Coeur Mining, Inc. Q1 FY2020 Earnings Call

Good morning. And welcome to the Coeur Mining First Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Paul DePartout, Director of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining’s first quarter earnings conference call. Our results were released after yesterday’s market close and a copy of the press release and slides are available on our Web site. I would like to remind everyone that our press release, slides and some of our comments today include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentation, as well as the Risk Factors described in our first quarter 10-Q and 2019 10-K. Now, I’ll turn it over to Mitch.

Thanks, Paul. Joining me on the line are Tom Whelan and Terry Smith, along with several other members of the management team. Before discussing the quarter, I'd like to provide a brief COVID-19 update. Since early March, our two objectives for navigating through the impacts of this global pandemic have been to protect the health and well-being of our fellow employees, their families, our contractors, and our communities where we operate and to ensure the continuity of our business operations as best we can. To date, we have had no positive COVID-19 cases anywhere in the company. Early last month we put a series of controls and procedures in place, focused on controlling and limiting access to our operations, thoroughly screening employees and visitors and reducing exposure and transmission risk through a range of social distancing protocols and sanitizing and cleaning procedures. Office employees are all working from home and nonessential travel has been eliminated. We are continually reassessing these procedures as the situation evolves, and as we gain additional information. The level of engagement, support and outreach by our employees to the communities in Western South Dakota, Northern Nevada, Southeast Alaska, Chihuahua Mexico and British Columbia has been truly inspiring. Slides 15 through 17 highlight several of the efforts being made by our employees. In terms of business continuity our three U.S. assets remain in operation with minimal adjustments or disruptions. Our Palmarejo mine suspended operating and exploration activities in accordance with the decree issued by Mexico in late March. Our Silvertip operation in British Columbia safely suspended mining and processing activities just ahead of the COVID-19 outbreak, and all ongoing site activities along with our drilling program are continuing there. We remain in close contact with our suppliers and with our smelter and refinery customers, and we have not experienced any significant disruptions to-date. Like many companies, we've taken steps to increase our frequency and methods of communication, bolster our liquidity levels and be as prepared as possible for a wide range of potential scenarios going forward. Overall, I think our strategy is serving us well during these unprecedented times. Our focus on operating a balanced portfolio of assets located in North America with a particular focus on the U.S. is helping us reduce our overall risk profile. Our shift over the past several years towards more gold and less silver has removed a significant amount of volatility and has us well positioned for the current environment. Our collection of organic growth projects offers investors compelling near, medium and long-term growth and our commitment to a higher sustained level of exploration, particularly near our existing assets, provides our stockholders with exposure to the upside potential associated with new discoveries and to opportunities for high return mine life extensions from successful reserve and resource growth. And finally, our U.S. listing and location as well as our liquidity and access to capital are key differentiators, especially during times like this. Now turning to our results. Overall, the quarter was in line with our expectations, mostly due to strong performances from Palmarejo and our Kensington gold mine in Alaska. Those two operations offset a lighter quarter from both Wharf and Rochester as anticipated, both of which are expected to deliver stronger results during the remainder of the year. I mentioned our collection of growth projects, the two most impactful near term opportunities are the expansion of Rochester and a potential restart of Silvertip. At Rochester, we achieved a major milestone on schedule for the POA 11 expansion project when we received the record of decision from the Bureau of Land Management last month. We plan to accelerate work later this year and complete this important project by late 2022. We are also on track to issue an updated technical report in the fourth quarter, incorporating an updated capital estimate, optimized mine plan and economic analysis. And at Silvertip, a pre-feasibility study for a potential mill expansion is now underway and we expect to have some results in mid-year. The drilling program at Silvertip kicked off last month and we remain optimistic about what this program will deliver. And finally, speaking of exploration, other key elements of our 2020 exploration program — the largest in our company’s 92 year history — are off to good starts. The bulk of our near-mine exploration investment during the first quarter went to Palmarejo and Kensington, while our single largest allocation of resource expansion drilling went to the Sterling and Crown deposits in Southern Nevada. We plan to provide a mid-year exploration update later this year, given the size and importance of these programs for the company. And with that, I’ll go ahead and turn it over to Terry.

Thanks Mitch and good morning everyone. Slide 6 highlights our production performance at each operation during the quarter, and provides an outlook for the remainder of the year. Starting with Palmarejo. Throughput increased by over 25% year-over-year and improved recovery rates from several optimization initiatives helped drive higher gold production quarter-over-quarter. As anticipated silver production decreased due to lower grades in our mine plan during the first quarter. Higher gold recoveries and throughput along with the slightly higher gold price combined to generate over $20 million of free cash flow at Palmarejo. It's also worth pointing out that we'll be well positioned to safely and efficiently ramp back up once the suspension in Mexico is lifted. Switching over to Rochester. We mentioned on the last call that crusher production was sitting at stride early in the year. I am happy to report that crusher performance during the quarter was 11% higher than our target and 33% higher than the fourth quarter. We have now rebuilt momentum on our leach pad that we lost late last year, but have not yet seen the benefit of improved ore replacement rates and restock metal inventories as we were operating on deeper sections of the pad in the first quarter. We expect production to improve during the second quarter and climb steadily through the remainder of the year. Before moving on to Kensington, I’ll add some color to Mitch’s earlier comments on our expansion plans at Rochester. We plan to spend roughly $30 million to $35 million on the expansion this year, which includes a mix of procurement and early stage work. We have several purchase agreements already in place for these items, including crushing and process equipment. At SNC-Lavalin, our third-party EPCM contractor, has progressed detailed designs to around 50% completion to-date. We are also conducting a targeted drilling program, which we are optimistic will help us upgrade our mine plan as we work towards an updated technical report at the end of the year. Now switching over to Kensington. Production was on budget for the quarter as we saw positive grade reconciliation on the Kensington main deposits. Financial performance remains strong as unit costs decreased by 5% to under $930 per ounce, helping to generate just over $14 million in free cash flow during the quarter. We were able to produce just over 2,500 ounces from Jualin at an average grade of 0.33 ounce per ton or 11.3 grams per ton, and now expect Jualin to account for 15% to 20% of Kensington’s production for the full year. We expect a slightly weaker second quarter due to fewer anticipated Jualin tons but expect Kensington will deliver another strong year for the company. At Wharf, adverse weather impacted first quarter pit performance leading to weaker than expected production levels. We have mobilized the third-party crusher contractor to accelerate our placement rates, and help us catch up and deliver on our full year plan. As a reminder, we are planning to increase our strip throughout the year but we expect it to revert to historical levels in 2021. Before passing the call over to Tom, I'd like to thank our workforce for stepping up during this difficult period. We had a solid quarter of safety performance despite this additional time of stress and distraction. We continue to be mindful and focused on the task at hand. We appreciate everything you are doing and your continued dedication to the company. Next Tom will cover the financial highlights for the quarter.

Thanks Terry. As presented on Slide 10, we have a very sound balance sheet with no near-term maturities and over $250 million of liquidity. With improved margins, our last twelve months EBITDA increased 44% to $195 million versus $135 million just 12 months ago. Higher EBITDA along with our 2019 debt reduction initiatives led to total and net debt leverage ratios at the quarter end of 1.8 times and 1.5 times respectively. We've been completing various scenario planning analyses to consider the potential impacts of COVID-19 on our business, specifically focusing on liquidity. From volatile gold and silver prices to estimating the impact of the temporary suspension at Palmarejo and other potential downside scenarios, we have modeled numerous cases to determine a range of financial impacts. We believe it is prudent to have a wide variety of options available to maximize our financial flexibility during these unprecedented times of volatility and uncertainty. Based on our analysis, we've taken the following key actions to be well positioned under various potential downside scenarios. First, we've added foreign currency hedges to lock in operating cash flow gains relative to our budget. Secondly, we drew down an additional $100 million after quarter end on our revolving credit facility. Third, we developed an internal list of opportunities where CapEx and exploration could be deferred. And fourth, we've also put a $100 million at-the-market equity program in place, which is available as a source of liquidity if needed. To date, we have not begun the deferral of any capital projects or exploration investments, and will not expect to reduce these key internal growth initiatives unless certain downside scenarios became likely. Looking at our financial results on Slide 5, we expected the first quarter to be our weakest quarter of 2020 and are pleased to be ahead of our internal budget on operating and free cash flow. Digging into the numbers, our first quarter results include $47 million of adjusted EBITDA, which is a 79% improvement over Q1 2019. We had a strong kickoff to our 2020 exploration programs and we had modest negative operating cash flow of $8 million, which was impacted by the timing of the annual Mexican EBITDA tax, the payment of our annual bonuses across the company and the buildup of inventory on the leach pads at Wharf and Rochester. The temporary cessation of active mining and processing activities at Silvertip also had a notable impact on our Q1 2020 results. Silvertip used $32 million of free cash flow during the quarter, a figure we expect will be much smaller going forward as the site focuses on exploration, pre-feasibility work and ongoing maintenance activities. We forecast that ongoing carrying costs will be $4.5 million per quarter, down from the $6 million figure that we guided towards at the beginning of the year. Exploration and pre-feasibility costs remain in line with our previous estimates. One additional note on Silvertip. Given the precipitous drop in zinc and lead prices during Q1 2020 and the significant increase in the 2020 benchmark treatment charges for zinc and lead concentrates, which were finalized during March 2020, we remain confident that the temporary cessation was a sound decision. Before handing the call back to Mitch, I wanted to draw everyone's attention to Slide 11 where we summarized our hedging program. We continued to take advantage of the stronger gold price by implementing additional price protection. You'll see that we've extended our zero-cost collar gold hedges to cover a portion of our production in 2020 with a $1,600 floor. As I mentioned earlier, we also laid in some foreign currency hedges over the next few years. Our hedging strategy is designed to support cash flow generation and help fund key internal growth projects, most notably the POA 11 extension at Rochester, which we anticipate funding with a combination of internally generated cash flow and borrowings from our revolving credit facility. I'll now pass the call back to Mitch.

Thanks Tom. Just to quickly wrap up, Slide 12 hit several of our key priorities for the remainder of the year. Of course, our top priority remains the health of our employees, their families and members of our communities as we continue to manage our way through the COVID-19 crisis. We remain optimistic about our exploration programs and the results we expect to see over the course of the year. We're also looking forward to seeing Rochester's production levels rise based on the higher crushing and placement rates the team has been delivering. All of us are excited about the operation's future growth potential as POA 11 is set up to gain momentum during the second half. I'm also enthusiastic about the work that is now underway on the pre-feasibility study at Silvertip, and we look forward to sharing results with you later in the year. And finally, we will continue to further improve upon our strong safety and environmental performance as we strive to deliver consistent operating and financial results. With that, let's go ahead and open it up for any questions.

We will now begin the question and answer session. Our first question will come from Michael Dudas with Vertical Research Partners. Please go ahead.

Good morning, Mitch, gentlemen. Glad to hear things are going safely and healthy for everyone. First question regarding Palmarejo: can you share some additional thoughts on expectations regarding the Mexican government decree and the news we're hearing about possible extensions of COVID restrictions? What options or avenues have you worked on there to alleviate the situation? Second, how quickly do you think you can ramp up once you get the green light? Third, what are some of the carrying costs that we should anticipate in Q2 given the suspension of mining down there?

I'll start and then Tom I'll ask you to step in as well. In terms of the overall status in Mexico, just to rewind the clock: on March 31st, the Mexican government issued the emergency decree regarding restrictions on nonessential businesses. Then on April 6th we received further clarification that made it clear that precious metals mining was not an essential business according to the decree. So on April 7th, we announced that we were going to begin the process of temporarily suspending operating activities at Palmarejo. That decree earlier this week was officially extended out to May 30th. However, there are areas with little COVID-19 impact that will be allowed to reopen on May 18th, and currently Palmarejo sits in one of those zones of little to no COVID-19 impact. So we'll circle May 18th as a potential target. Meanwhile, on a separate path we submitted an application for exemption to the decree under guidelines published by the Secretary of Mines; that's a case-by-case process, where they'll take the applications and discuss them with public health officials to determine whether mines can restart sooner than those May dates. So we'll keep pushing on that angle, as well as gearing ourselves up for a restart. Similar to the ramp down that took two to three weeks, there'll be a two to three week ramp up process to get ourselves back up and going whenever we do get the green light, whether it's May 18th or sooner. In terms of impact on costs, obviously that depends heavily on when we are able to restart so that we can measure how many days we were not producing. Tom, do you want to go into another level of detail there as far as potential impact?

As we talked and have been thinking about tons of scenarios around this, the number that I would use for kind of a 30-day shutdown — which feels like our best estimate at this stage — would be about $10 million in lost free cash flow for the year for Palmarejo. To break that down: you can estimate revenue loss, and we think we can reduce our operating costs by 50% during a suspension, and stop drilling and reduce CapEx, so that gets you toward that $10 million estimate. The other thing I would just remind everyone is that the peso is really devalued here, and as mentioned, we put on some hedges. About 50% to 60% of our costs are denominated in Mexican peso, so with those hedges we've locked in roughly the same amount of lost free cash flow from operations. We'll come back with a clearer picture as Q2 progresses, but hopefully that gives you some numbers to play around with.

Tom, that's perfect. Thank you. Mitch, thank you for the thoughts on that and hopefully May 18th is sooner rather than later. Second question is turning to Kensington. Sounds like Jualin will contribute a larger share later in the year. Will the 15% to 20% Jualin contribution be over the 12-month period, meaning the second half of the year could be a much higher mix? Is that how we should think about it?

First quarter contribution from Jualin was in the single-digits.

Yes.

A lot of that had to do with COVID-19 and workforce availability. A decent amount of our workforce at Kensington flies up from the lower 48 for rotations and that impacted first quarter and in particular March availability of workers at Jualin. That is a reason why we were a little lower in the first quarter than we expect to be in subsequent quarters. I view it as a positive that with only a small percentage of the tons coming from Jualin it had a great quarter on its own. With a higher contribution through the rest of the year, we should see the results reflect that.

And just finally, maybe back to Terry on scenario analysis or the hedging part. I assume since you've been layering on hedges over the last few quarters, you'll continue to consider that as markets move forward. From a scenario standpoint around potential deferrals, it seems like you feel you have enough liquidity to carry through without deferring important work. Would that be driven mostly by metal price changes or by scenarios such as Palmarejo being out for several months? What would be the triggers to start deferring projects?

I'll start and then Tom can chime in. Having a $1,600 floor under a good portion of our gold production provides a lot of comfort in ensuring we have sufficient cash flow from Rochester and elsewhere to fund the expansion project. POA 11 is a project that doesn't have a lot of room to be deferred, because as we stack on the stage four leach pad there's a point at which that pad is full and we need the new pad down and ready to start stacking on, which is targeted for late 2022. We're working on that basis and schedule and between our revolver and cash flow, especially with the downside protection at $1,600, we feel comfortable. If Mexico continues longer than we all hope, the numbers get a bit tighter, but we still feel comfortable that we'll have sufficient liquidity. Separately, on Silvertip and a potential restart, that's a project where we have a lot of flexibility in terms of timing if and when to pursue that. We're mindful of relative returns and sequencing projects against our financial capacity. Rochester clearly has the highest priority. Tom, anything on the hedging you'd like to add?

Yes, I'd just reiterate that a $1,600 floor is a target for us. The benefit of layering is that we're not trying to time the market; the more patient you are the higher the collars you can achieve. As a reminder, in March we saw gold drop below $1,500 and silver below $12, so we want to protect the downside to ensure we have sufficient funding for POA 11. The timing for that capital spend doesn't have much flexibility, so downside protection is important.

Our next question will come from Joseph Reagor with Roth Capital Partners. Please go ahead.

So first, thinking about the scenario with Rochester and building out the additional leach pads: would you need to have all of the capital in hand when you embark on that, or is that something where you can have a certain portion on day one that would make you feel comfortable?

I think it's the latter, Joe. We have the revolver balance available on day one. With the cash flow from Rochester and the other operations, that will come over time during 2021 and 2022 and act as another key source of funding. That cash flow will come as we go.

No, you nailed it. Joe, we think we've got the combination of internally generated free cash flow from our mines and the revolver capacity. Based on the scenarios we've run, we're feeling pretty good about our ability to fund POA 11.

Also at Rochester, a big portion of the decline in production has been related to tonnage. That stepped back up in Q1 but probably won't flow through until Q2 as you rebuild inventory. Is there any difference in ore makeup from mid last year to now? Are you experiencing any geological changes even though the model says it should be fine?

Joe, thanks for the question. No, there's nothing significantly different over that time period. One of the benefits at Rochester is uniformity. There are some differences in hardness; we do see drilling differences and crushing impacts from hardness, but nothing geologically or mineralogically different.

So given that, and given my layman's understanding of the high pressure grinding you're doing, there's really nothing but time standing between you and getting to where you want to be?

I think that's fair. Every time we put HPGR-crushed material on or near the liner, we see the recovery results that tests indicated. That's comforting and validating. It's really about timing — getting ounces down through deeper sections of that stage four pad and building up tonnage. Stacking rates and placement rates have been reestablished. Blasting in the pit has helped improve crusher performance. We like what we see at HPGR; it's more a function of time than anything.

One last one at Silvertip: are there any remaining contingent payments or did you make the final contingent payments in Q1?

Yes, we made that payment. No more to go.

Our next question will come from Brian MacArthur with Raymond James. Please go ahead.

I have three quick questions. First, on Tom's point about layering collars: you mentioned 99,000 ounces in 2021 in the presentation but the press release gave 56.5 thousand across first and second halves — can I assume the remaining ounces were layered in and will be spread through the year? Second, on the $100 million draw on the revolver: I get the precaution, but how did you arrive at $100 million specifically? Could you have drawn more, and why not? Third, on Silvertip: with TCRCs higher and zinc/lead prices down, and given you made the final $25 million payment, what's the thought process on any impairment testing this quarter? Would you wait for the new study rather than take any write-down now?

Tom, do you want to cover the layering question?

Yes. Regarding layering, the goal would be to have those ounces spread out evenly when we complete the program; there may be a bit more weighting to the first half. On the $100 million revolver draw, we ran multiple scenarios and viewed this as a precautionary measure to ensure cash on hand if downside scenarios materialized. We could have drawn more, but we thought drawing the entire facility would have sent the wrong signal and wasn't commensurate with the risk mitigation already in place. The hope is we never need to use it. On Silvertip and impairment, the assumptions used in our impairment analysis contemplated a restart in 2022 and relied on more long-term zinc and lead price assumptions. Whatever happens to zinc and lead prices over the next 18 months is unlikely to change the amount of any impairment determined under those long-term assumptions.

Yes, that makes total sense. Thanks for the color.

Our next question will come from Adam Graf with B. Riley FBR. Please go ahead.

A couple of questions. At Rochester, the study you're targeting for the end of the year — will that include Lincoln or Wilco, or is that the subsequent study for Rochester? And could you give some color on any progress in the first quarter on exploration at La Preciosa and at Sterling and Crown?

The plan is the updated study will include updated capital and an optimized mine plan that we hope will include some East Rochester ounces beneath the old stage one and stage two pads and additional material from Lincoln Hill, but nothing from Wilco or Gold Ridge further west of Lincoln Hill.

Adam, La Preciosa continues with engineers looking at our updated geologic and resource model; we have a meeting at the end of next week to review it, so sometime in May we'll have a much better idea of next steps. The Crown and Sterling projects started the year with three rigs turning: two up at the Crown area and one at Sterling. The Crown area had a large truck-grade target in a new geophysical target. Because of the success of that target, we've moved our smaller RC rig up there and continued drilling on the target called Seahorse, which is about a mile and a half north of the SNA resource in an area with no prior drilling. So we've been busy with one rig there. We sent the truck rig home and are continuing at Sterling. Sterling will move a core rig in starting on Sunday to do infill, large-diameter core for metallurgical work, engineering, and to look at a pick design at Sterling. Both Crown and Sterling have had some nice upside hits in the drill results, which we'll discuss in our mid-year updates in places we didn't expect. We'll have somewhere between five and ten holes to report in those new zones by the mid-year release. So it's going really well at Crown and Sterling.

And Hans, just to add on the bigger components of this year's program: Palmarejo and Kensington are the largest allocations. Palmarejo drills aren't turning now, but we have 10 rigs standing ready to get back into action. We're looking forward to that program and results. Kensington will also have good results to talk about in a mid-year update. Rochester and Wharf programs are more weighted toward the middle to second half of the year. There's a lot going on across the portfolio.

Silvertip just restarted near mid- to end-March and is up to three rigs. We'll have five rigs by the middle of the second quarter. Visually, things are looking really good there as well.

Can you remind us of Palmarejo's exploration focus this year — more resource conversion or resource expansion?

We started the year with more resource conversion drilling because of annual reserve and resource calculations — with a data cut-off at the end of June. So early spending is a bit more in infill and reserve conversion. However, it's important to find new veins and 'clavos' for expansion in a couple of years, so for the remainder of the year the focus will shift dominantly to expansion. We're seeing interesting results and have good intercepts north and east of Independencia that we plan to aggressively drill once permitted — we have 10 rigs geared up to pursue those targets and will discuss results in the mid-year report.

This concludes our question and answer session. I would like to turn the conference back over to Mitchell Krebs for any closing remarks.

Okay, thanks. We appreciate everyone's time this morning. We look forward to speaking with you again in the summer when things are hopefully returning to normal to discuss our second quarter results. In the meantime, I hope you all stay healthy and safe. Thanks again for your time. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.