 million to $25 million until we start mining from Jualin next year.
The underground development work in Jualin was started last August and now has advanced a little over 2,000 feet. We expect to encounter the Jualin ore body, once we've advanced about 7,000 feet. So we're almost 30% of the way there. Drilling stations are now being prepared underground there to facilitate an extensive drilling program of about 40,000 feet on Jualin this year to try and upgrade the resource and hopefully expand the size of the deposit.
We expect Kensington to have a similar year in 2016 in terms of production and operating cost. CapEx there, this year is expected to be a little higher, about $30 million, mostly for underground development at both Jualin and at Kensington in order to access higher-grade ore that sets up Kensington to achieve an even further drop in cost and to realize strong and consistent free cash flow.
At Rochester out in Nevada, we expect the investments we've made to scale up the operation and drive down unit costs to really start paying off. Over the past three years, we've invested about $50 million in larger mining equipment, in more crushing capacity and in several other areas intended to make Rochester a more efficient operation. We've now nearly doubled Rochester's mining and crushing rates and we've reduced mining cost per ton by over 40%.
We're starting to see the impact of these efforts, production in 2015 was up 13% over 2014 and cost per ounce were down by 18%. This year in 2016 we plan to mine and stack close to 20 million tons out on our existing leach pad, almost double from 2012, when we started this transition at Rochester, and up about 20% compared to this last year.
This should lead to even higher production rates and lower costs this year compared to 2015. We're now starting to receive permits for the next leach pad expansion scheduled to take place in 2017, and we expect to receive the record of decision from the BLM in the next month or two.
Our strategy at San Bartolomé to leverage our unique processing facility to purchase and process higher-grade ore from throughout Bolivia is really having an impact. Almost 30% of our ounces in the fourth quarter came from these third-party purchases of higher-grade material, which helped us drop cost to levels we haven't seen there in years. We think we can keep up this level of ore purchases during 2016, which should help San Bartolomé generate solid cash flow.
Switching gears slightly, I want to briefly mention what's happening on the exploration front. Slide 17, in the materials we've provided, summarize some of the highlights. Last year over 90% of our exploration dollars were focused on adding higher grade ounces around our existing mines, where the success rates are higher and the payback is quicker. We have some promising targets that we identified and drilled in 2015 and have more exploration planned this year.
At Guadalupe, we discovered the widest, highest grade mineralization to date in deeper areas of Guadalupe. We'll be starting a 10,000 meter drilling program there later this quarter. And then in between Guadalupe and Independencia, we have two new discoveries called Los Bancos and Nación that will also receive more drilling this year.
We've identified and drilled a new high-grade silver-gold zone at Rochester, called East Rochester, which is located only about 300 meters from the existing pit, which we'll evaluate further in 2016. And as I mentioned, we plan to begin underground drilling at Jualin up at Kensington later this quarter.
Now, Jualin is a series of five mill veins stacked on top of each other. Existing resource is on number 4, which will receive the majority of the drilling dollars here in 2016. But we also plan additional drilling on the number 5 vein, which we've already drilled, but do not yet have a resource on it.
One other thing I want to quickly mention, before we open it up to Q&As, are yearend reserves, which we put out yesterday as well. We used prices of $15.50 for silver and $1,150 for gold for the next two years, and then we use longer-term prices thereafter of $17.50 for silver and $1,250 for gold. Last year at the end of 2014, we used $19 for silver and $1,275 for gold.
As of the yearend, gold reserves rose 33% compared to a year ago to about 2.4 million ounces, mostly due to the addition of Wharf. Our silver reserves decline from 281 million ounces down to 156 million ounces, because we reclassified La Preciosa's 119 million ounces of silver from reserves to resources.
Palmarejo's reserves increased the most of all of our operations, a 46% increase in its silver reserves and a 41% increase in its gold reserves. Interestingly, over 60% now of the company's silver equivalent total reserves are now located in the U.S. and about 90% are located in North America. There is a good slide in today's materials, Slide 11, that shows the growth in reserves and grades at Palmarejo over the last two years, since we started down the path of remaking that operation.
Palmarejo silver and gold reserves are up a lot, as I mentioned, which is due both to the success of our exploration efforts as well as due to the paramount acquisition. But it's the average grade of those reserves that I think is worth pointing out. Over this two year period of time, our average silver grade at Palmarejo is up 33% and the average gold grade is up 49%.
Together with the end of the old Franco-Nevada gold royalty in a few months, this all bodes really well for Palmarejo's future and the kind of cost and cash flow we expect from this important operation, which in turn should help drive our company's cost down even further than they've already dropped and lead to strong cash flow for a long time to come.
With that, then let's go ahead and open it up for any questions that you might have.
[Operator Instructions] And our first question will come from Michael Dudas from Sterne Agee CRT.
Couple of thoughts. One on Jualin, as you move through to get towards the ore body you mentioned its 2,000 and you have total of 7,000. Is that total or is that left to go? I couldn't understand what you were saying?
That's 7,000 total, and we've gone 2,000 of that 7,000.
How comfortable you are with mining, labor capacity, and such as you get to -- once you get to your target, is there -- are we set there or do we still have more work to do?
Mike, we will be buying. We plan to balance out our existing work force to work both at Kensington mine grade and then Jualin. We're not anticipating any headcount increases.
And maybe a little more light on the Bolivia profile. I mean that's kind of interesting how you're getting some of this work. Could you maybe give a little more color on how that's occurring and how sustainable that might be given some of the situations that's going on in that country?
Yes, we're fortunate, in that our oxide facility there is really the only one of its kind in Bolivia. We've always focused more on just mining of the material off of the Cerro Rico Mountain itself. But when we looked around last year and the phase of lower prices and thought about ways that we can adjust to allow San Bartolomé to make positive cash flow even at lower prices, turning sort of outward and looking throughout the country for sources of ore who lack that processing capacity, where we could pay a lower rate than what it takes for us to mine off of the mountain and boost our overall grade made a lot of sense.
So we put together the resources there on the ground, the team that conducts these ore purchases and we blend in and stockpile at the plant. And overall recoveries have not been affected. The overall grade has gone up. And as a result you've seen these costs now go down by a pretty healthy amount. And like you can see there in the first three quarters of the year, cost were quite a bit higher than the fourth quarter, when we really got going in earnest on this initiative, just maintaining what we did in the fourth quarter throughout this year than we think is sustainable.
And as you know, Bolivia is a very well-endowed country in terms of its geology, so we think that there is plenty more to continue to do. We'll be careful in terms of how much we do to make sure that we're blending and mixing way that maximizes the plants efficiency. But we think we're onto something there that will help put San Bartolomé back into the category of being a net cash flow contributor to the company.
And final thoughts, certainly you've been managing well the cost and the grades throughout the organization, and given where prices for gold and silver been the last few months and second half of last year, not so much last month or so, are you thinking different about how you're managing the business as you get closer to the cash flow generation cliff that we're getting through in the second of the year in an environment of higher price, different prices? Is there a change in focus or thought maybe of what's next?
It's fun in price environments like we're seeing recently to start thinking a little bit differently compared to the grind of the last couple of years. But we keep reminding ourselves that the absolute -- number one priority for all of us is to see all of these initiatives through and really get to that kind of strong free cash flow outlook that we've been talking about now for the last really two or three years, as we put all of this different pieces in place, the people in place.
We really don't want to fall short on what we can see here, this company being able to do on a sustained basis. So we got to keep the focus ahead of us on these very tangible kind of initiatives that we've been focus on now for the last couple of years and see it through, and that's really no change to how we're running things. We got to get cost down, cash flow up and maintain it.
Our next question will come from Jessica Fung from BMO Capital Markets.
Just a few questions, couple of a little detail. So the recoveries at Palmarejo improved pretty well last quarter. Can you give us some more details on what exactly was undertaking at the plant to achieve these recoveries?
There's several different things that we've accomplished. We're still optimizing the blending process on the front-end of the mill facility. At this point, we're doing it based on the increase in metallurgical knowledge on all the different ore streams that come in with established met testing programs on ores that we're producing today and we'll be producing in the future. So we just optimize the blend with the objective of maximizing plant recovery, that's one element.
The second is in the Merrill-Crowe part of the mill flow sheet, we've increased capacity and we have improved recoveries in that circuit sizes, those gold and silver ounces passed through there, they're just one step away from being in the product that we ship with improved performance there.
And then the third is that we've introduced, we had converted in 2014, converted the CIL circuit, which is a pulp leaching circuit that had a lot of carbon in it. We took all that carbon out and enhanced the recovery or the extraction of gold and sliver in that particular plant. Well, we actually gone back and now use a little bit of carbon in just two of the eight tanks that adds an additional incremental number of gold and sliver ounces that we recovered and we process those outside the mill facility.
And then the fourth is we have a tailings thickener, and it's the last piece of equipment in the entire flow sheet. We've just established some very tight operating controls around that pit now and have had a much of great success in limiting or reducing a number of ounces going to the tailings in Palmarejo.
In addition to all that, we're operating at lower throughputs. And so the residence time in each of the different unit operations that we treat the ores increased and that's helpful. So it's a number of different factors, but it's all added up to a pretty significant benefit to us.
So with the lower throughput, presumably that will continue into 2016, as you guys are ramping up the two underground veins. Do you expect maybe recoveries to come off a little bit then in 2017, as you guys ramp up your throughput, despite sort of all the other structural positive changes you've made?
No. We expect that things will continue as they are based on how we've come around to managing this plant. We'll never see the throughputs, at least in our current plans that we used to achieve, say, two or three years ago, when we were really exceeding the plant design capacity.
When we ramp up these underground mines, we'll be processing normally 4,000 to 4,500 tons a day and we used to push the plant to 5,500 tons a day and higher. So we'll always have that retention time benefit there. But all these new practices that we put in place are going to pay dividends going forward.
And then my second question is at Rochester delaying the construction of the next leach pad, do you foresee any kind of capacity constraints this year there?
No, we won't have any capacity constraints. We're putting more out on her stage through leach pad now, and it's got capacity through there at some point in 2017. So we'll start reconstruction efforts on stage 5 of this year, and we'll finish off the pad construction next year. So all trying to fit where we can accomplish and see what's transitioned over pad to the other without an impact on production.
And my final question is just, I just wanted to get your thoughts on potentially hedging, whether it's currency or the metal prices, as we've seen to move up in the last little while?
Certainly, we have had a very active hedging program in silver and gold. Our last hedges ran out July of last year, and we've stepped back from that. If we see a decent recovery in silver and gold prices, in particularly, silver, above our costs, above our all-in sustaining costs, and sort of view that hedging requires us to be generating margin, and really the focus is on hedging margins specifically. So it's something that we're monitoring on a constant basis and we will certainly plan to do in the future. As far as currency or other hedges at this point, it's not really our intention to do that. We really focus on the metal prices themselves.
Jessica, when we talk about hedging we're talking about downside protection and leaving the upside alone, but put spreads to kind of protect us on the downside, but leave the upside alone.
Very important point, that's the exact strategy that we've used all the time. And we've actually gravitated to hedging more silver than gold, just given the inherent volatility of silver.
Our next question will come from Chris Thompson from Raymond James.
Just got a couple of quick questions here. We'll start off with Palmarejo and what's happening into Independencia. I think I've said that correct, I'm getting better at that. Just grade reconciliation, what is your understanding, what are you noticing obviously beginning to develop into that deposits, can you just comment on that?
Yes, Chris, let me just describe where we're at, at the moment. We're not quite in a position to start looking at the reconciliation, but we've developed the declines over to the Orko [ph] rise and we got here as we had predicted kind of late last year. And we're starting the development work in and around the ore body itself.
We did intercepted the vein network, primarily targeting first two-times at this point in time and receives nice grade coming out of that. But really still very premature to start talking about reconciliations through midyear and by the end of this year, and that will definitely be something that we will attract at that point in time.
Just a quick comment, if you would, on how you're going to be managing the production of tons, I guess, from those, the tons that are obviously associated with the Franco royalty and those that aren't?
Well, I can -- you think about, you step back and you look at what the source of mill feed was last year compared to this year, 60% of the tons last year to the mill came from that open pit compared to, I think, this year that will only be about 5% of total tons mill that will come from the open pit here just in the first month or two.
Guadalupe, last year was about 25% of the total tons that went to the mill, this year it's about 75%. And then old Palmarejo underground was about 15% of total tons to the mill and then I think for the full year 2016, the old Palmarejo underground represents about 10% of this year's total mill tons through September.
And then the rest is really that balance from Independencia that will start essentially at zero tons per day in earlier in January and get up to about 1,000 tons a day by the end of the year like we said. We will be -- the focus of the development works that Frank was talking about does prioritize the east side of Independencia, which is the old Don Ese side of the Independencia ore body, which is free of any obligation to Franco-Nevada. So we'll be starting the mining and the prioritization of the mining off of the old kind of area of interest that the Franco obligation covers.
But here in 2016, that's not going to be as big of a driver, just given and we still have the old gold royalty agreement in until about September. And those Independencia tons aren't really high enough to make a big difference until really over the last probably two months of the year.
But then in 2017, if you look at the total tons coming from Guadalupe of, call it, 2,500 tons a day and then about the same 1,500 tons to 2,000 tons a day coming from Independencia, almost all of those tons from Independencia will be royalty free or gold stream free. Does that help kind of get to your question?
That's great. I guess, quickly moving on the Kensington, the sort of mill throughput we saw in the Q4, would that be representative of what to expect for this year? Any chance of an increase on that?
No. There won't be a substantial increase about what you saw in the fourth quarter. I think it will be status quo throughout 2016.
And then, finally, just on Wharf. I mean, I understand this is probably a quarter-to-quarter sort of variation I guess in production tons to be expected more sort of seasonal or anything else. Can you just expand upon that a little bit, what we're going to see on a quarter-by-quarter basis this year? I'm talking about ton placement more than anything else.
We target at normally 14,000 tons a day crush rate for ore placement on pads. And if you look at the year, as it ensued out for the acquisition, we stepped up each quarter on what the tons of ore that would be mined. We make some improvements in the crushing area, where we could improve availability of the crusher itself and increase the runtime and so on. But really just kind of got up to the peak of where they have historically operated. What you saw in the fourth quarter is pretty much going to be status quo going forward.
More on the golden reward there, Frank. What do we see as far as production rates from that on a quarter-by-quarter basis this year?
We'll be mining there in part of the second quarter and the third quarter, before we have to suspend the operations. Now, rest assure that we would be mining out the remainder of golden rewards. I'm thinking in terms of April to roughly October timeframe. And yet, we'll still be drilling over there and like there is possibility. But before we have to suspend the mining operations, we might identify more material for next year. We hope we do.
Our next question will come from Craig Johnston from Scotiabank.
Just one quick question, as everybody else has asked some pretty good questions. Just on the working capital management in Q4 and looking out into 2016, with the increase in accounts payable, decrease in accounts receivable. Do you see a big swing, say, in Q1 in the opposite direction that you saw in Q4 or maybe is this a new level of both those balances?
I think the latter is a good conclusion, Craig, its Peter. But obviously in this environment we're working hard to squeeze working capital a little and use that as a source of cash. So holding those balances, making that assumption through 2016 I think is a pretty good assumption.
This will conclude our question-and-answer session. I would like to turn the conference back over to Mitch Krebs for closing remarks.
End of Q&A
Well, we appreciate your interest and your questions today. Thanks for your time. I know it's a lot obviously happening and you can tell a lot happening here at the company, and all of which I think is moving us in a really positive direction. So we look forward to speaking with you again in May to discuss our first quarter results. Thanks again for your time.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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