Coeur Mining, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the Coeur Mining Second Quarter 2022 Financial Results Conference Call. All participants will be in a 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 Mitch Krebs, President and CEO. Please go ahead.

Good morning, and thank you for joining our second quarter earnings call. With me here in Chicago are Mick Routledge, Tom Whelan, Aoife McGrath, along with other members of our team. Before I begin, please note our cautionary language on forward-looking statements in our slide deck and refer to our SEC filings, which are available on our website. Our second quarter was marked by solid top-line growth and continued progress at the Cornerstone Rochester POA 11 Expansion Project. As highlighted on Slide 3 in the earnings deck, three of our four operating mines delivered strong production growth compared to the first quarter. Solid metal sales, coupled with some positive changes in working capital led to a strong rebound in quarterly operating cash flow as well. As we look toward the second half of the year, our operations remain on track to achieve our full year production guidance. On the cost side, inflationary pressures continue to impact our results, especially from sharply higher diesel costs. So we have made some minor adjustments to our 2022 cost guidance that Mick and Tom will review in more detail in a moment. We also modified our full year guidance to reflect our decision to invest an additional $11 million in exploration during the second half to follow up on recent positive drilling results at Kensington, Palmarejo and the Silvertip project, which Aoife will talk more about shortly. Most importantly, the ongoing expansion at Rochester is now at peak levels of activity and remains on track to be completed mid-next year. There are over 400 contractors going through the gate every day now. And several key milestones were achieved during the quarter, including the completion of major concrete pouring and the start of steel erection at the Merrill-Crowe facility and secondary crusher. Almost all components and equipment are now on site. The photographs on Slide 10 and 11 demonstrate the terrific progress being made. We reached an important milestone a couple of weeks ago with the successful installation of pre-screens at Rochester’s existing Crusher that Mick will talk more about in a few minutes. The balance sheet remains in solid shape, with total adjusted liquidity of nearly $360 million, including the recent Victoria Gold share sale proceeds with an additional $59 million of potential liquidity in the form of marketable securities. With the completion of the Rochester expansion coming into view, we look forward to delevering the balance sheet with the strong cash flow we expect to generate. The next stage that awaits us post-expansion is higher production, lower costs, positive free cash flow, and reduced debt, which will place Coeur in a great position to pursue other opportunities to further enhance the business. Finishing up with the highlights, I'm very pleased to welcome Jeane Hull to Coeur's Board of Directors. Jeane brings over 35 years of engineering, operational, and leadership experience. Her unique background will be particularly valuable as the Rochester expansion progresses toward completion. Jeane's work on advancing ESG initiatives also meshes very well with our commitment to be an industry leader in this area. Coeur's diverse independent board is stronger with the addition of Jeane, and we'll continue to pursue opportunities to further enhance and refresh our board in the future. Shifting gears, I want to turn your attention to Slide 17 that highlights some important progress we're making on the people side of the business. The ability to attract and retain the best talent remains a critical priority in our business, especially in the current tight labor market. We continue to address that opportunity head-on through the creation of programs and training designed to maintain our reputation as a place where people want to work and develop themselves and build rewarding careers. Before having Mick provide an overview of our operations, I'd like Aoife to provide an update on her first 90 days with the company and give some additional color on our second half exploration priorities.

After three months in the new role, I've had an opportunity to visit all of the company's projects and meet the exploration teams across the organization. I've been very impressed both with the people and the potential of our assets. One thing that became quickly apparent to me was the near term opportunity to invest additional exploration funds in the second half of the year to allow three sites to accelerate drilling on targets showing some excellent results. We look forward to reporting back at year-end and the impact of these programs. At Kensington, wide and high-grade results in the upper areas of the main Kensington deposit point to a very real potential for meaningful mine life extension from its current three-year reserve life. A key priority in the second half of 2022 will be to continue to target the lowest risk, potentially highest value and traditions by testing the southern extensions to Kensington, Elmira, and Johnson veins. At Palmarejo, recent drilling in the Hidalgo zone at the Independencia underground mines has returned some of the highest-grade gold silver intercepts the team has intended this year, with drilling planned to continue for the remainder of 2022. At Silvertip, which is at a very exciting stage right now, drilling continues to show the robustness of the deposit, with consistently impressive intercepts in the Discovery South, Southern Silver, and Camp Creek zones. Drilling will continue to step out from and extend known deposits. But in addition, summer season programs are being expanded to include testing of the regional package with the aim of vectoring towards the mineralizing source. We believe that the resource outlined to date has been defined in what is likely a small part of a larger mineralizing system. And we firmly believe that Silvertip has the possibility to become a much larger resource and be a future source of high-quality growth for the company. I'll now turn the call over to Mick.

Thank you, Aoife. Before getting to the quarterly review, I want to add that the development and training programs Mitch touched on earlier have had a clear impact on our ability to effectively grow our people, align objectives, and establish a safe working environment from the ground up. Slide 19 highlights the continuation of our multiyear downward trend in injury rates. I strongly believe this investment in our people is a big reason for that success. Excellence in health safety and environmental performance is the foundation of a world-class business. Looking back on Coeur’s first half of 2022 from an operational perspective, our teams have worked hard to overcome considerable headwinds on costs and global supply chain disruptions. When we factor in the addition of a major expansion project at one of our four operations, our performance is even more impressive. Our priority in the second half of the year is on maintaining that momentum by: first, steadily advancing POA 11 and carefully managing Rochester’s transition; second, implementing business improvement initiatives that drive efficiency and productivity at our operations; and third, most importantly, focusing on the safety and wellbeing of our people. Turning to our second quarter production summary on Slide 6 and beginning with Palmarejo, metallurgical recoveries improved due to ongoing blending optimization, and metals grid remained consistent. We are confident in our ability to achieve production targets for the year. We have a good handle on unit costs at Palmarejo, and guidance has been adjusted largely to reflect an expected change in the allocation of costs on a core product basis. Moving to Rochester, gold and silver production benefited from strong ore placement rates in the first quarter. Gold ounces produced increased 37% quarter-over-quarter while silver ounces produced increased 5%. Tons placed in the second quarter were impacted by the installation of the pre-screen pilot system, which was completed on July 22. The ramp-up of the pre-screen pilot system, as well as optimization of the product size placed on the leach, is now underway. These learnings should help us further de-risk and optimize POA 11 as we move forward with our pre-screen system. Following a slower first half of the year, we remain confident that Rochester is on track to achieve 2022 production guidance for gold and silver. COGS guidance for 2022 has been revised upwards to reflect higher diesel, labor, and maintenance costs. As a general matter, we anticipate a period of elevated costs throughout Rochester’s transition period as experience is gained and best practices are developed. These learnings we believe will ultimately lead to a major reversal on costs as the scale and efficiencies in an expanded operation are fully realized. Beginning with Rochester and the POA 11 expansion for a moment, Mitch hit the key Q2 highlights. On July 29, the transmission lane and on-site substation were successfully energized by Nevada Energy, as another example of the tangible progress taking place. In the second half of the year, we will see the pace of activity continue, with the start of the product conveyor installation along the crusher corridor set of secondary conveyors, commencement of pre-screen installation, and the completion of the Merrill-Crowe electrical systems among many others. The mining and project teams are aligned and working well together with over 1 million hours without a lost time injury, zero on the project to date. At quarter-end, the project's estimated cost remained approximately $600 million, roughly $523 million of the project capital has been committed, and we incurred $350 million of that estimated total through the end of the second quarter. Key Q3 updates on the final engineering and procurement of the pre-screen, along with an updated multicolor analysis of the contingency, will be completed as part of our ongoing governance over the project. This work is not yet complete, but it is fair to say we continue to see some inflationary pressures and could see the final cost of the project end up around 5% higher than the current estimate. Switching over to Kensington, production increased on the back of Kensington's highest ever quarterly throughput, driven by improved mining and mill efficiencies. The team continues to catch up on delayed stock development due to COVID impacts on the workforce in the first quarter, and we remain optimistic that Kensington is on track to achieve the 2022 production guidance. Wrapping up with Wharf, we continue to place higher-grade material, which led to a 15% increase in gold production versus the first quarter. Wharf remains on track to achieve its 2022 production guidance range. 2022 gold cost guidance has been revised upwards to reflect high anticipated diesel costs.

Thanks, Mick. I'll briefly run through our consolidated financial results that are highlighted on Slide 4. An 8% increase in revenue quarter-over-quarter was driven by increased metal sales at each of our operating mines. This higher production coupled with favorable changes in working capital led to $23 million of operating cash flow during the quarter. We are positioned for a stronger second half of the year with 2022 production guidance reaffirmed. We remain focused on opportunities to contain industry-wide cost pressures. Slide 5 in the deck provides additional detail on four of Coeur's key costs and their impact on our business. As the slide demonstrates, cost increases other than diesel have moderated compared to the increases we experienced last quarter. Diesel, however, remains our largest line item in terms of cost exposure. Coeur consumes between 16 million to 18 million gallons of diesel per year, and we're currently running at approximately $1.50 per gallon over budget through the end of the second quarter. Accordingly, we have increased our cost guidance at Rochester, Kensington, and Wharf primarily related to diesel prices. Next, turning to Slide 12 and looking at the balance sheet, we ended the quarter with $319 million of liquidity, including $74 million of cash and $245 million of availability under our revolving credit facility. Additionally, we had $99 million of strategic investments in equity securities, leaving us with $418 million of potential liquidity as shown on the slide. We monetized a portion of our position in Victoria Gold at quarter end and received proceeds of approximately $40 million in early July. We're comfortable that the balance sheet remains well positioned to fund the CapEx and exploration priorities that we've highlighted during the call. Lastly, I wanted to remind everyone of the downside protection that we've put in place during the POA 11 build. We have 108,500 ounces of gold hedges remaining in 2022 at an average forward price of $1,965 per ounce, and an additional 112,500 ounces hedged in 2023 at an average forward price of $1,982 per ounce, which is providing meaningful downside protection in this current market price environment. The fair value of the gold hedge book at quarter end was approximately $29 million. I'll now pass the call back to Mitch.

Thanks, Tom. Before moving on to the Q&A, I want to quickly highlight Slide 13 that summarizes our top priorities for the second half of the year. By delivering on these priorities, we remain confident that Coeur is well on its way to being a truly differentiated opportunity for investors seeking industry-leading organic growth from a U.S. company with a balanced portfolio of North American precious metals assets. With that, let's go ahead and open it up for questions.

We will now begin the question-and-answer session. The first question is from Trevor Turnbull of Scotiabank.

I was interested in the higher throughput scenarios that you mentioned for Silvertip. I assume these are being driven by exploration success, and just wondered if you could talk a little bit about maybe the framework around those scenarios. For example, are you weighing these expansions in terms of having a minimum mined life? Or are you looking at things that might be more scalable, depending on exploration success?

Silvertip is certainly a substantial system that keeps expanding as we conduct more drilling. In her first 90 days, Aoife has shown great enthusiasm for this project. As we aim for a significantly larger scenario, it will naturally take time to continue the drilling, design, and engineering work, and to establish a strong business case. Meanwhile, we will stay focused on completing and commissioning Rochester POA 11, which will help generate positive free cash flow and strengthen the balance sheet. As we manage these projects, work at Silvertip can also progress. Mick, would you like to share more about the potential expansion scenarios and how we are approaching these considerations?

Yeah, absolutely. The original idea was a fairly small site at Silvertip, but since we've continued to get this success with the exploration results, at Silvertip we have to have a rethink of that. And now we're looking at what is that rate size. So as you mentioned, we have to target a minimum mine life, which is then going to make a successful capital project, and effectively support that investment case. As we continue to hit with the exploration program, then we'll reevaluate size. But at the moment, we're going through that trade-off study to look at what that rate size is, for the asset as it stands today, with an expectation that we'll continue to explore while we finish off the POA 11 project.

And just to put a fine point on that, Trevor, I think last year a lot of the work that we did focused around a 1,750 ton a day scenario; we're sort of in the range of double that now plus or minus, and we'll fine-tune that range as the work continues. But Aoife, is there anything you want to jump in and say, from your standpoint on Silvertip?

I think we are at a really exciting stage right now. We've taken a step back to examine the larger mineralizing system within the hub and spoke CRD deposit model. Essentially, the hub refers to the intrusive source or a porphyry that generates the heat and fluids, which then move outwards to mineralize the surrounding rock in a radial manner, creating a hub and spoke effect. The data indicates that the resources identified so far represent only one of several potential spokes. Additionally, the geophysical data shows signs of where the porphyry source might be located. This summer, we plan to take a step back and test some additional spokes, and as our underground development approaches the potential hub, we intend to conduct drill tests in that area as well.

Great. Sounds exciting, and look forward to hearing what you come up with. Thanks again, Mitch, for letting me jump in.

The next question is from Mark Reichman with Noble Capital Markets.

So I've got two questions, one question for Tom and then one for Mitch. So the first question for Tom is, you know, when the 2020 technical report on Rochester was completed, the capital costs were roughly $397 million and now it's $600 million. And it seems like the NPV has also declined under the base case discounting of 5%. So I wanted to ask you, has the cost topped out? Is $600 million kind of the ceiling? And could you just kindly walk through for investors, kind of a comparison between the technical report outcome and kind of where you stand today?

Thanks, Mark. Hi, good morning, Tom, feel free to take a crack at. I'll start off with a couple of my own thoughts, if that's all right, Mark. The $600 million, obviously as we get further along here with nearly 90% committed, there is less and less uncertainty remaining. The one piece that we are trying to pin down here in the third quarter are these pre-screens that will go into the new crusher. And as Mick said, we are seeing some cost pressure coming back on the bids for some of that work, which after the last nine months shouldn't be a huge surprise. Nothing seems to be coming back lower than prior estimates. So, we did put some language, I think Mick mentioned, a 5% sort of indication of potential increase above and beyond the $600 million, kind of our attempt to provide an indication to capture some of those potentials that may or may not arise between now and when we have this thing wrapped up in the middle of next year. And as far as the comparison between kind of the $400 million to $600 million, in my mind, there is kind of a bucket of inflation and a bucket of scope enhancements, about 50-50, if I had to say off the cuff. But Tom, do you want to go with another layer on that?

Yes, absolutely. The original estimate was $397 million. As we progressed through detailed engineering, we discovered additional opportunities to improve safety and increase throughput, which brought us to the $450 million figure we communicated at the end of the third quarter of 2021. When the revised technical report was released, we encountered two factors: a design change involving the pre-screen and the impact of inflation. I believe we have effectively managed these challenges. Many key components were ordered before the significant inflationary pressure took hold. Therefore, when we evaluate the total capital expenditure, I believe it will be viewed as a success. We are in a strong position, perhaps at the top of the seventh inning, while some peers are still in the early stages of their projects. Regarding the project's economics, the internal rate of return is still quite attractive at 17%. It’s important to note that technical reports reflect a specific moment in time. As we continue to progress and apply the lessons learned from the current Stage 4, this project is poised to be compelling, particularly considering it is situated in one of the best mining jurisdictions globally.

I think you've managed the project well, given the difficult circumstances, the inflationary environment. I just wanted some assurance on the economics, because clearly the original NAV was about $634 million, now it's $348. But I mean, you are still expecting that $90 million of cash flow. So, I was just kind of more interested in kind of the economics. And then the second question I had for Mitch was really just kind of long-term. I mean the Silvertip project seems to be getting more exciting by the quarter. The challenge is that, I've heard from some investors that, kind of the knock on Coeur’s been that they are always issuing equity. And I think that there is some concern. I think there are some investors that would like to see kind of a halt in the spending. And then once Rochester is in place that cash flow would be returned to shareholders in the form of buybacks, whereas it kind of seems like that once Rochester is completed, that the cash flow will be used to delever the balance sheet and then embark on another big spending project in Silvertip. So, I mean, will there be any room to return some cash flow to shareholders in the form of buybacks?

That's a fair question. We largely agree with your concerns about timing and sequence. We have given this a lot of thought, and the growth potential of Silvertip has helped shape our perspective. Our plan is to complete Rochester, generate free cash flow, and initially use that to strengthen the balance sheet, as we have been doing to fund the POA 11 expansion. We want to consistently generate free cash flow as we develop Silvertip. This marks a shift from our thinking nine months ago, where we anticipated transitioning more quickly from POA 11 to Silvertip. With the free cash flow we expect to generate post-POA 11, we believe de-levering will take less time. Regarding returning capital to shareholders, we will discuss this with our Board at the appropriate time. Our focus is on achieving and maintaining positive free cash flow while advancing Silvertip. We are also open to exploring partnership models and other options that could help manage risk and reduce capital requirements, ensuring we don't create significant future strain on the balance sheet when moving ahead with expansion and restart plans.

The next question is from Brian MacArthur of Raymond James.

I want to follow up on the remaining capital expenditures at Rochester. You mentioned $600 million, with $350 million already committed, leaving $250 million to go. However, looking at your guidance, you have projected amounts of $217 million to $257 million this year. If I subtract the $73 million spent at the low end and $143 million, then the low end for next year is $131 million. This puts me at $275 million versus the $250 million. Have you included that 5% already, or how should I interpret this? I'm mainly focused on understanding how much cash is still available for Rochester, and I'm trying to reconcile these figures.

Thank you for the question, Brian. What you've pointed out highlights our current situation regarding the timing of billings and payables. We have capital expenses ongoing, and there are still payments exceeding the 350 we've already incurred. We are closely monitoring this, and the timing of cash flow related to our peak capital at POA 11 is slightly shifting to the current third quarter and into the fourth quarter. Initially, we expected much of this to be paid out in the second quarter, but it is now occurring later in the year. This is a key distinction you've identified. Tom, would you like to add anything?

Sure. So here are some key figures, Brian. We incurred 350, of which 297 has been paid. Essentially, about 300 has been disbursed in cash. This leaves a remaining cash amount of 300, although it's important to note that some of this will be financed through capital leases. So, 300 is a significant figure that we still have to account for. As Mitch mentioned, we've updated the timing of invoices, and we expect about 155, or roughly 150, to be processed in the second half of the year. The projections for next year remain unchanged.

And then Brian, just to circle back real quick. The multiple levers, if there's 300 million or so to go, the same kind of levers we've been talking about, still exist, right? There's the cash, there's the revolver capacity, there's the other equity investments. And then there's the free cash flow from our other operations, which are underpinned with the gold hedges that Tom detailed. So you add all those up together. And you compare that to what's left to go there at POA 11. And we feel good about where we sit and we know the levers we have and ones that we can pull if and when we need to.

That is very helpful. I appreciate it, as I was always trying to figure out the timing and whether it was over budget. Regarding the 600, normally working capital isn't always included in these projects. Do I need to worry about the timing of working capital on top of that? It will obviously ramp up over time and require funding. Should I consider anything on that front as well?

We're in the middle of the '23 budgeting process where we’re factoring in all the various ramp-up scenarios, when’s the Merrill-Crowe done, et cetera, et cetera. So at this stage, we don't have anything further but that '23 guidance will be very clear about expected timing ranges of cash costs for next year, et cetera, et cetera.

On that second-half commissioning.

Yeah.

I'm imagining there's some pad buildup, but there are also aspects related to fresh liner. We will address a few things as we progress through our budgeting and set guidance, and we will make sure to clarify that part, Brian.

Great. That's very helpful as well. And maybe just following up on the other question on Silvertip, because I sort of was looking at it the same way. I mean, at one time maybe you were thinking ‘25, maybe ‘26 getting stuff in. It sounds to me like a bigger project, going to take some time to figure it all out, against that is obviously time value, money. If you keep pushing it back and back before developing it, eventually that factors into it. But should I sort of think about a '26, '27 timeframe? Is that sort of what you're thinking right now to get all the work done for Silvertip, which would then, as you said, give you that gap to pay down debt and potentially return money to shareholders? Is that a fair way to think about things now?

I would provide a specific answer if I had one. The reality is that none of us do at this moment, but conceptually, that seems much more likely than a transition from POA 11 to Silvertip. Considering the commissioning and ramping up of POA 11 in the latter half of 2023 positions us well for a strong 2024. If our goal is to generate some free cash flow and reduce debt, this gives you an idea of how many additional years we might expect to avoid incurring significant capital at Silvertip. I hope this provides some insight into our current thoughts. Additionally, a larger project will require a different permitting process, which will also take extra time during that period.

Sorry, that was going to be my next question, so I'll give it up. That was my last question. Considering all this discovery, is there a lot of new permitting that needs to be done? I understand the interest in another hub and spoke. How much would be in areas that are already developed? As you mentioned, it progresses quickly, but how much time would you actually need to spend on permitting?

Okay. So from an exploration perspective, we are in good shape and we have got access to all those areas to be able to go and investigate. From an operational perspective, if we expect to put a plant in place that's twice the size or bigger, then we are going to need an environmental assessment, and that takes some time. We have actually already started some of that work to understand what that looks like and the timelines for that. And as we progress that planning, then we will share that. But as Mitch said, it's exciting. It's growing, and we will have to plan that out and get this right-sized.

Thanks. Does that help Brian?

It does. Thank you very much for answering all my questions. I appreciate it.

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

Okay, thanks. Before wrapping up. I just want to quickly thank all of our employees and contractors for everybody's terrific work and dedication and resilience. I'm so proud of everyone's effort, and seeing the impact you all are having as we continue to pursue a higher standard and turn Coeur into America's premier growing precious metals company. So with that, thank you for joining the call today and we'll speak again with you in early November to discuss our third quarter results. Have a good day. Thanks.

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