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Coeur d'Alene Mines Corporation (NYSE:CDE)

Q3 2012 Earnings Call

November 06, 2012, 02:00 pm ET

Executives

Wendy Yang - VP, Investor Relations

Mitchell Krebs - President & CEO

Frank Hanagarne - SVP & CFO

Leon Hardy - SVP & COO

Randy Buffington - SVP, Operations

Don Birak - SVP, Exploration

Analysts

Michael Dudas - Stern, Agee

Sean Heberling - Marion Street Capital

Operator

Good afternoon. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Coeur d'Alene Mines Corporation Third Quarter 2012 Quarterly Financial Results 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. Wendy Yang, you may begin your conference.

Wendy Yang

Thank you, Matthew. Welcome to our third quarter conference call. I am Wendy Yang; I am Vice President of Investor Relations. This call is being webcast on our website at www.coeur.com, where we have also posted the third quarter 2012 financial results presentation to accompany our remarks. Telephonic replay of this call will be available on our website until November 20th.

We will be discussing some forward-looking information today and we caution our audience that such statements involve risks and uncertainties that could cause actual results to differ materially from projections. Please refer to the cautionary statement shown on slide two of our financial presentation and review the risk factors, including some that are specific to our industry that are also described in our latest annual and quarterly financial results filed with the U.S. SEC and Canadian regulators.

On our call today we have Mitchell Krebs; Frank Hanagarne; Leon Hardy; Randy Buffington and Don Birak.

With that, I’ll turn it over to Mitch.

Mitchell Krebs

Hello and thanks for participating in our third quarter call. The company’s performance for the nine months has been strong with silver production totaling 14.2 million ounces and gold production exceeding 165,000 ounces. But we did had a disappointing third quarter at our two largest operations.

Palmarejo’s production was down due to unexpected underground challenges that were encountered in September in high grade area of the mine and to a transition phase in the open-pit that negatively impacted grades. It's important to stress that what impacted third quarter production in the 76 clavo in Palmarejo’s underground operation is a timing issue and is temporary in nature.

No reserves are lost or at risk and the area where poor ground conditions were encountered comprised less than 10% of this specific area of the underground mine. We're still mining in some areas of the 76 clavo and we will go back and mine the second secondary stopes in this area that impacted the third quarter, once we complete some additional back filling in previously mined primary stopes. In the meantime, we will rely more on the fully developed 108 clavo in the underground mine.

At San Bartolomé, the operations lost of days of production in late August due to power disruptions which reduced the number of tons processed and increased costs on a per ounce basis. Our other two operations performed well during the quarter. Our Rochester mine in Nevada and our Kensington mine in Alaska both delivered higher production at lower costs.

Company-wide, we expect 2012 production to total 18.5 million to 19 million ounces of silver and between 215,000 and 225,000 ounces of gold. We expect cash operating costs to be approximately $7.50 per ounce of silver.

As we look ahead to the 2013, we expect silver and gold production levels to be consistent with 2011 and with what we expect to produce here in 2012. We will be providing more specific 2013 guidance early next year.

During the quarter, we acted on a $100 million share repurchase program that our Board authorized in June by repurchasing $10 million of our common shares and we’ve reduced outstanding debt by nearly $100 million over the past 12 months which has left just $48 million of remaining debt on the balance sheet compared to total shareholders equity of $2.1 billion.

In addition to reducing debt, we continue to invest in the company's future through aggressive exploration, pursuing capital projects that help ensure the sustainability of our operations and by making strategic investments in promising non-producing companies.

Now Frank will take us through the third quarter financial highlights.

Frank Hanagarne

Thank you. The table on slide six shows that metal sales totaled $230.6 million, down 9% from the second quarter. Adjusted earnings for the quarter totaled $25.8 million or $0.29 per share, while third quarter EBITDA was $86.8 million. Prior to changes in working capital Coeur generated $77.3 million in operating cash flow in the third quarter ending with $143.6 million of cash, equivalents and short-term investments for the quarter.

Slide seven shows lower silver ounces sold in the third quarter, due primarily to lower production rates at Palmarejo. Gold ounces sold remained relatively flat. Its important to point out that the company sold an abnormally large amount of metal in the third quarter of 2011; 6.2 million ounces of silver and over 67,000 ounces of gold compared to metal sales in the normal quarter which for us are around 4.5 million silver ounces and 55,000 to 60,000 ounces of gold.

Consolidated cash operating costs were $9.05 per silver ounce compared to $6.41 per silver ounce in the second quarter. This increase on a per ounce basis was driven more by lower production rates and by increased spending. On a dollar spend basis, we are actually doing quite well.

That said, we did see temporary increases at Palmarejo and mining costs associated with additional underground support measures, maintenance costs and waste haulage costs related to the transition in open-pit operations.

The average realized price per ounce of silver was $30.09 and $1,654 per ounce of gold in the third quarter. These were fairly flat compared to the second quarter, but were down 21% and 2% respectively compared with last year’s third quarter. Silver contributed 59% of the company's total metal sales during the third quarter 2012 compared to 68% during the third quarter of 2011.

The graph on slide eight shows that the company has kept its share count level for the past two years, is now reducing it's outstanding shares by approximately 0.5 million shares due to the repurchase program implemented in June. The quarter also repaid the remaining 72 million outstanding balance of the Kensington term loan facility, the largest piece of our long-term debt resulting in total remaining debt of 47.4 million. Additionally, we have put in place an undrawn, 100 million four year revolving credit facility that provides us with additional financial flexibility.

With that, I'll turn it over to Leon.

Leon Hardy

Thank you, Frank. (Inaudible) production levels at our Kensington gold mine increased 13% over the second quarter. Recovery rates continue to improve as a result of process improvement at the mill. We remain focused on further improvements at Kensington to deliver a higher and sustainable level of production through year-end and in to 2013.

We're now attacking Kensington’s cost structure and expect these efforts to be reflected in 2013 performance. Rochester had a very strong third quarter, laying foundation for what we expect to be an even stronger fourth quarter.

Year-to-date, 2012 silver production was up 94% and gold production was up 507%, a result of a new leach pad that began production in the fourth quarter, 2011. We expect to see continued higher production and lower cash cost at Rochester through the fourth quarter.

As Mitch mentioned, in September we encountered unfavorable ground condition at Palmarejo, a high grade area of the under ground mine. This has required additional ground support and maintenance work, limiting our short-term ability to advance the high grade secondary [stopping] area, also slowing the third quarter production.

In addition, we transition to a new phase in the open pit, which also had a negative short-term impact on old rates. Cash operating cost per ounce increased over the second quarter cost as a result of lower production. Silver production at our San Bartolome mine was level with the second quarter at 1.5 million ounces, unit operating costs were up from the second quarter however we expect these costs to decline in the fourth quarter.

Looking at slide 11, silver and gold productions was down from the second quarter due mostly to lower production at Palmarejo which caused cost per ounce to increase. Randy will now take us through a brief overview of each of our mines.

Randy Buffington

Thank you, Leon. Total silver production at Palmarejo was 1.8 million ounces down from 2.3 million ounces in the third quarter of 2011. Gold production was 23,702 ounces compared to 29,815 ounces a year ago. Cash operating costs increased to $3.75 per ounce. We expect cash operating costs to remain high in the fourth quarter as we complete underground support and maintenance work and continue moving waste material in the open pit to position the mine for 2013.

As previously reported, the Guadalupe deposit located approximately six kilometers from the main Palmarejo mine is expected to begin contributing ore to the mill late in the first quarter of 2013.

Turning to slide 14, silver production at the San Bartolome remained steady at 1.5 million ounces in the third quarter. Production cost was down from the same quarter a year ago, due to lower volumes of ounces sold. Total cash operating cost per ounce in the third quarter were $12.13 up from the last quarter largely as a result of lower mill production rates due to a power interruption in August from our commercial supplier which caused temporary [unfired] mill down time.

Moving to slide 15 on the heels of a solid second quarter with the resumption of full scale operation in April, Kensington produced 24,391 ounces of gold up 13% from second quarter. Kensington generated $36.5 million in sales and $7.3 million in operating cash flow. Cash operating cost per ounce at Kensington declined 4% from the second quarter to $1298.

Cash operating cost per ounce are expected to be approximately 1350 for 2012 and declining to less then $950 per ounce in 2013. Slide 16, illustrate the steady increase in production and the decrease in cash operating cost per ounce, we saw at Rochester mine due to the expansion it took place in 2011. Rochester delivered stellar result in the third quarter producing 819,349 ounces of silver and 10,599 ounces of gold, 15% and 5% higher than the second quarter respectively.

Cash operating cost declined from the second quarter $9.58 per ounce. We expect production at Rochester to continue to rise through the end of the year. Now Don, will take us through the exploration highlights.

Don Birak

Thank you, Randy. The third quarter was the busy one on the exploration front. We completed over a 147 feet of drilling and sampling is up to 16 rigs and crews operating at the pick of the quarter. Again the primary focuses of our exploration efforts less on Palmarejo, where we saw encouraging results in the Palmarejo mine area and the Guadalupe Norte.

We also completed the first phase of the metallurgical testing on La Patria, which is located about seven kilometers south of the Palmarejo mine and are pleased with the initial test results. More work is planned there. As announced in August, we expanded the silver, measured and indicated resources at Joaquin silver project in southern Argentina and filed a new technical report on the results. We have plans to update the metal resources there again.

On behalf of the company's drilling conducted in the third quarter was accomplished at the Palmarejo mine split between the surface and the underground mine area and other exploration targets including Guadalupe, while we expect this will expand the reserves and resources in preparation for mining to begin next year.

Slide 19 shows the main mine area in the five main zones of mineral reserves and resources and two other exploration areas. In underground drilling, we tested a new Inter-Clavos zone which is located between the Rosario and 76 zones and from the surface we are testing our union zone. These are both new targets which could potentially add to underground and surface mineral resources with further drilling.

Slide 20 shows a map of the Kensington mine area with the mine at nearby notable gold occurrences identified. We conducted both surface and underground exploration in the third quarter to discover and define new gold mineralization around the mine. Two drills were engaged with the most significant results coming from the Elmira and Kensington South targets.

In our drilling at Elmira the first (inaudible) located about 2000 east of the main mine, we cut six separate gold mineralized structures. We have also seen some exciting drilling results from Kensington South including the best drillers at this target to date of 10 feet creating over 1.7 ounces per short ton.

Mineralization in this area has geologic similarities with main Kensington mine and we believe that we have intersected only the edge of a potentially large mineralized area at Kensington. More drilling is planned here which may include driving an underground rift to set up more efficient, underground drill platform for next year and beyond.

We shifted our exploration trenching and sampling at San Bartolome from infilling of inferred mineral resources to exploration for new resources this quarter. Slide 21 illustrates a new target lease which we explored called [Fukovama] nearly half of the trench that is excavated and sampled at [Fukovama] did not reach the bottom of the mineralized gravel of (inaudible) indicating potential for additional mineralization at depth. More work is planned on this encouraging new target.

Mitchell Krebs

Thanks Don. Although we are not pleased at all with our third quarter performance, the issues are short term in nature and are being addressed. As we move into the last quarter of the year, we are focused on improving the operating performance at Palmarejo and driving production rates higher at Rochester and Kensington.

We are focused on establishing solid mine plans for each of our operations that will guide us into the future, while we seek to reduce costs at all of our mines. At the same time, we will keep up the pace on our drilling programs in an effort to increase company wide reserves and resources at year end.

Looking ahead the outlook for silver and gold prices remains positive, which should translate into strong cash flow for the company. We will maintain our commitment to running the business in a strategic and disciplined way as we seek to create value and deliver consistent results for our shareholders. Thanks again for your time today. Operator we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Michael Dudas with Stern, Agee.

Michael Dudas - Stern, Agee

So the topic of the day, could you follow on to your prepared remarks Mitch on the 76, how has remediation gone, how has October looked so far? How much support the maintenance costs, are they going to dissipate by year end, is it something to think about moving into the first part of next year and as you see development in the other parts of the mine and what you are looking at, has the mine plant changed dramatically in your view, even though you are not probably finish with it, to what you are thinking about in 2013?

Frank Hanagarne

Yeah, I will answer those that I can and then Leon feel free to jump in but some of the impact of what we saw in September has spilled or did spill over into October but we look like we're now back on budget in November and December at Palmarejo. So that’s certainly positive and as we look at the mine plant in the 2013, no, we don’t see significant change in terms of the underground and open pit component to the plant. The remediation work that is underway, keep in mind, we are mining still in 76 club in this one area where we saw some ground conditions that didn’t appear safe where we pulled back. We're now focusing on the back filling in those areas so that we can go back in and access those secondary stopes safely later this quarter and into 2013. Leon do you have anything? I think I hit Mike most of those questions, but Leon, anything to add to that?

Leon Hardy

No, the infected area that we're talking about is about an 8 to 12 stope areas, secondary as we already mined the primary stopes in the area. The primaries are principally all filled but the fault zone that’s given us the problems is really outside of the vein and it's in the hanging wall. So as we push these secondary towards the hanging wall, we are getting a lot of [raveling] out of the hanging wall. So what our plan is to go back in, refill some of the portions of these primaries that didn’t get jam tied and also to look at our grouting method of grouting the fault zone so that we don’t get the raveling. We could be mining these secondary today and I think we acted prudently in pulling out of this area for safety reasons and we want to make sure that when we go back in there which we are looking at probably 30 days or so before we get the grouting completed that we don’t have this excessive raveling in these stopes which would lead to a loss of ore reserves in the long run.

Mitchell Krebs

And then just Michael a follow-up there the 108 Clavo which is fully developed is in area than that we have gone into to help supplement the underground mining that’s still taking place in the 76.

Michael Dudas - Stern, Agee

That’s encouraging I appreciate those answers Mitch and Leon. My one follow-up is regarding an early look on capital allocation next year Mitch you talked about exploration development CapEx and strategic investment may be as we look out to ‘13 I know the budgets aren’t done yet but given where you are looking at a range or a direction on capital at the mines itself and there is going to be a significant change of what you have thought may be three months or six months ago?

Mitchell Krebs

Yes, good question. We are in the middle of the budget process, but just directionally CapEx next year looks to be quite a bit lower than the $120 million or so that will come in at here in 2012, not a real change from where we thought three months or six months ago, but 120 down to I don’t think it will be half of that but it will be meaningfully lower than 2012 level

Operator

(Operator Instructions) We do have a question from the line of Sean Heberling. Your line is open.

Sean Heberling - Marion Street Capital

This is Sean Heberling with Marion Street Capital.

Wendy Yang

Matthew did we lose Sean?

Operator

Yes, he has been removed from the queue. Yes.

Wendy Yang

Would you put him back on please?

Operator

Sean, your line is open.

Sean Heberling - Marion Street Capital

Just quick question on the royalty obligation and a related fair value adjustment?

Frank Hanagarne

Yeah.

Sean Heberling - Marion Street Capital

Okay. Are you folks using quarter end metals prices?

Frank Hanagarne

Yes, that's correct, everything for the period is adjusted based on the end of the quarter price.

Sean Heberling - Marion Street Capital

As opposed to average metals price in the quarter?

Frank Hanagarne

That's correct.

Sean Heberling - Marion Street Capital

Okay, was the significant difference in metals price this quarter, end of quarter versus beginning of quarter the source of substantially all of that fair value adjustment?

Frank Hanagarne

No. The third quarter of this year we saw prices for gold rise compared to the second quarter of this year, so we did book for the third quarter just a slightly higher obligation and when you compare a year ago quarters they are a little bit more equally spaced on the pricing and we saw a reduction of that obligation on the long-term portion on the balance sheet.

Mitchell Krebs

From the end of the second quarter to the end of the third quarter that gold price was up just a little over 11%. So pretty meaningful move in gold which led to an increase in that estimated future liability that sits on our balance sheet related to that royalty.

Sean Heberling - Marion Street Capital

You understand. Were there changes to any other assumptions other than the precious metals prices?

Frank Hanagarne

No there weren't any other variables in that.

Operator

(Operator Instructions) Your next question comes from the line of Chris. Please introduce your company name and your line is open.

Wendy Yang

Matthew let’s go back to Chris later and let’s take the next one up.

Operator

(Operator Instructions) Sir we have no one else in the queue that we have the information for.

Mitchell Krebs

Okay. Well, then let's go ahead and wrap up. I appreciate everybody’s time today on Election Day and look forward to our next conference call which will be in conjunction with our year end results in February and hopefully between now and then we will have a chance to talk or see each other. We will be out on the road quite a bit here between now and then. So I look forward to staying in touch with you. Thanks again for your time.

Operator

This concludes today's conference call. You may now disconnect.

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