Coeur d'Alene Mines Corporation (NYSE:CDE)
Q1 2008 Earnings Call
May 12, 2008, 04:00 pm ET
Karli Anderson - Director of Investor Relations
Dennis Wheeler - Chairman, President, and Chief Executive Officer
Mitchell Krebs - Senior Vice President and Chief Financial Officer
Richard Weston - Senior Vice President of Operations
Don Birak - Senior Vice President of Exploration
Good afternoon. My name is Cimarian and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter and 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, Ms. Anderson you may begin your.
Karli Anderson - Director of Investor Relations
Thank you, Cimarian. Thank you for joining us today to discuss the company's results for the first quarter of 2008. This call is also being broadcast live on the Internet through our website at www.coeur.com, where we have also posted the slides that accompany our prepared remarks. A telephonic replay of the call will be available for one week afterward on our website.
On the call today are Dennis Wheeler, Chairman, President, and Chief Executive Officer; Mitch Krebs Senior Vice President and Chief Financial Officer, Richard Weston, Senior Vice President of Operations, Don Birak, Senior Vice President of Exploration.
Any forward-looking statements made today by management come under Securities Legislation of the United States, Canada and Australia and involve a number of risks that could cause actual results to differ from our projections. Please see our full cautionary statements on slide 2.
With that, I would like to turn the call over to Dennis.
Dennis Wheeler - Chairman, President, and Chief Executive Officer
Welcome and thank you all for joining us on today's call. In the first quarter, we took a number of important steps in our strategy to become the worlds leading silver company, with long life, low cost mines that will maximize value for you our shareholders. Our goal is to triple our production in the next couple of years and to lead the industry with low cash capital cost to take advantage of continued high silver and gold prices.
Progress in the first quarter of both our new and existing mines demonstrates that we are closer than ever in achieving those objectives. Today's call comes as we are in the final stages of start up at our new San Bartolomé mine in Bolivia the largest pure silver mine in the world, which has been a great construction achievement surpassing safety milestones, as well as the newest anchor in our development strategy of long life silver mines.
Operationally San Bartolomé has gained momentum. We expect it to yield 6 million ounces of silver over the balance of 2008 and 9 million ounces in 2009. Clearly, we are excited to be in the final stages of start up at this unique asset located in Potosi, which is the cradle of civilization and is being reborn due to the investment made at San Bartolomé by Coeur.
During the first quarter, we also completed design and engineering at our new Palmarejo mine in Mexico. We look forward to completing the third party review of our feasibility study on Palmarejo in the second quarter and soon sharing these results with you.
We are pleased to tell you today that the recovery plant at Cerro Bayo began late last year is succeeding. The mine has demonstrated substantial improvement. In the first quarter alone Cerro Bayo produced 434,000 ounces of silver and over 10,000 ounces of gold and cash costs plunged to just $1.25 per ounce of silver.
We previously told you that the mine operations have been temporarily suspended in April to upgrade the electrical systems as part of this recovery plan. We are now back in full production. With improved mining methods and productivity we expect Cerro Bayo to steadily increase production in the third and fourth quarters of this year and hats off to out operations folks down there.
I would also like to draw your attention to the release we issued just this morning regarding our Kensington Goldmine in Alaska. Friday the United States forest service announced that it would conduct an environmental assessment or EA to evaluate our proposed alternate tailing plan. This is a favorable development which allows for an expedited permitting process to be completed later this year. And with permits in hand by the end of 2008 production at Kensington could begin in the second half of next year.
In April Coeur Alaska and Goldbelt, a major native corporation, entered into a new memorandum of understanding designed to address the Kensington Goldmines transportation needs.
First quarter our overall production was 2.4 million ounces of silver and approximately 17,000 ounces of gold with silver cash cost at just $2.52 per ounce. While production in ounces was down slightly over the previous quarter, this was due in part to the recovery plan underway at Cerro Bayo and the planned reduced ounces from Rochester in its residual leaching phase and some seasonal slowdown in Australia.
We thinks its important to mention how importantly we take our role as a responsible corporate citizens in the development and operation of not just San Bartolomé, but everywhere we operate internationally. It has been both a hallmark and a critical part of our success.
In Bolivia for example we have forged very strong relationships, in fact strategic partnership with COMIBAL, Bolivian State Mining Company, as well as the local mining cooperatives which lease the mining concessions for San Bart to us.
As a producing mine San Bartolomé will employ approximately 250 workers, providing high paying job opportunities to the residents of Potosi with the multiplier effect of an additional 1000 indirect mining related jobs in the area. This is most important to that region and it is built tremendous positive community support for Coeur.
Our corporate social responsibility initiative has participated in funding a development study for the indigenous community and we will be providing training and other benefits as a result. Other efforts have included industrial safety workshops for cooperative miners in an area where there are still thousands of individual local miners. We have sponsored in the community, the national soccer team, music concerts, science fairs, and we've helped a small business initiative for local manufacturers of cyclone fencing start-up, which has spring boarded into other opportunities locally.
So it's important for you to know how seriously we put into practice in fact our corporate social responsibility, which has become an integral part of this mine and community, and we think it will pay huge dividends for our shareholders in future operations, such as this as well as the Palmarejo Mine, Kensington, and ultimately for our shareholders.
Another first quarter highlight was the inauguration of the new Martha mill, which was attended by Argentinean President, Cristina Fernandez de Kirchner who toured the facility, met the staff and led our ribbon-cutting ceremony.
Finally, just a few comments and shed some additional light on our strong financial position. As you can see, at the end of the first quarter, Coeur had approximately $300 million in cash, short-term investments, and equivalents. This includes the proceeds from the senior convertible note offering we completed in March.
I'd like to take just a moment to again emphasize that this financing was designed to minimize dilution to our then existing shareholders. This financing allows Coeur to complete its investments in our long life sustainable low-cost assets such as San Bartolome and Palmarejo. We were not required to hedge any future gold or silver production, there by retaining future metals upside for the company's shareholders. And speaking of up side, we expect to more than double our 2007 operating cash flow this year based on current metals prices.
With that, I'd like to ask Mitchell Krebs, our Chief Financial Officer to review the quarter's financial performance in more detail. Mitch?
Mitchell Krebs - Senior Vice President and Chief Financial Officer
Thank you, Dennis. Before digging into the details, I'd like to point out a few highlights for the quarter on slide 8. Metal sales were up 13% over the same period a year ago. We reported net income of 4.7 million or $0.01 per share, which reflects the impact of 5.8 million of expensed pre-development costs at Palmarejo. If you backed out that 5.8 million, our earnings per share would have been $0.02 per share.
Cash costs during the quarter were down 43% year-over-year and down 7% from the fourth quarter. We're maintaining our full-year production guidance of 60 million ounces of silver representing nearly a 40% increase over 2007 production levels. Finally, we have nearly $300 million of cash equivalents and short-term investments as Dennis mentioned, and our capital plan for 2008 is fully funded and has not changed.
The next few slides give you a comparison of a few key metrics. Slide 9 gives you a sense of improvement in cash costs on both the year-over-year and quarterly basis. To reduce our cash costing for ongoing recovery plant at Cerro Bayo, improved mining methods in the mining of higher grade material. Reducing our cash costs is one of our key initiatives and we expect our new mine, especially Palmarejo, to be the key drivers towards achieving our goal of being the lowest cost producer in the industry.
Sales of metal are detailed on slide 10. For the first quarter we reported $57 million of sales, up from $51 million at the same quarter a year ago. That breaks down approximately 75% from silver and 25% from gold, representing one of the purest silver company profiles in the industry, no base metals, just silver and gold.
EBITDA shown on slide eleven was down from the same period last year due largely to the pre-development costs we incurred at Palmarejo that I mentioned before. Adding that back to EBITDA was roughly flat year-over-year.
Turning to slide 12, net income was affected by increased investment in our aggressive exploration program, as well as the aforementioned pre-development costs associated with Palmarejo. For the first quarter, as I said we reported net income of $4.7 million or $0.01 per share.
In the first quarter, we yielded a healthy gross margin of about 56%, which we view as a key parameter of operating efficiency. Gross margin has defined as net metal sales, less production costs, we view this as a metric which has a clean gauge for assessing the performance of our mines, as well as for comparison purposes.
And on slide 13, you will see it has shown a significant improvement over the prior quarters. Our ability to maintain strong margins is among the first indications that our transition to long life low-cost mining assets is showing results. We believe the investments made to date will vastly improve our ability to generate operating cash flow in future years and strengthen Coeur's position in this still dynamic precious metals market.
Finally, I would like to provide some additional color on our successful offering of $230 million,3.25% senior convertible notes, which are due in 2028. This transaction closed from the first half of March. As Dennis mentioned, the notes were structured to minimize dilution to existing shareholders. The notes have a net share settlement feature which requires us to settle the principal amount in cash, not stock. This means that the principal must be repaid in cash. These notes are structured to be as close to straight debt as possible in the existing credit markets.
The initial conversion rate on these notes is 176 shares per note with the $1,000 of principal payable in cash. Coeur then has the option of repaying the additional value or premium above the $1,000 principal per note in cash or shares or combination of the two. There's a five-year investor put, so holders may request repurchase after 2013, and there's a seven-year bullet which the company then can redeem these notes any time after 2015. This financing provides funding for completion of all three of our major new mines, San Bartolome, Palmarejo, and Kensington.
With that, I would like to turn the call over to Richard Weston to discuss our site operations.
Richard Weston - Senior Vice President of Operations
Thank you, Mitch. In the first quarter our focus was on the construction at our new growth properties, as well as the continued improvement and development at our existing operation. In particular, Cerro Bayo and Maratha mines.
On slide 16 you will see our production breakdown by site for the first quarter of our 2.4 million ounces of silver production. As you can see, Coeur has a balanced portfolio producing assets worldwide and we look forward to the inclusion of San Bartolome in these results. Our most exciting operational development right now involves the commencement of production at San Bartolome.
Turning to slide 17, we've provided some additional color on the mines. The mill has started to process ore and we're working with manufacturers' representatives on site to ensure equipment specifications are met and we are now in the final stages of start-up.
We are on track to produce 6 million ounces of silver in 2008 and we have had continued positive relationships with all our stakeholders in Bolivia. We expect San Bartolome to produce about 9 million ounces of silver annually once in full production. And we believe it will be a tremendous asset for the company.
Turning to our other operations in South America, starting with Cerro Bayo in Chile. We continue to implement a recovery plan, which had four goals; to improve mining methods, to lower out costs, to exploit the new vein systems that we discovered in late 2007, and to restructure the organization.
We also completed some electrical upgrades on site during the quarter, which we were able to expedite and bring the mine back into production earlier than expected. We are now back to full operations, and there was minimal affect on the amount of silver we expect to produce this year from Cerro Bayo. We have streamlined the workforce to 445 people from 700 at the beginning of the year. We have reduced cash cost to $1.24 per ounce from $7.74 in the previous quarter.
In the first quarter at Cerro Bayo we saw 31% higher gold grade and a 6% higher silver grade in the previous quarter. We expect to see continued positive results from this recovery plan during the second half of 2009.
Turning to Mina Martha, the newly completed mill was commissioned in the first quarter. The facility is currently processing ore and we expect to see an improvement in cost as we gain efficiencies stemming from this facility, which will allow for increased production at lower cut-off grades.
Regarding our interest in Australia, Coeur has now recouped 100% of its investment in Broken Hill made only two and half years ago. We expect the site to produce for another eight years at cash costs that are effectively fixed over the time. Recovery rates are increasing at the Endeavor mine with a 43% production increase in the first quarter of 2008 compared to the same period in 2007. At Endeavor, Coeur has recouped approximately 40% of its initial investment made three years ago. We expect Endeavor to produce for another 15 or more years and like Broken Hill, at a very low cash cost per ounce of silver.
Coeur Rochester provided $12.4 million in cash flow in the first quarter 2008. It remains in residual leach down mode and we had cash costs of negative $1.26 per ounce because of the byproduct gold credit at the site during the quarter.
Construction at Palmarejo is progressing very well as you can see on Slide 20. Mining crews have been established and key construction milestones have been met. More than 140 operating personnel are on-site along with an additional 450 construction workers. Pre-stripping and underground development are well advanced, with both portals now established. Underground development is continuing as scheduled and construction of surface facilities is progressing as plan.
We also expect the third party review of the feasibility study to be completed in the second quarter. Production is expected to begin during the first half of 2009 with targeted annual production of 10.5 million ounces of silver and approximately 115,000 ounces of gold at negative cash cost. We maintain our schedule and budget estimates for Palmarejo.
Kensington. I'd like to also update you on the progress at Kensington on slide 23. Our modified plan of operation was approved by the US Forest Service last Friday when they asked for an environmental assessment be prepared. This allows for the quickest possible permitting processes for the alternate tailings plan. The environmental groups which had opposed the earlier tailings plan have supported this alternate plan and the expedited environmental process and permitting. We are optimistic that with the strong support we have in the Juneau community, we will be able to achieve final permitting in late 2008 with construction of the tailings facility to begin next spring and initial production possible in the second half of 2009.
At this time, all surface facilities, except for the tailings facility, are completed at Kensington. We are keen to develop and operate the Kensington gold mine and to provide long term employment and career opportunities for the people of Juneau once permits are granted.
With that, I would like to turn it over to Don Birak to discuss our exploration activity
Don Birak - Senior Vice President of Exploration
Thank you, Richard. I'm pleased to report today the favorable results were obtained from all of our exploration programs in the first quarter. Our exploration teams have been active on several fronts and the majority of those efforts were devoted to our new Palmarejo development property in the State of Chihuahua, Mexico, and at our Cerro Bayo mine area in Chile. We also conducted exploration drilling on a new Greenfield property in Argentina called Lejano.
As you can see on slide 25, our new large property position at Palmarejo contains multiple silver and gold bank targets and deposits. The vast majority of prior exploration is focused on just three of those deposits Palmarejo, Guadalupe and La Patria, each of which remain open for expansion on strike and at depth. While we plan to continue the focus on these three significant deposits, we will also evaluate other targets in the Palmarejo district. On that latter front, results from the first drilling at the Los Bancos target, north of Guadalupe on the La Blanca trend returned favorable results which we reported earlier this year. Recently we completed a new model of Measured Indicated and Inferred mineral resources for the Palmarejo deposit as a basis for estimation of proven and probable mineral reserves and the feasibility study which is currently under review.
On slide 26, you will see a three dimensional view of this Palmarejo deposit, showing the drilling define limits of two main mineralized structures, La Blanca and La Prieta that comprise the deposit. The intersection of the two northwestern structures is called Rosario Clavo and will be the center of the planned surface mine.
Now on slide 27, superimposed on the last three dimensional view we show the color- coded silver and gold metallization on the La Blanca structure. The plan limit of the surface mine is also shown. Note that the high grade metallization in red extends well below the pit limits. These zones will be the focus for the future underground mine and later exploration. All three ore chutes or clavos, Rosario, 76, and 108 are open at depth and on strike.
Core drilling recently commenced on the Chapotillo clavo at the southeast end of the La Prieta structure to help define its limits and that of the future waste rock pile to the southeast of the clavo. In addition, we are also core drilling for geo-technical analysis at the plant tailings area. Following that, the drills will move to Rosario and 76 and to Guadalupe.
Finally we also recently announced drill results from our wholly owned Lejano property in Southern Argentina. The property is located about 170 to the north, northwest of our Mina Martha mine. Drilling at Lejano consisted of 12 short core-holes and it identified locally wide zones of sliver mineralization containing zones of higher grade silver in veins and breccias. A new line of drilling will commence shortly.
Now, I would like to turn the call back over to Dennis for final comments.
Dennis Wheeler - Chairman, President, and CEO
Thanks Don. Last week we were in New York for the release of the annual world silver survey. The analysts that follow our industry continue to be bullish on its prospects. Industrial demand continues to drive the growth in our sector. It was up 7% in 2007 and reached a record 54% of total global silver fabrication demand for last year.
Overall, silver supply declined 2% in 2007 and is forecast to increase by just plus or minus 2% this year. And forecast silver prices at levels near $20 per ounce in later 2008. I guess in some way we entered 2008 with a team dedicated to successfully executing our growth strategy to make Coeur the leading primary silver producer in the world.
In the second quarter, you should look for continued ramp up at San Bartolome, ramped up construction activity at Palmarejo, including the results of the third party review of the feasbility study, a continued positive result from our record exploration program and good progress on our expedited permitting process announced by the forest service for Kensignton. We are committed to achieving nothing less.
I thank you for joining us today and we are ready to take your questions.
Okay. (Operator Instructions). And your first question comes from the line of John Bridges.
Hi Dennis and everybody.
Hi. I missed you at mine last week.
While I was down there a couple of weeks before John but we are glad that you got an opportunity to come down to Boiliva and I look forward to maybe seeing each other on site in the future.
I would so hope one day to make it there. But many thanks to your team on-site they did an admirable job of at least trying to get us there. Just on Rochester, the 1.9 million ounces you are planning for the year, that’s assuming that you don't sell the property. But you are thinking about selling it. Is that still the case?
John, this is Mitch Krebs here. Hi yeah, that’s exactly right. The 1.9 million ounces is a forecast for the full year, assuming we own it for all of 2008. We are currently in the evaluation stage of the sale process that we have been running. And as Richard pointed out, we've had a real strong first quarter there with about $12.5 million of free cash generated from Rochester, but you're spot on there was the 1.9 million ounce assumption for '08.
Are you in negotiations to sell it, or where are you with that?
Yeah John, we haven't made any decisions yet. We have received some initial proposals, and that's where we stand right now.
Okay. Cerro bayo you did about 400,000 ounces in the first quarter. You are looking to 2.1 for the year. In the balance of the year are you looking for more tons, more grades? Both? Where do you see that going?
Yeah, it's Richard Weston, John. We'll be looking at maintaining or increasing our grade throughout the end of 2008 and also looking at increasing tons wherever possible.
So the bulk of the extra production is probably come from more tons by the sound of it.
More tons and grade.
Okay. And then on the Kensington situation, I know you can't answer the question, but if you can give us little bit more color. What exactly does support of the environmental grade mean, does it mean that they've agreed to stand back? Are there others who might still be uncomfortable with this new plan? How much comfort should we have that this thing is going to go ahead by the end of the year?
John, Dennis. The environmental groups, the plaintiffs in the original litigation, participated in a full review of the plan before the application was made for the new environmental assessment process. So they're thoroughly familiar with the plan. They have publicly stated that they would support the environmental assessment process, and of course as indicated, that provides for a faster review process and ultimate issuance of the permits to go ahead and build the tailing dam. We are targeting that process to be completed early fall.
Okay, that's very encouraging. Where did they publicly announce support?
Well, they announced it both in the news publications. They've had very positive remarks in their letter to their own membership, and they've spoken on occasion at public forums in Juno, and we have a very constructive process underway with them.
Okay. That's nice. I'd love to see a copy of that.
We'll be happy to send you a couple of the items on which we base our feelings today.
I'd appreciate that. Thanks a lot, Dennis, and best of luck.
(Operator instruction). And your next question will go through line of Jorge Beristain.
Two questions. One is just the results at Cerro Bayo on quarter-on-quarter basis do point to quite an impressive turnaround as you said from $7.75 unit cash cost in 4Q to $1.25. Looking back, to the past few quarters typically Cerro Bayo has averaged around $3.00 unit cash costs for the past few years, its really hard to judge given the '07 data. Are you still looking forward to having a roughly $3.00 unit cash cost for 2008 or because you're hitting higher silver grades, do you now see that this new $1.25 could be at sustainable levels for the next few quarter?
Yeah Jorge, Mitch here. How are you doing?
Hi. For the rest of the year, what we see is, especially in third and fourth quarters, is a return to lower cash costs. What you will see on the second quarter is an impact from the fact that –in April the mine was temporarily shut down so that will impact costs negatively, so that for the full year, I would not look to first quarter costs as a guide for full year cash costs?
Okay. I remember we had spoken pretty clearly about a $3 cash cost range on this mine for a full year basis.
Yeah, and I would say that that was before the April shutdown.
Okay. Pre-April shutdown. And my second question is just again related to this Kensington project. Maybe you could just walk us through the actual weather conditions for the building of the tailings mine assuming that you get full environmental sign off this year. How many months of actual production could you expect to see out of that mine in next year, in 2009. When you're saying a second-half start up, would it at all be weather impacted because of the winter?
The mine is located near Juno as the closest major city. It's not the extreme weather conditions of the far north, but having said that, conditions in that region are what they are basically every year. I mean you have significant rainfalls, you have snows, you have sunshine. It is a typical year-round climate that does vary, but we have been there for sometime now. We plan to clearly operate year around there at Kensington and we are targeting as we mentioned, a second half of the year for a start up there. We do not have a specific date within that range, obviously pinned down to the day, but we are comfortable with the overall timetable that we have set for you. And the plan would be to hit the ground running as soon as the springtime arrives up there and begin building the tailings dam based upon the successful completion of the environmental assessment process that we've talked about here.
Okay. And just lastly, related to the Rochester mine still staying on your balance sheet, that would have seemed to generate just in the quarter alone about a $0.02 free cash flow per share impact positive. Would it be safe to assume a continuation of this $0.02 positive impact until the mine is potentially sold?
Yeah. Hi, it's Mitch again. The production profile there at Rochester in the leach down phase continues to gradually decline between now and 2011. So the cash flow that we generated out of Rochester in the first quarter will decline gradually along with that production profile. But it will continue to be substantial given the lower cost of just running the mill there, and it won't be a $12.5 million quarter going forward, but it will still generate healthy cash flow through the expected 2011 time frame.
Jorge, I'd like to just say a couple other things in view of your last few words about until the mine is sold. What we're telling you here to date is the process is ongoing. We have not made up our mind yet as to whether or not we will sell the mine. The performance of the first quarter was very strong from a cash basis at these prices. And we are going to take a look at everything and make up our mind and advise the mark at that time.
Okay. Thank you very much.
And at this time, there are no further questions in queue. Mr. Dennis Wheeler, do you have any closing remarks?
We'd like to say thank all of our shareholders and interested parties for joining us here today. I think you've seen significant progress with regard to our growth strategy at Coeur, and the team here at Coeur is doing a great job and working very hard for us. And thanks for joining us here today.
This concludes today's conference call. You may now all disconnect.