Coeur Mining, Inc. Q2 FY2020 Earnings Call

Good morning. And welcome to the Coeur Mining Second 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. Please go ahead.

Thank you, and good morning. Welcome to Coeur Mining’s second 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 website. 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. And good morning, everyone. Thanks for joining our call. I first like to introduce everyone to Mick Routledge, who joined us last month as our Chief Operating Officer. As we show on slide three in today's presentation, Mick is an accomplished leader and brings a lot of great experience to the company, which will help us improve our operational planning and execution. Later in the call, he'll give you his initial thoughts on the operations, touch on some of the highlights from the quarter and summarize the key operational priorities looking ahead. Terry Smith is also on the line and has now transitioned to his new role as Chief Development Officer where he is overseeing our major projects and helping to advance our longer term growth pipeline. And in addition to Mick and Terry, Tom Whelan and several other members of the management team are also on the line. Second quarter cash flow was stronger than the first quarter despite losing 45 days of production and cash flow from Palmarejo, our largest operation, due to the Mexican government’s mandated suspension of mining activities as a result of the COVID-19 pandemic. However, the rest of our operating portfolio, all located in the U.S., continued operating and two of them, Kensington and Wharf, delivered strong quarters and allowed us to generate some solid overall results and achieve several meaningful accomplishments that I'll quickly highlight and are summarized on slide four. We successfully and safely restarted Palmarejo and expect it to generate strong free cash flow during the remainder of the year. As I mentioned, our Wharf and Kensington gold operations both had very strong quarters. Kensington's free cash flow more than tripled and Wharf’s free cash flow increased nearly nine-fold on the back of a higher gold price and a 60% increase in production. We expect both assets will continue delivering strong gold production and free cash flow throughout the second half of 2020. Out in Nevada, we’re set to break ground at Rochester next month on the POA 11 expansion. Construction is scheduled to be largely completed in late 2022, at which point Rochester should become the largest primary silver mine in the U.S. More importantly, we expect Rochester’s free cash flow to exceed $100 million annually post completion, which is a major step change over the past three-year average free cash flow of about $2.5 million. We remain focused during the quarter on carrying out the largest exploration program in the company's history that is targeting new discoveries and resource growth to further extend our mine lives. Quarterly exploration investment increased 60% quarter-over-quarter and nearly doubled year-over-year. And we're excited to share the results of the program so far this year with you next month. Tom will cover our liquidity position and balance sheet in a few minutes. With cash up quarter-over-quarter, debt down, and adjusted EBITDA continuing to climb, we feel really good about our financial flexibility as we move into the second half of the year. Before handing the call over to Mick, I want to quickly call your attention to a set of slides that highlight our best-in-class corporate governance, proactive ESG programs and priorities and our focus on fostering diversity and inclusion at our company and in our communities starting on slide 15. Finally, I want to highlight a few upcoming disclosures we're planning for the rest of the year. The first one is the exploration update that I touched on earlier, which we plan to publish in mid-August. And then later this fall, we’ll have the results of the updated technical report for the Rochester expansion. And finally, we plan to end the year with a virtual investor day to provide you with a more fulsome overview and outlook. We’re all very excited about how we have positioned the company, and we look forward to updating all of you on our progress along the way. With that, I'll go ahead and turn it over to Mick.

Good morning, everyone. Before going through operational results, I'd like to start off by sharing my perspective on the company after being here for just about 60 days. First, I want to highlight what a strong and balanced team I have joined. Everyone at Coeur works extremely hard and collaborates well to make the company’s strategy clear to the workforce with strong alignment across the leadership team. Next, and in particular, I want to mention Coeur’s health and safety standards. The company has great pride in taking care of its people. I look forward to building on this platform and working closely with leadership in the field. When we get health and safety right, strong production performance follows. From outside the company before starting with Coeur, I couldn’t easily see the upside potential. What I see now as part of the team are exciting long-term opportunities we are developing into a robust, executable five-year strategic plan. Now along with the team, we have a ton of excitement about the assets in our portfolio, and the potential to generate meaningful value. We have work to do, and we’re confident in our ability to execute those plans, with the goal of unlocking all of that value for our stakeholders. Now turning to the operational results on slide six, beginning with Palmarejo. The team did an excellent job shutting down and then ramping up in a safe manner, starting with lower grade stockpiles to balance the process plant. We are now maintaining solid performance and seeing good results over the past few weeks. Our workforce capacity is currently limited to 85% based on government guidelines that aim to protect our more vulnerable employees. Right now, we are running just over 4,600 tonnes a day through the mill, which is close to the 5,000 tonnes per day normal run rate. And we intend to follow the mine plan and partially offset the lower tonnage with higher grades and better recoveries. This is expected to drive production in line with full-year guidance ranges and generate strong free cash flow. Turning to Rochester, dilution impacted our results; however, we recently designed and implemented a new stacking plan to help counterbalance headwinds. As highlighted on slide eight, a new plan utilizes an inter-lift liner, allowing us to place ore closer to the plastic liner, shortening the recovery cycle and giving us good visibility of our improved performance from HPGR. We’ve also leveraged separate collection systems to better monitor the solution grades coming off the pad and validate our expectations for this new plant. The team brought in some of the best heap leach experts in the world, and they are continuously helping us revise our models. We are already beginning to see encouraging results after having the new liner down for only a few weeks. We are confident in our ability to increase production in the second half and carry this momentum into 2021. Going back to slide six, and looking at Kensington. Production remains strong as we continue to see positive grade reconciliations from the Kensington main deposit. We also mined transitional material during the quarter; most of that material was developed into ore, providing access to higher grade ore during the second half of the year. We expect Kensington to finish the year strong, and be the largest free cash flow mine in our portfolio. At Wharf, gold production increased significantly during the quarter, driven by improved weather conditions and higher grades. We also have much better crushing performance during the quarter, and we enhanced our maintenance strategies. Impressively, the team was able to stack nearly 50% more tons quarter-over-quarter. With this strong performance, we are now caught up on placement rates and have demobilized the third party crusher contractor. Before passing the call over to Tom, I want to thank the team for continuing to operate safely during the pandemic. Let’s stay disciplined. Keep up the good work and finish the year with a very strong second half. Tom?

Thanks, Mick. Looking at slide five, our second quarter financial results reflect strong performances from Kensington and Wharf, which helped to partially offset the 45 days of production we lost at Palmarejo. Together with a higher gold price, this led to $154 million of revenue and $42 million of adjusted EBITDA, both of which were down only 10% quarter-over-quarter. By sustaining higher margins, our LTM EBITDA has increased nearly 80% to over $200 million versus $116 million just 12 months ago. We incurred $6 million of incremental operating costs associated with COVID-19 during the quarter and expect these costs to total approximately $10 million to $12 million for the year. Despite losing Palmarejo for 45 days, operating cash flow was $18 million higher and free cash flow improved by over $20 million, quarter-over-quarter. We expect both operating and free cash flow to be considerably stronger during the second half of the year, consistent with our updated production and cost guidance. Before moving on, I want to hit on something that we discussed during our last call. Our decision not to defer any of our capital projects, including the expansion of Rochester, or our significant investments in exploration in the wake of the uncertainty related to COVID-19. The combination of improved financial results and the anticipation of a strong second half makes us confident this was the correct decision. Turning over to slide 11, we continue to have a very sound balance sheet with no near-term maturities and over $240 million of liquidity. If you recall, we took a precautionary revolver draw of $100 million back in April as a result of our downside scenario planning for COVID-19. I'm happy to report that we repaid $90 million before the end of the second quarter. We expect to repay the revolver in full by year-end, and hopefully sooner at current gold and silver prices. Additionally, we have not utilized the ATM and it remains in place for now during this unprecedented time of volatility and uncertainty. Total and net debt leverage ratios at quarter end were 1.7 times and 1.3 times respectively. We expect our leverage ratios to continue trending downward over the remainder of the year. Over the last 18 months we had increased liquidity, materially reduced debt and significantly lowered leverage, leaving us very well positioned for upcoming growth initiatives. Before handing the call back to Mitch, I wanted to quickly touch on our hedging program highlighted at the bottom of the slide. We continue to utilize zero-cost collars to achieve downside price protection, targeting up to 50% of expected gold production in 2021 and 2022, with a minimum price floor of at least $1,600 per ounce. We believe it is prudent to underpin cash flow generation during the construction of POA 11. I’ll now pass the call back to Mitch.

Thanks, Tom. Slide 12 outlines our key objectives for the second half of the year. First and foremost, it’s essential that we maintain our rigorous health and safety protocols to continue protecting our workforce, their families, and members of our communities. Secondly, we need to develop the future of our business by sustaining our higher level of investment in exploration, and by successfully executing on our internal growth projects. And finally, it’s critical that we execute our plans to deliver consistent operating and financial results from each of our assets. We see a compelling future for our company. And we’ll get there by continuing to pursue a higher standard and by executing our strategy to protect, develop and deliver from our North American-based precious metals assets. With that, let’s go ahead and open it up for questions.

We will now begin the question and answer session. Our first question comes from Mark Mihaljevic with RBC. Please go ahead.

Hey, perfect. Thanks and good morning, everyone.

Hi Mark.

Hey, I'll start with Mick. And obviously kind of new to the role here — just give us a few highlights of what you think you might change or opportunities for improvement that you see in your first few months on the job.

Oh, sure. I’m really excited. I’ve been out to a couple of the sites already, and obviously with COVID restrictions that travel is a challenge, but we’re working out how to do that. What I see is strong teams already here and good assets, and what we’re doing in this initial phase, we’re joining up that strong exploration work that Hans and his team are doing. We’re lining that up with our strategic plan and then we have to get on the next key part. I see that being the best opportunity for us is to draw that picture of the long game and then execute well in the short game. And I think we'll have the teams do that. And we certainly have the assets to use to do that. And it's a little bit of upside in the processes, in the process assets and the equipment. So, I think it's a great opportunity going forward.

Okay. And then I guess, digging into some of the results here. Obviously, Rochester you had some challenges in Q2 and are making some changes, but can you just give us a sense of really what was different to plan? I mean, I guess you guys were expecting to be stacking up these higher areas of the pads. So kind of what was different than what you were expecting in the actual performance?

Yes, I'll start, Mark, and then Mick maybe you can jump in on the heels of a couple of comments for me. You go back to rewind to the first of the year. Priority number one was really dialing in that new crusher configuration and getting that running consistently, which we've been able to do. Then transitioning into the second quarter, the real focus turned to that staged leach pad model calibration to align with the past six months, and then starting to make some adjustments to this new stacking plan and putting this interstage liner into place to obviously get ounces out faster and further validate the HPGR. So it's kind of been a step-by-step learning process and then making adjustments as we go. And I feel like we've learned a lot over the last few months. I think now we've gained the knowledge that we can apply to set us up well for this expansion phase that we'll be going into now the next 24 months or so. Mick, do you want to go into a little more detail in terms of some of the learnings we've made mid-year through the year?

Yes, for sure. So particularly Pad IV, when we look at how long that pad has been in operation, it's been quite a period and so it had been quite exhausted. So when we put the material on the top, we certainly expected some dilution but didn't quite expect as much as we saw in the end and the models we had didn't predict that as well as we'd like. But now the new models are predicting that well, and that's encouraging us with our new plan to install even potentially additional inter-lift liners to support the one we have in place right now. That allows us to implement a short-interval control and optimize our production process all the way back from the mine and blasting through the crusher circuits and the HPGR and under the heap, and then to fine tune that to get the best recovery that we can get from that heap. And yes, it was not as predictable as you thought, but now it's much more predictable and the view going forward is stronger.

Okay, perfect. And I think you probably gave the answer already. But just to confirm with the inter-lift liners, given where you're placing them, we shouldn't assume that you're losing any material pad inventory that you won't be able to irrigate anymore. You're only kind of stacking on a portion of it and it had already largely been under leach for a long time. So not much inventory left. Is that the way to think about it?

Yes. So yes, that's the correct assumption. And there may be some slight impacts, but we're working on those plans as well to ensure that we can recover that material over time. The material that we already had on the pad was under irrigation. We're already seeing some benefits coming into flows, but it's just going to take a little bit longer for that historic and that more recent material to give us the metal, but it is there. And it'll just take a little bit longer to come out. And we're optimistic that that will support the system going forward.

Okay, perfect. And then I guess not much commentary around Silvertip on the call today, any updated thoughts and how do the current silver prices adjust your thinking on the asset or where do you sit on it right now?

Yes, fair question. Second quarter there was a lot of heavy lifting done at Rochester on that expansion. Third quarter will be a lot of heavy lifting, I think, on Silvertip for the PFS, pulling the different pieces together. We're starting to get different components of the work that's been going on since February and so we'll be fitting those different pieces together whether it's on the metallurgy flow sheet or a potential expansion of that milling facility. That work is starting to come to an end. Meanwhile, we're continuing to drill the exploration program there that's intended to give us confidence in a much larger, longer mine life to support any potential restart. We'll have more to say about that during the exploration update here in a couple of weeks. And then the third piece that sits outside of our control obviously is the zinc and lead concentrate markets primarily. The silver price will be one factor that will go into the analysis, but I want to make sure that despite all of our strong desires to get Silvertip right, we don't rush too fast; we adhere to a disciplined process. We go through those steps, assess the business case thoroughly, review the underlying technical fundamentals, and then look at the returns and timing, how it fits with our other priorities, and then make a sober clear-eyed decision on Silvertip once we have more pieces of information. So not a lot to say at this point, more to say in the coming months, and we'll obviously keep you posted.

Okay, perfect. And then I guess just last one for me and obviously, you guys are going to be putting out a bigger, more comprehensive exploration update next month. But are there any highlights you'd like to share with us today and what parts are really going to be the most exciting that we should be watching out for?

I wish Hans was in the room with me right now, so I could pull the reins in on him because he would love to talk a lot about it. I'm expecting Silvertip will be a big theme, a big story. Rochester and the drilling that's going on to support the updated 43-101 that we'll have finalized later this year along with updated capital, updated mine plan and hopefully more tons as a result of this drilling. And then down in southern Nevada, there's a lot going on there at the Crown project. It’s a busy neighborhood down there. There's a lot of excitement and activity and so we're looking forward to highlighting that as well. Those are the ones that stick out to me. Hans, did I leave any off without stealing that completely?

Mark, thanks for the question. Like Mitch said, I'm jumping up and down excited about our program this year. Even though we did have a slow down at Palmarejo, we're still seeing excellent new results there too for growth. This is a year for resource growth and discovery, with 80% of the budget focused on that and one of the largest budgets I've ever seen. The news release will demonstrate that we have been successful at achieving that with a few new discoveries that will be discussed in the news release. You've gotten a taste of one of them from Coeur’s release on July 16. One of our holes cut some mineralization on the Seahorse target at Crown, which gives you a taste of a part of our project called Seahorse at Crown, where we have 18 holes drilled and that's one of them. For the news release, we only have six back from the lab. But it's a super exciting year, and pretty much all sites are delivering on their programs. It's almost like we had a bunch of pent-up demand in geologic targets and once we got board approval to drill this year, the drills were put in the right places.

Perfect. That's great to hear and looking forward to the update in August. That's it for me, and thanks for that.

Yes, thanks, Mark.

Our next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

Good morning, gentlemen. And welcome aboard, Mick.

Hey Mike.

Thanks.

Mitch, maybe you could talk about COVID, share some comments on how successful the ramp up had been at Palmarejo, and how the COVID protocols are working across the organization. How you think productivity has been, how well it's worked out for the organization in Mexico? Certainly there's been some concern about wave two that could come by, and how are labor, the community and the government officials fitting in and thinking about it relative to that potential as you look through Palmarejo? Can you ramp up and hopefully maintain its output during the second half of the year?

Yes, sure. Obviously, top area of focus for us and as everyone on the call can attest to, a lot of layers, a lot of complexities and a lot of moving parts. Tom, maybe after I give some comments you can talk more about the financial impacts as we see it. Starting with just the footprint of our assets has served us well for the most part with three of our four operating mines being in the U.S. under the Department of Homeland Security designation of mining as an essential or critical business. That designation has really given us kind of that license to continue operating, obviously with a lot of new protocols and procedures in place here in the U.S. Some adjustments at Kensington and the other sites were necessary given the location up in Southeast Alaska, including a requirement to quarantine coming in from the lower 48 before going out to the mine. So we've had to adjust some rotations and work schedules. Mexico has probably been the most complex area not only because of the 45 days that we lost at Palmarejo but just the logistics there of our workforce and camp setup, people coming from all over Mexico, some who live in higher risk areas and not able to travel back. Mexico, as Mick mentioned, has designated vulnerable sections of the population, whether it's age or pre-existing conditions, and that's kept us about 120 people short of a full roster there. So we've been managing through that and doing the best that we can with what we have. I'm particularly proud of the fact that we have been very proactive in the testing infrastructure that we've put in place and the technology. We've now tested 100% of our population with PCR tests, other than a couple of rotations who have yet to come to site — I think one at Kensington, maybe one at Palmarejo. I think our team has been very effective in a short period of time to get that testing done for thousands of people. We have had some positive tests, almost all of them with the exception of one have been asymptomatic. The important thing is we're catching these cases through our proactive testing before anybody enters a site. And we've got robust contact tracing and all the other measures around screening, sanitizing and distancing. Here in Chicago, we're still mostly remote. People can come back to the office under a certain set of criteria and health procedures, but for the most part we're maintaining productivity at headquarters despite most people being remote. It goes without saying, with COVID fatigue possibly setting in, we need to resist the urge to take our foot off the gas and continue to maintain the discipline that we've had around these procedures and protocols that have served us well so far. So I don't know, Mike, if that helps?

Yes, it does. Just, how do you think from the Mexican government standpoint they are thinking about if things were to get worse — is there more sensitivity to a more centralized approach versus what we had in early indications or any sense from observations?

It felt like it took the Mexican government a little while there in late March and April as they were quickly putting in place some mandates. But then in May when they came out and designated mining to be an essential industry, since then things have been pretty straightforward. Obviously, we've put a lot of effort into implementing the requirements they issued in conjunction with that designation. We want to maintain a safe and healthy workforce. We've got very strong screening and testing procedures down there, complying with everything that the government has rolled out. But since that designation was put in place in May, we have had a much more straightforward experience down there and it's allowed us to get back up and going with restrictions still in place.

I appreciate those answers. Thank you, Mitch. One follow-up: with higher gold and silver prices, this is certainly going to improve cash flow and balance sheet metrics dramatically here, assuming prices maintain near these levels. How are you thinking about implementing the spending program at Rochester or changes to other plans now that prices are higher? Including on the hedging policy, how that may change now versus what it was a month or six weeks ago?

Yes, sure. I'll take a shot and Tom can chime in. We have that capital allocation framework — I think that slide is in the deck today. We keep preaching that we have to follow the framework: fund things according to returns and stick to the plan — organic growth, exploration to the extent there's excess free cash flow, and further debt reduction opportunities. Capital can flow there, and if there's still excess capital beyond that, which is more likely on the back of the expansion at Rochester, returning excess back to stockholders becomes a relevant discussion. We're not deviating from that framework. We might spend a little bit more on exploration as long as there are good business cases to justify it, but that's how we're continuing to think about how higher prices impact our decision-making. Regarding hedging, our rationale is that the Rochester expansion is large and important in 2021 and 2022 when capital is being spent. We think it will generate a great return and fundamentally change the company. We don't want to fund that with dilution. It's important to us to self-fund that project, relying on free cash flow, and by relying on free cash flow we think it's important to have a floor or underpinning with a minimum price. When we think about it, the downside protection is important during construction. Also, remember gold is about 70%–75% of our total revenue, so the target of up to 50% hedged is up to 50% of the gold portion. We are still letting silver run given its volatility. That's how we are thinking about it. Tom, did I miss anything?

No. I just say 90 days ago we confidently stated we plan to fund POA 11 with our existing operating cash flow and the existing debt capacity we've got, and here we are 90 days later feeling that much more positive about it. We've got that downside protection underpinned and ready to roll. So I think we're feeling really comfortable with the balance sheet and that the entire team knows this capital allocation framework is in our DNA. We've actually changed our long-term incentive to have return on invested capital. So this is more than just something you see on a slide — we're living it every day at Coeur.

That's well said, gentlemen. Thanks for your thoughts. Appreciate it.

Thanks Mike.

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

Good morning, guys. Thanks for taking the questions. I guess following on the questions about free cash flow, given current gold and silver, do you guys have a rough estimate for what you think you can generate for free cash flow for the rest of the year?

Good question. It's a tricky one to answer without modeling different metal prices, but we do have updated guidance out there. Tom, do you want to give general direction?

Yes. Again, we try and be pretty transparent with the guidance to give you what the case is and we kind of leave it to everyone on their own to figure out what gold price they want to plunk in there. When we did our second quarter forecast, we used $1,615 per ounce for gold and $16.50 per ounce for silver to plan out our updated forecast. We had an upside case which shows that we intend to repay our revolver throughout the rest of the year. So it's really up to analysts to pick prices to figure out free cash flow, but we feel confident that we'll have the revolver paid, which gives some indication of how much free cash flow we expect to generate.

Okay. And can you remind us what's remaining on that revolver?

$60 million.

Okay. And then switching gears. At Palmarejo cash costs in the first half of the year were low. I realize it's really a quarter and a half not two full quarters, but it kind of suggests either higher costs in the second half or that the cost guidance is a little bit higher than maybe it could be. Can you give any additional color there?

Mitch, do you want to take a crack at that one?

So the team has worked very hard to maintain costs and with us being at 85% workforce capacity we will have to watch that closely. I'm confident that we will maintain our current trajectory. Certainly we expect if we move more tons throughout the second half of the year to spend a little bit more, but the guidance we've issued is based on a solid forecast for the year and I think we will deliver on that.

So for modeling purposes should we model costs to get within that guidance range or is it possible to come in below it for the year?

I would say it's possible. We were careful in setting those ranges to set us up for a high likelihood of meeting or beating. That’s the job we have ahead of us for the second half.

Okay. One final thing: with the exploration update you're providing in August what areas are we going to get drill results from besides the six holes from southern Nevada you mentioned? Any other greenfield stuff?

Hans, do you want to take that?

No other true greenfields specifically, but all the programs are reporting on aggressive exploration for resource growth. Silvertip, we're doing some big step-outs. We now have holes with visible mineralization a kilometer north of our prior resources and 1.5 kilometers south of our prior resources. So these are almost greenfield step-outs at Silvertip. We wanted to start testing edges and we still haven't found the edge. That's good news. That's about it for the closer-to-greenfields portion of the release. Everything else will be resource growth and aggressive exploration discussions. Very little infill this year — just at Palmarejo. That was it.

The only other thing I'd hop in to say, not directly related to your question Joe, but on the greenfields or earlier stage side, not that we'll have any drilling to talk about in August, I look now at that Allio gold transaction that we did and other similar things like that in the past few years when markets and sentiment were different. We have a ton of drilling and growth ahead of us on the earlier-stage side of exploration and I know Hans and his team are out there on the ground developing those targets. West of Rochester there is a series of projects and deposits we control. When we did that deal with Allio I think we more than doubled our land package there to the west and so there is a lot to do out there. Then Hans already talked about Crown and Seahorse and Sterling down in southern Nevada. There is a lot of drilling ahead and hopefully a lot of new discovery and resource growth. So no shortage of exploration opportunity.

If I could just ask about La Preciosa: you don't get a lot of value in the market for it historically, but with silver now approaching the mid-20s is there any opportunity to relook at that or vend it out to someone who could do some work and capture some value there?

Yes and yes. We had a process of re-examining and optimizing La Preciosa late last year and earlier this year; there's some ongoing work right now. You plop in the current silver price and that project as it sits today starts to look pretty interesting. Now does it fit into our capital spend profile? How does it compete in terms of relative returns — that lies ahead — but your other point about what else we could do with La Preciosa is valid: it doesn't have to be 100% us. That's another angle we are considering. Anything we can do to highlight value there is being considered because we haven't been getting a lot of attention or value out of that big silver resource in Durango historically.

Okay. Thanks for the color. I will turn it over.

Yes. Thanks Joe.

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

Hey guys.

Hey Adam.

Thanks for taking my question. Welcome Mitch. Congrats on the strong quarter. I think most of my questions have been asked and answered. Quick question for Hans: the step-outs you guys are doing at Silvertip, what's your feeling or bet that it's contiguous with the main ore body there?

Don't mind if I jump in. You got me excited Adam. Visually the mineralization looks exactly the same in these big step-out holes and stratigraphically it's in the exact same horizon as the mineralization in the ore body. All indications are it should be a continuation but we have zero holes in between in both of those step-outs I mentioned. As a result of these successes we'll fund a winter program that will include three rigs full time through the winter on that northern piece that is a kilometer north of our discovery ore body and that will essentially — the reason we're doing the winter program is we want to do as much step-out now as we can in the higher terrain and higher elevations, and then once the snow hits we'll be down closer to camp. The higher-elevation hits down south on Silvertip Mountain are approaching a magnetic feature that we've always thought as the source of mineralization. So between now and when we shut this program down in mid-September, probably because of the snow, we anticipate three or four more holes in that area including into that magnetic anomaly and we should have a pretty good idea that that is the source and that we've got exponential growth potential based on that being the source in the future. That's been the enigma on the project ever since the silver discovery — what is the source of mineralization. So to answer your question, I believe it will be continuous but we have no evidence yet because we have no infill holes.

Are you seeing any gradation in the alteration or the mineral assemblage that would let you believe you're moving closer or farther from the source?

To the north we're seeing more pyrite but we've also seen more pyrite on the fringes of the discovery east zone. So that's our only clue that we may be hitting closer to the northern edge up to the north which is still 3.5 kilometers from that southernmost ore hole. So quite large and a lot of infill to do on that. That's about it. The hole to the south that we've just hit looks very strong alteration around the massive sulfide. We're still waiting for assays to compare actual metal grades.

Well great. Thanks for that and you and I should follow up offline because I've got experience with similar systems. Anyway great. Congratulations again guys on the strong quarter.

Thanks Adam.

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

Good morning. I have two questions. First on Rochester you made a comment you could make more than $100 million in free cash flow. Is that at about the $1,615 gold price and $16.50 silver price is that sort of what you're assuming? I realize it's a general number.

Yes, generally speaking yes, and then obviously you can play with the model and see how much leverage there is to current prices.

Is that assuming using tax pools going forward and things like that or is that just purely on a fundamental study basis?

Well, that would be using our NOLs, so it's an after-tax number, taking into consideration the fact that we have close to $0.5 billion of U.S. NOLs.

Perfect. Now philosophically in the past you have made a number of moves to balance the portfolio but as you look forward and when Rochester is up and running I could make the case that it becomes a very significant asset and kind of dominates everything else. How do you philosophically think about that? Is five mines the right portfolio then? Does it make more sense to take advantage of high prices to move something out right now to realize some value to fund this because it's so important or how are you thinking about that going forward?

You're thinking about it the right way. Between the POA 11 expansion and the potential to the west, Rochester is likely to be a dominant, cornerstone asset for a long time. Sitting in northern Nevada is a great place — we've been there for 30 years and have meaningful relationships with the state and community. Down south on an earlier-stage basis there's a lot going on at Crown and Sterling and Seahorse. The western U.S. long-life heap-leach, gold-dominant assets work well for us. If we can have five to seven assets each generating in excess of $50 million of free cash flow a year that sets us up nicely to be an attractive intermediate to senior company, particularly U.S.-centric, and that's pretty attractive. That's how we're thinking about it and where we're trying to take the company from a high-level perspective.

Great. Thanks very much, Mitch.

Yes. Thanks, Brian.

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

Okay. Well hey thanks. We appreciate everybody's time and look forward to that exploration release here in a few weeks. So hopefully we can talk to you again then and in the meantime if we don't talk, I hope you all have a great rest of the summer and stay healthy and safe. Thanks again for your time and interest. Bye. Bye.

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