Coeur Mining, Inc. (NYSE:CDE)
Q1 2016 Earnings Conference Call
April 28, 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
Hans Rasmussen - Senior Vice President, Exploration
Michael Dudas - Sterne Agee
Craig Johnston - Scotiabank
Jessica Fung - BMO Capital Markets
Chris Thompson - Raymond James
Chris Terry - Deutsche Bank
Joseph Reagor - ROTH Capital Partners
Good day, and welcome to the Coeur Mining First Quarter 2016 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Ms. Rebecca Hussey, Manager of Investor Relations. Please go ahead.
Thank you, and good morning. Welcome to Coeur Mining's call to discuss first quarter results. There are slides available on our website to go along with today's remarks. Please review the cautionary statement and the risk factors in our latest 10-K and 10-Q for risks and uncertainties that could cause actual results to differ from any forward-looking statements made today.
I'll now turn it over to Mitch.
Thanks, Rebecca, and good morning, everybody. We appreciate you taking the time to dial in to our call. We're proud of the first quarter results we issued late yesterday. They reflect the continuation of the same themes and priorities that we've been highlighting for several quarters now.
Cost keeps trending down across all of our operations. Slide 6 in the presentation materials shows these industry-leading trends. Our G&A costs declined once again, and the team continues to do a great job of carrying out the strategic plans at each of our mines. Each operation has its own specific strategy, but on a combined basis, they're all designed to deliver a greater level of consistency and efficiency and reposition the company as a lower-cost precious metals company with strong and sustainable free cash flow.
We remain well on track to meet our production guidance targets we provided earlier this year, and most importantly, we remain on track to achieve our main objective of becoming free cash flow positive during the second half of the year.
As Slide 4 highlights, adjusted EBITDA during the quarter jumped up to $35 million, which was 46% higher than last year's first quarter when prices were significantly higher. On a trailing 12-month basis, EBITDA was $127 million. That's up about 58% from what it was a year ago at this time. The Wharf acquisition has definitely contributed to this rise in cash flow, but we're just now starting to see the impact of the investments we've made in our existing operations to boost grades, enhance recovery rates and mine at higher, more efficient levels.
Our liquidity remains strong. We ended the first quarter with $173 million of cash. We've said before that we expect our cash balance to decline during the first half of the year as these operating initiatives take hold, and as we aggressively fund the projects necessary to drive our repositioning forward. We anticipate cash beginning to build later this year on the back of these efforts.
As you can see on Slide 7, our total outstanding debt remained about the same as it was at year-end, but our leverage ratios continue to improve as our EBITDA keeps increasing. A year ago, our net debt-to-EBITDA ratio was 4.2 times, and at the end of the first quarter, it dropped 36%, down to 2.7 times.
Like a lot of mining companies, we underwent a credit review with S&P and Moody's during the first quarter, but unlike most companies, S&P actually upgraded our credit rating and Moody's elected to drop its negative outlook. These actions reflect an appreciation by both agencies for our growing track record of industry-leading cost reductions and for our ability to grow cash flow even in a declining price environment like the one we've seen over the last few years. Our diversified and balanced portfolio of five operations and improved mix of revenue between silver and gold also contributed to their positive reviews.
One other topic worth mentioning relating to our liquidity is our recent efforts to monetize certain non-core assets. We've talked on prior calls about how core capital could be a potential source of liquidity for us. Over the past several months, we've looked at a few different ways of monetizing all or parts of that subsidiary. We elected to selectively sell several individual components of core capital where we felt we could realize an attractive value.
Slide 14 in the presentation materials highlights the individual transactions we've entered into. One was completed in the first quarter that added $4 million to our quarter-end cash balance and the rest should close during the current quarter. The only assets we'll retain in core capital of any relevance then are the Endeavor silver stream in Australia and our portfolio of equity investments, which has a current market value of about $10.5 million. In all, we expect to generate total consideration of approximately $25 million from these transactions, and we anticipate using those proceeds to reinvest into high-return opportunities inside the business and to potentially pay down outstanding debt.
What excites me the most is the fact that even though the first quarter was solid and a clear beat, each remaining quarter of the year should only get stronger, especially if these higher prices are maintained. At our Palmarejo operation in Mexico, the repositioning to a higher grade, higher margin and lower tonnage underground operation with our long mine life is advancing according to plan.
Slide 9 does a good job of illustrating a few of the key trends we're seeing there. Underground tons mined have increased by about 45% over the past year. The silver grade -- average sliver grade is up 12%, and the average gold grade is up over 40% compared to a year ago. And thanks to some great work by our teams here at the corporate office and at site, silver recovery rates have increased by 10 percentage points and gold recovery rates have increased by a full 18 percentage points over the last year.
As mining at the new Independencia deposit accelerates to augment the mining taking place at the Guadalupe mine, we expect to see Palmarejo's grades continue to rise, the recovery rates to remain at these higher levels and costs to continue to decline, resulting in strong cash flow from Palmarejo.
We will also be rolling off the old Franco-Nevada gold royalty in the third quarter and on to the new gold stream agreement we were able to renegotiate with them. We expect this will have the effect of reducing what was a $40 million to the $50 million a year annual outflow from the mine's cash flow to something more in the $5 million to $10 million a year range.
Our Rochester mine in Nevada had a decent quarter but not the greatest one. Poor weather in January and February negatively impacted crushing rates, and we were leaching some of the deepest parts of the Stage III leach pad during the quarter, which means the ounces are slower to come out.
Despite these two challenges, costs remain in the $11 to $12 an ounce range. And now with better weather, a new fleet of larger haul trucks now in place and the second crusher now commissioned and hitting design capacity, we expect Rochester to have a strong remainder of the year.
The Wharf mine in South Dakota kicked up $8 million of free cash flow during the first quarter due in large part to higher recovery rates and low costs of $667 an ounce. Wharf also should see its production climb throughout the rest of the year. Like Rochester, production during the first quarter came from the highest lift on Wharf's active leach pad, so it needed more time for it to break through. We're now seeing production increase in April and expect that trend to continue throughout the rest of the year.
Our Kensington mine in Alaska had another consistent quarter after having a record year in 2015. Costs dropped again down to $761 an ounce in the quarter. The daily throughput averaged about 1,800 tons per day, which is nearly 50% higher than only a couple of years ago. The next objective for Kensington to get costs down even further and to start generating strong and sustainable cash flows to have 20% to 25% of those tons each day coming from higher-grade ore sources.
The Jualin deposit is one source we're targeting, but there are several others. The development of Jualin continues. We'll be drilling it throughout the remainder of the year to hopefully expand and better define that deposit, and we plan to start mining in Jualin late next year.
Our strategy at San Bartolomé to purchase and process higher-grade ore from third parties continues to have a significant impact. We've also made some process improvements there that helped kick up recovery rates during the quarter. About one-third of our ounces in the first quarter came from these ore purchases, which helped us keep costs at levels where the mine can generate solid and sustainable cash flow.
And just to wrap up quickly, Slide 16 illustrates several of the key milestones that lie ahead for us during the remainder of the year. Our sites remain set on achieving these objectives like we've been doing and delivering the strong results for our stockholders that these plants should provide.
That's the extent of our prepared comments. Let's go ahead and open it up for questions.
[Operator Instructions] The first question comes from Michael Dudas of Sterne Agee.
First, the question on Palmarejo. Both recovery rates were quite impressive. Maybe a little bit more explanation on what we've done to get there and the confidence level once the new ore from Independencia kind of runs through that, you can keep those recovery rates with those higher grades into ‘17.
Yes, sure. Frank, do you want to handle that?
Sure, happy to. Hi, Mike. Palmarejo, the recovery story goes back over about the last 18 to 24 months. We've done a number of different things that have cumulated up to what you see now. Blending has been optimized. We've talked about that in past earnings calls. We've also improved our performance in the Merrill-Crowe area where we've increased the capacity for flow through the presses and recovery of metal through those presses. We've also really enhanced the operating performance of the tailings thickener, just reducing the number of tailings losses to our tailings area. And we're also using carbon as a kind of a final polishing of the tailings values in the old CIL circuit, now the agitation leach circuit. All these things have added up to what you're seeing in the recovery figures there for both gold and silver.
And Mike, your second question there about Independencia and the confidence levels as that ore now starts to flow through the mill life. Frank, tell me if you disagree, but we feel pretty confident that the recoveries will be consistent with what we're seeing now.
That's right. We've been involved in a metallurgical testing program for well over a year now. We're seeing very good recovery figures coming from this ore. It's really good over at Guadalupe. The areas that we're going to be mining in for the next couple of years are very good at Independencia.
Appreciate that, those thoughts. My second question is, maybe Mitch can share some observations relative to your last visit down to Mexico and maybe how you guys are reassessing Preciosa given that the fact that we're starting to see pricing improve. And is there any potential for something interesting to happen there as we kick out of the ‘16 into ‘17?
Yes. Thanks for that question. It's a project that had been put on the backburner back in 2014 when we completed the feasibility study and, of course, prices were working against us. I think at that point, we had concluded that in order to achieve an attractive enough rate of return to justify going forward that we were going to need a silver price north of $20 an ounce. And we've really taken advantage of the benefit that time has given us now over the last 18 months or so to go back and kind of take a fresh look at La Preciosa and see if there is maybe another way to approach that project, that, that could be an attractive project in a current price environment. We're encouraged by what we're seeing there.
As we think about future growth opportunities for our business, La Preciosa is at the top of that list. We already obviously own it. It's a unique thing. There's not a lot of quality silver development projects out there. And to have one in our portfolio and one that we think we can make attractive and economic is something that we're excited about and, hopefully, we'll have more to say about that by the end of the year.
The next question comes from Craig Johnston of Scotiabank.
Hi guys, thanks for taking my call and good quarter and nice to see some progress on the asset sales. Just a couple of quick questions on the cost side. I'll start with Palmarejo. Looks like a good reduction in underground mining costs. Just wondering if you guys could provide some color there in terms of what caused the improvement and then just what you're expecting as you transition more from Palmarejo and the Guadalupe and then Independencia as well. What you're looking for in terms of underground mining costs?
Frank, do you want to cover that?
Yes, sure. Hi, Craig. That $39 a ton that you see there in the first quarter of this year is kind of the cumulative, in fact, of the number of factors that have worked in our favor. As we've developed the Guadalupe mine, we are in a phase, at least in this quarter, where development work required to tee-up our headings for taking out and extracting the stopes was minimized to some degree. So we were mining mostly in stopes and ore. We're also finding that the rock conditions in that mine are favorable in some locations where we can lengthen the stopes and so therefore take for the same -- almost the same costs of developing a stope, incrementally take a lot more tons out by lengthening those stopes. So that's really worked in our favor.
Going back some time, you can to some degree see this in the numbers of these five quarters, but we've optimized the haulage of that material back to the Palmarejo mill through the use of 777 trucks. And we've optimized that cost quite a bit, bringing that down probably about $4 a ton from where we started by using 777s. Lower fuel prices has helped where you have to haul the ore back to the mill, so that's working in there as well. As I look forward, I don't see that $39 a ton at Guadalupe will be sustainable. I would continue to view that at about $45 per ton.
As far as Independencia is concerned, it will be a pretty similar mine in terms of the mining methods and so on that we will employ. I'm planning on $45 a ton there as well. Yes, it will be higher than in the early days as we ramp up. We're currently doing development work and haven't actually taken a stope out yet. That's planned for later this year, but as we've noted, we're trying to achieve 1,000 tons per day by the end of this year and the next year becomes a bigger ramp-up here. I do feel that it will settle in about $45 a ton.
Okay. Thanks, Frank. That's great color. And then just going back, Frank, on the previous question on royalties -- royalties recoveries, sorry, are you confident in the levels we saw in Q1 going forward? Or would you stay cautious and maybe Q1 was just a really good quarter?
No, I'm very comfortable with that. I think you're going to see recoveries for both silver and gold are going to range between 88% to 90%. We are investing a little bit more capital later this year in the second half of this year in that Merrill-Crowe circuit. And I think we'll see another little incremental bump. So I'm very comfortable saying between 80%, 88%, 91%, 92% on these metals going forward.
And then just on Wharf and processing cost per ton on Wharf. Just wondering if you could -- it looks like costs dropped off a cliff in Q1, just wondering if you could provide color there.
Well, you see the mining costs on that slide at $2.43. Kind of compare that to Rochester, the falling [ph] costs at Rochester just hovering around $5 a ton for mining and processing and G&A. A little bit higher than that here, but considering the scale of operations, I think these costs at Wharf are quite phenomenal. We did have some pad unloading costs that kicked in there in the first quarter. You'll see that $0.68 per ton. It brought the total mining costs up to $3.11, but I still think that's a pretty decent number considering how much scale it lacks compared to Rochester where they're hovering along at about $1.50.
Processing costs were down. We just had a good quarter where not a lot of -- where we've really optimized the process plant there. We note in some of this material that recoveries in the process plant at Wharf have been improved, and I think that's reflected here in this cost dropping as well. I don't think it will stay at that level going forward, but I think you can count on something in the range of $3 to $3.50 going forward on processing.
The next question comes from Jessica Fung of BMO Capital Markets.
Just a couple of quick questions here. First is on San Bartolomé, very, very strong recoveries in the quarter. Do you expect that to be maintained going forward?
Frank, you're on a roll.
Yes. I guess, I'll take this one as well. Yes, we do, Jessica. We've deployed oxygen. We're using oxygen in our agitation leach circuit there. We began that January of this year. It's a little bit bumpy in January and February as we're optimizing things, but we really started to see that benefits show through in March and a bit of a bump in the first quarter. The oxygen will help the leaching reactions. And now that we've got that more or less optimized, we look forward to being able to maintain this kind of recoveries going forward. I'm seeing a full 5% increase in extractions in that plant right now. Recoveries will be even higher than that after taking into account some of the other metallurgical calculations that surround the plant, but very pleased with it. It's helping quite a bit.
Okay. That sounds good. And then just a question on your exploration expense. I guess, overall you guys are still guiding to $11 million to $13 million for the year. How back-end loaded do you think that's going to be this year? And then going forward, is this a figure that you guys would be comfortable with in terms of sustaining your current asset base or would you ideally want to be spending more?
I'll start, Jessica, and then, Hans, you can chime in. Yes, the full year, like between capitalized and expensed, it's something around $25 million. Half of that goes to expensed. Half of that goes to capitalized. I think of that full $25 million, $10 million of it is allocated to Palmarejo. With what we have as opportunities to extend mine lives at Palmarejo and Kensington, in particular, our hope and expectation is to spend more. There is just no better way to generate great cash flow, great rates of return than spending money around these existing mines where the success rates are higher, payback is quicker. And we'll keep funding that all day long as long as we can keep having success.
Rochester would be the kind of third in line in terms of money behind Palmarejo and Kensington, but that's a lot cheaper to drill obviously out there. And then Wharf has, I think, about $1 million a year, is all for some -- and that's capitalized drilling. So I think between $25 million, maybe $30 million to $35 million, when we really -- Hans is sitting up straight, excited about that $35 million number. But most of it will still be around existing mines. I think 95% of the money we're spending this year is around existing infrastructure.
And in terms of back-ended or when we spend that, our middle part of the year is really where we're going to be spending the biggest chunk of that. So you could see the majority of that being spent in Q2 and Q3. Hans, what did I leave out?
No, that's exactly it. I wrote down that $35 million number, by the way, and circled it. We didn't rehearse it, so Mitch volunteered on the exploration budget there. Definitely Q2, Q3 will be our biggest drilling quarters. The rigs just started at the end of Q1 for a lot of reasons, weather being part of the reason, and access to drill sites, drill stations at Palmarejo and then at Kensington later in the second quarter are what slowed us down this year. But we're up and running and lots of drilling going on in both Kensington and Palmarejo.
The next question comes from Chris Thompson of Raymond James.
Couple of quick questions here. We'll start off with Palmarejo. Just can you give us a sense of the mining rates right now from Guadalupe and in the Independencia?
You're getting -- each quarter on the call, Chris, you're getting better at your pronunciation of Independencia. Actually, I wrote down a couple of notes, expecting the Palmarejo questions from you on tons. Two things, and Frank, fill in any gaps that I leave out. But I think we averaged in the first quarter at Guadalupe around 1,800 tons a day. That will average for the year right around 2,000. I think, so far, at Independencia, January, February was very, very little, like 100 tons a day. That was I think -- and April now is more like 300 tons a day. And as we go through the rest of the year that will gradually bump up to 1,000 tons a day.
You go into 2017 then, Palmarejo -- sorry, Guadalupe would be in that 2,000 to 2,500 tons per day and then we'll see that next kind of step up out of Independencia from 1,000 up to close to 2,000 later on in 2017. And then that's kind of a good steady-state assumption. What I thought you might ask, Chris, was dividing up Independencia between what's on the West side of the old border and on the East. And I'll you give you that just -- It wasn't time wasted. I think of about 120,000-ish tons to come out of Independencia this year about 106,000 of that comes from the East side. And then you fast forward to 2017, out of about 600,000 tons of total Independencia ore production, about 450,000 tons comes from what we call Independencia Este and the balance from Oeste from the West side. So that's proportionately how, at least, this year and next year look. And I don't know, Frank, is that a decent trend then to assume going forward?
Yes. I think that's -- you've done well there. I will add this on Independencia. Early this year, in January, we arrived at the mineralized horizon and began our development work on strike with vein itself. The ore that we've mined at this point is development ore. We haven't actually taken a stope yet. That's planned for a bit later this year, but we have been putting in crosscuts that will facilitate that on both an upper and a lower level where we'll begin our mining activities. Every time we cross the vein itself, we encounter some of this ore. And we've been able to bring out and actually ship over to the mill for production purposes, a little over 700,000 tons so far this year.
And then very, very quickly, sorry to be very granular on this, but how are the grades holding up at Guadalupe at the moment?
They're doing well. We're seeing gold grades at Guadalupe -- or sliver grades that range between 200 and 250 on average in recent months and pushing between 2 and 2.5 grams gold. We organized our mine plants around gold equivalency, so we're well above 5 gram gold equivalent per ton there. And as we cross the vein at Independencia, we're seeing a lot of -- the grade is coming in a bit higher on gold in Guadalupe and a bit higher on silver as well, so coming pretty good.
Great, perfect. And just moving on very quickly to Rochester. You mentioned, I guess, the approval for the POA 10 is anticipated, I guess, this quarter. When do we need that approval in order for the development plant for the mine not to be affected -- detrimentally affected?
We need to start some construction activity out there later this year still in the construction season and then finish that up early in the springtime, summer next year so that as we get into the second half of 2017, Stage III is going to be awfully full. So that's kind of the timetable we're working with.
Then finally, over to Wharf very quickly. When I was at the site, I guess, last year, we were chatting about the significance of the Golden Reward there, I guess, component for the mine. Can you give us a status on the mine life there and the development plan, I guess, looking forward?
Would you like me to handle that, Mitch?
Yes. We have another mining cycle at Golden Reward. As soon as springtime, we're getting into early summer. We're going to have one more season. We plot that would happen and be done this -- last year, but we just didn't get all the mining done. So we have one more good cycle there. We'll enjoy good grades coming out of there as a result of that, but we benefited this year by being a nice zone in the main pit, the American Eagle pit. We're averaging grades above 0.03 there.
The next question comes from Chris Terry of Deutsche Bank.
Just a few questions from me. Just talking about the asset sales that you've done within core capital, are there any other assets to, I guess, eaten up the portfolio maybe outside of core capital that you could look to sell at this point? And just leading on from that, in terms of core capital, what do you think is in the timeline for that to potentially wind up?
Yes. First question, there's really nothing else that we have -- our site has been a meaningful non-core asset opportunity in the company. This would kind of clean that up for at least -- for now. And to your second question there, these individual transactions that are summarized in our slide deck, they should all be wrapped up here in the current quarter.
Okay. But in terms of core capital and making decision on where that fits overall, is there a timeline on that?
We will still retain that subsidiary. And in there, we'll sit that Endeavor silver stream. We'll also, in that entity, continue holding that portfolio of various investments we have, equity investments in other companies that we've kind of amassed over time. And then there'll be a couple of small NSRs in there, one on a nonproducing project down in Chile and then a small NSR on a gold, actually an operating mine in Ecuador. And that will be what will be in core capital going forward, and it'll just sort of remain that way. Does that answer your question?
Yes. No, that's fine. That's fine. And then just on the mixed shelf filing, was that just a matter of course or what can we read into that from a few weeks back?
Yes. It's just a matter of course and I think every company has one. Ours, last one expired. So we put a new one in.
Okay, sure. And then final one for me, just your view on the silver market fundamentals and how you're looking at the price against gold and what might happen for the rest of the year.
Yes. Well, a lot of people have been watching that gold/silver ratio and saying that it had gotten awfully stretched and that silver represented an interesting opportunity and I guess, they were right. It's really more than caught up to what gold had done in the first quarter of the year. It still, I think, has probably some room to compress a bit more, if you sort of accept gold in this $1,250 an ounce range, getting to a more normalized level of, call it, 60 or 65 to 1 implies that silver could have some more room to move to the upside. We'll see if that actually plays out.
But the EPS demand, the coin demand is definitely there. We're seeing overall global production and supplies both from scrap and from mines decline, which is positive. The industrial demand component of silver, which is about 60% of total demand, is kind of anemic, kind of like global economic growth is. But within that larger bucket of industrial demand, there's some strong performers like the ethylene oxide and solar, for example. Jewelry demand in India has been particularly strong as well for silver. So there's always so many different aspects to silver. There is usually one or two that are doing well and some others that sometimes offset those, but it's really been that return of investment demand here so far that has really reignited the momentum in silver.
The next question comes from Joseph Reagor of ROTH Capital Partners.
Congrats on not only a good quarter but finally getting some credit for it from the markets.
Hey, amen to that.
So I guess, a lot of things have already been touched on, few I guess side notes. First one, should we expect any gain on the income statement from the core capital asset sales for Q2?
Yes. We're looking at about a $7 million gain on the core capital assets that'll be booked in Q2. There is about $2 million pretax with the one sale in Q1, Joe.
Okay, that helps for estimate reasons. Kind of bigger picture, the core capital assets, essentially the ones that could be sliver, is now sold, maybe Endeavor can be once it's back up and running. Are there any other assets that you guys feel are the ideal next candidate if you guys want to continue to streamline the business to your main focus of being a gold/silver producer in the jurisdictions?
The only one that, Joe, comes to my mind is what do we with Argentina. We, as you recall, have a late-stage exploration project down in Santa Cruz called the Joaquin, which is a 60 million ounce or so resource that we don't really have any plans to advance aggressively on our own. And so the question of what do we do with that is one that we kick around whether a joint venture might be a way of advancing that faster. But you look at our plans and our progress in terms of the free cash flow and you look out over the next few years of this company and Argentina isn't something that we need to have come into that to deliver the kind of cash flow that we're anticipating. And so that's one asset that we have kind of a question mark next to in terms of how best to go about getting some value out of that. But that's the only one that really, I think, come to mind.
And then one final question. On Wharf, I remember when you did the site visit up there, one thing that had jumped out was just the complete lack of interest in exploration by Goldcorp for a number of years before they sell to you guys. Have you guys done any exploration up there? And how is it looking? Do you think there's potential to extend the mine life? And what kind of magnitude possibilities are there?
Hey Joe, this is Hans. The Wharf acquisition was kind of interesting. And really, what I recognized right away was all the upside potential was within the resource itself. And you saw that with our first reserve statement where we added three years mine life. It had 8,600 drill holes when we bought it. And again, we're seeing all the upside potential within the existing models. And so we're drilling, as Mitch mentioned earlier, about $1 million a year in capitalized drilling within the existing resource model to continue to upgrade. And that looks like it's going to just continue to add years to the mine life.
As far as the expansion in terms of exploration around the property, I'm working on that. We're looking at different opportunities. And so some new properties should come to light in the next year or two as we work on our exploration program around the Wharf mine.
End of Q&A
This concludes our question-and-answer session. I would now like to turn the conference back over to Mitch Krebs for closing remarks.
Okay. Well, hey, we appreciate everybody's time this morning. Our team continues to deliver strong results and everybody is doing a really good job of carrying out the repositioning of the company according to plan. We're excited about where these efforts are leading, and we look forward to speaking with you again this summer to discuss our second quarter results. So everybody, have a good day. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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