Endeavour Silver's (EXK) CEO Bradford Cooke on Q2 2016 Results - Earnings Call Transcript

| About: Endeavour Silver (EXK)

Endeavour Silver Corp (NYSE:EXK)

Q2 2016 Earnings Conference Call

August 3, 2016 13:00 PM ET

Executives

Meg Brown - Director, Investor Relations

Daniel Dickson - Chief Financial Officer

Godfrey Walton - President and Chief Operating Officer

Bradford Cooke - Chief Executive Officer

Analysts

Jessica Fung - BMO Capital Markets

Chris Thompson - Raymond James

Howard Flinker - Flinker & Company

Anil Nimmatadeka - Private Investor

Operator

Thanks you for standing by. This is the conference operator. Welcome to the Endeavour Silver's Second Quarter Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions]

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

Meg Brown

Thank you operator. Good morning everyone and welcome to Endeavour Silver Corp Q2 Earnings Conference Call. On the call today we have the Company’s CFO, Dan Dickson; as well, our President and COO, Godfrey Walton.

Before we get started, I’m required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour’s anticipated performance in 2016 and future years, including revenue and cost forecasts, silver and gold production, grades and recoveries, and the timing and expenditures required to develop new silver mines in mineralized zones. The Company does not intend to and does not assume any obligation to update such forward-looking statements or information other than as required by applicable law.

With that, I will turn the call over to Dan Dickson.

Daniel Dickson

Thanks Meg, and thanks for everyone attending our Q2 conference call. I think the first six months we’ve seen a significant change in the precious metals sector. A lot more flow of funds coming into the space is absolutely reflected in the prices. We’ve reached $1,386 per ounce gold and just under $21 per ounce of silver.

Q2 for us was what we see as a very successful quarter. Subsequent to the quarter end, we raised our 2016 production guidance to 9-9.8 million silver equivalent ounces. We increased our capital budget to $17.4 million, and our exploration budget to $10.1 million to accelerate our two growth projects and hopefully drill about 23,000 meters in the second half of 2016.

In Q2 our net earnings rose to $1.7 million compared to last year’s loss of $1 million. EBITDA decreased 7% to $10.1 million. Our cash flows from operations before working capital changes decreased 15% to $9.4 million, and that’s just a function of lower production with lower prices compared to the prior year. Cash costs though decreased 38% to $5.37 per payable silver ounce and our all-in sustaining cost decreased 38% as well to $10.53 per payable silver ounce.

Additionally in the quarter, we completely restructured our balance sheet; we restructured our debt and currently owe $14 million, and we raised net proceeds of $31 million in Q2 2016 through our second ATM offering. Subsequent to quarter end, we completed the second ATM offering, raising an additional $14 million in July.

Cash increased 178% to $57 million at the end of Q2 and our working capital increased over 300% from year-end to $72.1 million at the end of the second quarter. Additionally in the quarter, we announced the acquisition of the El Compas property, May 31 of this year. It’s a small project in Zacatecas that we see as a near-term production target. We’ve got some drilling and we’re going to put a PEA on it that we announced July 11. Additionally, we continue to focus on advancing the Terronera project, focusing to deliver a PFS by the end of this year.

With that, operator, it’s probably most useful at this time to open up to questions to our shareholders. We have Godfrey Walton here with me to help answer any questions from our operations or financial questions by myself.

Question-and-Answer Session

Operator

Thank you. The first question is from Jessica Fung of BMO Capital Markets. Please go ahead.

Jessica Fung

Hi. Good morning, guys.

Daniel Dickson

Good morning, Jessica.

Jessica Fung

Just wanted to get a couple of I guess just sort of small details from you guys. Bolanitos, what do you expect your mining rate to be there in the second half of the year.

Godfrey Walton

Hi Jessica. This is Godfrey. Thanks for your question. We’re looking at the next month or so at about 1,500-1,600 tons a day, and that will gradually drop down to 1,000 tons per day, and that’s what we expect to finish the year on.

Daniel Dickson

We did announce that it was going to be–in the updated guidance we had the basis that we’d be running between 800-850 tons per day but we’ve had some historical stockpile underneath the stockpile that we had before we acquired it. We’ve been able to run additional material through the plant at relatively low cost.

Jessica Fung

So is this stockpile being processed included in your guidance of 1,500 down to 1,000?

Godfrey Walton

Yes.

Jessica Fung

Okay. Got it.

Godfrey Walton

So that’s why it’s a bit higher than the numbers we put out in July 11.

Jessica Fung

Okay. Got it. Can you give us some indication as to the work you’re going to undertake at El Cubo, in the second half of the year, maybe heading into next year?

Godfrey Walton

We have a zone down below where we’ve been mining and we will be ramping down in-vein to get to the bottom of that and then we’ll actually mine back up and so that’s what going to keep El Cubo open through the balance of this year and into next year.

Jessica Fung

Okay.

Godfrey Walton

We’re also doing a lot of looking around in Santa Cecilia where we’ve actually found some other areas that have been not mined, and we are looking at being able to start mining in there, which is why, A, the tonnage will come up from what we had originally forecast; and B, extend it into next year.

Daniel Dickson

From a more long-term standpoint, we announced with that revised guidance that we’re evaluating different plans to be able to ramp back up to 1,500 tons per day. Those evaluations are still ongoing so there’s not a lot that we can say around that at this point.

Godfrey Walton

Yes. Right now we’re looking at–if you look at the current plan it takes it down to about 1,000 tons per day by October or November this year, but there are a lot of options we have that we’re looking at to continue at 1,500 tons per day, which is what we said we had aimed to do.

Jessica Fung

Okay. I guess at El Cubo, given the change in not switching to care-and-maintenance, was there any development that had been slowed down in the first half of the year that you guys need to catch up on?

Godfrey Walton

We weren’t doing any development in the first half of the year, except for a little bit in-vein. In fact, the development that we’re going to be doing in the second half of this year will also be in vein and that’s how we will be able to extract that lower section of ore that we didn’t expect to get this year.

Daniel Dickson

With that additional development this year, it will allow us to get through year-end and into effectively 2017, but announcing the capital program for 2017 will come early 2017, if that’s the case.

I’m guessing, Jessica, you’re trying to drive to what do we think production will be or what our throughput rate will be for 2017, it kind of sounds like, if we’re not going on care-and maintenance.

Jessica Fung

Yes, just to get a sense of how far ahead you guys were in terms of development in the first half of the year when you initially decided to go on care-and-maintenance. So, if you guys were still ahead a little bit or if there was a lot of catch-up to do, and I guess with the $1.6 million and the capital spend and some on exploration as well, whether you’d be all caught up by sort of yearend.

Godfrey Walton

No. We’ll need to spend some more and that’s part of the planning that we’re doing already for 2017, just what will we need to spend in development so that we can continue mining in 2017 and beyond.

Jessica Fung

Okay. Got it. Finally, one last question on El Compas. Just wanted to know if you guys are planning to do a PFS level study and if you can give any guidance in terms of the development timeline there.

Godfrey Walton

Thanks again for all the questions. In August we’re planning a drill program starting up and we need to do quite a bit of drilling before we can actually complete the PEA or PFS level report. We’ve got engineers going to site in August as well, so all of that met work and mine planning will be done during the fall here with the idea of getting a report out by the end of the year with a new resource and new plans. So, we don’t expect to be developing anything until we have Board approval and we have all our permits in place.

Daniel Dickson

The distance, according to the historical resource, is about 600 meters of ramp that would be required to get to the orebody once we go into a production decision, and then obviously development inside that orebody as well. So it’s not a long drive that would be required so we could probably - if we can come to a decision by the end of the year or early 2017, we expect production mid-2017 from El Compas.

Jessica Fung

Perfect. All right, thank you very much, gentlemen. I’ll follow up with you guys afterwards if we have additional questions. Thank you.

Daniel Dickson

Thank you, Jessica.

Godfrey Walton

Thanks, Jessica.

Operator

[Operator Instructions] The next question is from Chris Thompson of Raymond James. Please go ahead.

Chris Thompson

Hey, good morning guys. Congratulations on a good quarter. A couple of quick questions here. We’ll start off with Bolañitos. Just looking at the grades for Bolañitos in Q2 here, what’s the potential for picking up on those grades, or is that what we should be modeling for the near and medium term?

Daniel Dickson

Hey Chris, thanks for the question. Thanks for the compliment about the quarter. At Bolañitos, these are the grades we expected. So we expect a big drop in our silver grades going into La Luz and Plateros, and for those listeners out there, our Q2 grades were 80 grams silver per ton and 2.4 grams of gold per ton. Q1 was actually similar; I think it was 93 grams per ton silver and 2.33 grams per ton gold. This is what we had modeled for the year and this is kind of the expectation going forward. I don’t know if, Godfrey, do you have any clarity of what we’re seeing currently?

Godfrey Walton

No. Those are the numbers that we are seeing. We knew all along that La Luz was going to be a lot lower silver grades but higher gold, and that’s what we’re seeing. So, we don’t expect any change for the balance of the year. We’ll use up the stockpile there in August and then it’ll settle into those grades and a few lower tons.

Chris Thompson

Right. Beyond that, what does the mine plan call for beyond La Luz?

Godfrey Walton

Well, we’re going to be starting development into Plateros, which we announced in July, and the grades there are actually a tad lower than we’re seeing in La Luz. But we’re also picking up a lot of material from some of the old workings and things like that which we’re adding in. We’re getting up to 5,000 tons a month to add into the production.

Chris Thompson

Okay. All right. Just moving on then again to–actually, just staying with Bolañitos, you say you’re going to be dialing back the throughput to 1,000 tons a day, and you see that as steady-state 2017 and onwards?

Godfrey Walton

Yes. It’ll bounce around. It will go as low as about 900 but it will go up to 1,200. So, steady-state around 1,000, yes.

Chris Thompson

Okay, then moving quickly onto El Cubo, again a grade question. Good grades obviously in Q2. Are they sustainable at these sorts of levels? Is that what you guys are modeling right now on a sustainable basis?

Godfrey Walton

Yes. Yes, we are, Chris. We’ve got a good program to even out the high grades/low grades.

Daniel Dickson

For the rest of our listeners, our grades at El Cubo have significantly come up. We had 150 grams per ton silver and that’s a function of bringing the Villalpando discovery onboard and a lot of the production coming from there, and then that’s part of the reason why we’re developing lower into Villalpando because the grades are consistent to what we’re seeing now. With these higher grades and slightly higher prices, this has made El Cubo operating at a profit, effectively for the first time for Endeavour in the last two years.

Chris Thompson

All right, excellent. Then finally just El Compas, I mean so you mentioned the previous - I think Jessica was talking. You were talking about a PEA/PFS there as far as economic study. Idea of timeline for that?

Godfrey Walton

We expect to have it completed by year-end. The big question mark is how much drilling we have to do to upgrade the resource. We will be infilling that resource and getting it to a PFS level, and then we can decide whether we go with the engineering to PFS level or whether we just stay with a PEA.

Chris Thompson

Okay. So is it just a matter of resource refinement more than resource addition or growth at the moment, Godfrey?

Godfrey Walton

We’re doing both, actually. We’re going to refine it, so we’re going to do some infills, and we’d also like to expand it. There are a number of targets that we have on the property that we think have good potential but have never been drilled.

Chris Thompson

Then just on the resource, I mean what sort of–how many tons, I guess, give you the comfort to make a positive development decision? What are you looking for to pull the trigger on this?

Godfrey Walton

I’d like to have a sort of five-, six-year mine life at this point, with the idea that we’d find more as we continue on.

Chris Thompson

Okay. Then what sort of operating margin at current metal prices would you be looking at?

Daniel Dickson

I think from an overall NAV standpoint, our hurdles to clear will be about 20% IRR rather than getting into what the margins will be without having gone through that study yet. That’s typically what we’ve talked to at the Board level so far, Chris.

Chris Thompson

Great. Okay guys. Congratulations. Thanks for the answers to my questions.

Daniel Dickson

Thank you.

Godfrey Walton

Thanks, Chris.

Operator

The next question is from Howard Flinker of Flinker & Company. Please go ahead.

Howard Flinker

Hello everybody.

Daniel Dickson

Hello Howie.

Howard Flinker

Hey guys, how much of your decline in costs is attributable to a reduction of the peso?

Daniel Dickson

About 18% of our costs, so on a cash cost basis we dropped 38%. Half of that essentially is related to the peso basically going from–last year we averaged just under 17:1 US dollars and now we’re, in the quarter averaged 18.5; right now, we’re bumping up against 19.

Howard Flinker

Okay, thanks.

Operator

There are no more questions at this time. I would now like to turn the conference over to the CEO, Bradford Cooke, as he has recently joined us.

Bradford Cooke

Hi all. It’s Brad here. I just wanted to say that we’ve come off a pretty good half in terms of our financial and operating performance and we’re looking forward to a number of catalysts for additional performance in the second half. We’ve already bumped our production guidance for the year. We’re well ahead of our cost guidance for the year. In terms of what’s going to keep us busy in the next six months, clearly the permitting of a new mine Guanacevi and the developing of a new ore body at Bolañitos are material for our short-term outlook. We’re evaluating and in fact already working on a production ramp up back to the 1,500 ton per day mark at El Cubo.

Obviously, there’s going to be exploration results from all projects across the board going forward, and we’re looking forward to our year-end updates on reserve and resource estimates, the engineering studies at Terronera and El Compas, and adding to our land position at Zacatecas. So, a pretty full plate of activities to drive value in the second half. Anyway, on that note I’d like to thank everybody for dialing in and stay tuned for the third quarter.

Operator

Pardon me. We do have one more question from Mr. Anil Nimmatadeka, a private investor. Please go ahead.

Anil Nimmatadeka

Mr. Cooke, this is Anil from the United States. I wanted to ask you and your team if you’re hedging silver or if you are selling it at spot price.

Bradford Cooke

We don’t as a matter of policy hedge. Thanks, by the way, Anil, for your question. Did we meet in New York last week?

Anil Nimmatadeka

I wish. No, we didn’t.

Bradford Cooke

We don’t as a matter of policy hedge, but from time to time and intraquarter we have a sales strategy to either accelerate sales or hold back sales. We do that only from time to time. But generally, no hedging.

Anil Nimmatadeka

Okay. Thanks a lot.

Bradford Cooke

Operator

This concludes the question and answer session. I would like to hand it back once again to Mr. Brad Cooke for closing remarks.

Bradford Cooke

Thank you all for attending and looking forward to a very good third quarter.

Operator

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

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!