Earnings Call Transcript - CDE Q1 2024

Operator, Operator

Good morning and welcome to the Coeur Mining First Quarter 2024 Financial Results Conference Call. Please also note that this event is being recorded today. I would now like to turn the conference over to Mitch Krebs, President and Chief Executive Officer. Please go ahead.

Mitchell J. Krebs, CEO

Okay. Hello, everyone, and thanks for joining our call. Before we start, I want to point out our cautionary language on forward-looking statements in today's slide deck and refer you to our SEC filings on our website. I'll kick off with some brief highlights on Slide 3 before turning the call over to Mick, Tom, and Aoife. Overall, we had a solid first three months of the year, both Palmarejo and Wharf had strong quarters compared to plan, which puts the company in a great position for a successful 2024. Slide 4 does a nice job of showing where production stood after the first quarter compared to the quarter-by-quarter guidance profile we provided earlier this year. We often talk about the strategic importance of being a multi-asset company and having a balanced portfolio of operations. The first quarter was a great example of that. Palmarejo and Wharf's outperformance helped to offset Rochester's planned transitional quarter over to the new crusher, which began to process fresh ore on March 8. Commercial production was achieved just three weeks later, which was a great accomplishment, but what's been happening underneath the hood leads to our excitement for the balance of 2024 and beyond. More on Rochester in a minute. On a company-wide basis, overall revenue increased 14% year-over-year, while adjusted EBITDA jumped 76%. Capital expenditures dropped off significantly during the quarter with the Rochester expansion now behind us. We're on track to flip to positive free cash flow in the second half of the year, which will be earmarked for debt repayment. That deleveraging process can be further accelerated assuming current silver and gold prices continue leading to a rapid and dramatic improvement in our overall financial condition and outlook. In the middle of all these positive catalysts, Rochester is routinely processing and placing over 70,000 tons of ore per day and occasionally exceeding run rate throughput levels as we put the new crushing circuit through its paces. The rapid ramp-up curve is a real testament to the knowledge and operating experience the team is bringing to bear at this world-class operation. Before turning the call over to Mick for some additional Rochester details, I want to touch briefly on our progress and plans at some other key initiatives expected to augment the near-term growth we anticipate from Rochester. First up is Kensington, which is in its final full year of elevated investment aimed at extending its mine life and enhancing its operational flexibility. Positive exploration results and impressive underground development progress are pointing to the potential for a substantial mine life extension by the end of this year, which Aoife will talk more about in a few minutes. Over the medium term, we continue developing a comprehensive drilling and development plan at Palmarejo on the recently acquired lands located to the east of the current operation. The goal is to hit the ground running once the acquisition of these concessions from Fresnillo is completed, hopefully, later this year. The nearest of the two acquired blocks to Palmarejo's existing infrastructure sits just outside the boundaries of the Franco-Nevada gold stream and has the potential to materially supplement our production and cash flow profile within the next three years. Over the longer term, excitement continues to build at our high-grade Silvertip polymetallic exploration project in British Columbia, which Aoife will cover shortly. The convergence of all of these catalysts, higher commodity prices, a completed Rochester, a stable suite of U.S.-centric mines in North America and a world-class Canadian exploration project set us apart from our peers and leave us very well positioned. Finally, we published our 2023 ESG report last week, which is summarized on Slide 16. The report does a great job detailing our leadership in this area and highlights our efforts to continue raising the bar as we try to pursue a higher standard. With that, I'll turn the call over to Mick.

Michael Routledge, COO

Thanks, Mitch. Before reviewing our first quarter operating results, I'll recommend spending some time with Coeur's 2023 ESG report, if you haven't already. While Rochester's construction was a significant priority over the last three years, I'm an operator at heart, and experience has told me that building a very strong foundation in sustainability, responsibility, and safety delivers operational success. In addition to the strong points Mitch highlighted, I'm particularly proud to call attention to two headlines from the ESG report. First, our #1 position among our peer group in key safety indicators for the second year in a row. And second, our decision to adopt the global industry standard on tailings management, one of only 17% of non-ICMM member companies in the industry to do so. Making the right decisions is not always easy, but it is the right thing to do, and we'll continue to dedicate ourselves to leading in both these areas. Turning to our quarterly results, we are pleased with the solid start to the year. Our projections illustrate that 2024 production is expected to be significantly weighted towards the second half, consistent with the production guidance we've provided earlier this year. Improvements at Wharf and day-to-day operating enhancements will drive most of that change in quarterly production. Staying with Rochester, silver and gold production in the first quarter totaled nearly 700,000 ounces and about 5,800 ounces, respectively, right in line with our expectations. Following the fourth quarter of 2023, we dismantled the Stage 4 crusher, which has allowed us to focus on commissioning the new crusher and starting to place more ore into cellars using only crushed ore from the new circuit, which commenced on March 8. The crushing circuit is functioning as planned, and we're maximizing our use of refined operations. What has really stood out is the tremendous flexibility of the new free stage line, allowing stockpiling and ore feed to bypass certain stages, giving the team unprecedented levels of control over our ultimate size reduction of the ore. Mining rates and refining capacity are more than keeping up with the increased throughput. Looking ahead, we remain on track to conclude the ramp-up by the end of the second quarter. The priority in the second half of the year will be on optimizing mining and processing rates and refining the push size to maximize recoveries. Rochester remains poised for 2024 gains. It's an exciting time, and we are pleased with our progress, while we remain focused on the work needed to properly position this operation for its long run in Northern Nevada. Moving on to Palmarejo on Slide 23, the team hit the ground running in the first quarter, achieving its highest quarterly gold and silver production levels in several years. Higher-than-expected growth from Guadalupe drove strong quarterly free cash flow and positions us well for the rest of 2024. Continued high inflationary pressures in Mexico and other input costs have been a challenge. The team is focusing on mining and plant efficiency programs aimed at reducing costs while navigating continued inflation in Mexico. Moving to Kensington, our focus in the first quarter was on stabilizing the operation following the challenges of 2023 as our multi-year investment in mine development continues. Mitch mentioned the positive results on that front, with that investment now about 71% complete for the current scope of the project. We see a clear path to a substantial mine life extension and, perhaps more importantly, to the prospect of increased work phases evolving with more consistent performance. Finally, we achieved results ahead of plan, benefiting from recent operational success. Due to seasonality, the first quarter is typically the lowest of the year, so we are particularly pleased with our strong start to 2024. With three mines performing well, and Rochester well positioned to complete its ramp-up, we remain comfortable with our 2024 production guidance. With that, I'll pass the call over to Tom.

Thomas Whelan, CFO

Thanks, Mick. I'll briefly touch on our first quarter financial results before discussing our financial position and balance sheet, including our plans to materially deleverage beginning in the third quarter. As detailed on Slide 9, higher year-over-year gold production led to a 14% increase in consolidated revenue and a 76% increase in adjusted EBITDA, driven by the strong start at Palmarejo and Wharf, alongside continued favorable metals prices. As expected, we had lower Q1 production at Rochester due to the decision to dismantle the Stage 4 crusher during Q4 2023. The dismantling of the Stage 4 crusher is now complete, providing access to higher grades from the Yankee pit. Turning to costs on Slide 11, we continue to see moderating inflationary pressures across our U.S. operations; however, inflationary pressures in Mexico persist. Costs in Mexico have also been affected by the continued strong peso. Operating cash flow during the quarter was impacted by two one-time payments totaling $22 million, including the annual EBITDA mining tax in Mexico and the company-wide 2023 annual incentive payouts, along with an $8 million semiannual interest payment on our senior notes. Regarding the balance sheet, the company is poised for a sustained period of positive free cash flow following the successful ramp-up at Rochester, as Mick described earlier. Capital expenditures at Rochester were approximately $20 million during the first quarter, a $45 million decrease from the average quarterly Rochester CapEx in 2023, contributing to the lowest quarterly capital expenditures level at Coeur since Q4 2020. As noted on Slide 12, we ended the quarter with an improved net debt-to-EBITDA ratio of 3.2x and approximately $225 million drawn on our $400 million revolving credit facility. We expect to draw further on the revolver during the second quarter as we await the breakthrough of silver ounces at Rochester. However, beginning in Q3, the company aims to begin aggressively paying down the revolver and our prepaid gold sales agreements as we drive toward achieving our long-term leverage targets of total debt-to-EBITDA of 1x and net debt-to-EBITDA of minimal. While our work is not yet done, we entered 2024 as a significantly stronger company with improved flexibility to fund our robust asset portfolio and maximize our potential in a strengthening commodity price environment. Two final important reminders: no at-the-market programs are currently in place, and the company's remaining hedges roll off at the end of Q2, coinciding with Rochester's ramp-up to full nameplate capacity. I'll now pass the call to Aoife.

Aoife McGrath, Chief Exploration Officer

Thanks, Tom, and good morning, everyone. To continue the good news story presented by Mitch, Mick, and Tom. Exploration is off to a great start in 2024. A key highlight of this quarter is the drilling at Kensington, where the program is going very well, and the rigs are outperforming relative to budgeted footage. At lower Kensington, the recently identified Zone 50 is being traced over additional strike length and is continuing to be a focus for exploration to add to mine life in the very near term. In Upper Kensington, results from already outlined portions of Zone 30 continue to impress. Excitingly, potential for new parallel zones has recently been identified and is being investigated. At the nearby Elmira deposit, infill and extension drilling continued to intersect wide and rich zones, especially in the upper portions of the deposits. There is high confidence that inferred resources here will be converted this year. By the end of 2024, we anticipate extending mine life to approximately five years, representing roughly a doubling since the start of the program two years ago. At Rochester, drilling commenced early in the second quarter with the program there designed to test high-grade potential on recently identified structures around the Rochester pit. Preparation work for drilling at Nevada Packard, located south of Rochester, is also well underway. At Silvertip, we began the year with a comprehensive project review that included one of the world's foremost carbonate replacement deposit experts. Significant leaps forward are being taken in our understanding of the controls to mineralization, and this new knowledge is guiding the planning for Coeur's busiest summer program ever. We aim to drill much more aggressive step-outs from known deposits and to identify high potential targets. Ultimately, the goal is to ensure rapid resource growth over the next few years to allow a restart decision on this world-class high-grade deposit. At Palmarejo, our aggressive 2024 programs are well underway, with a key focus on scout and expansion drilling across the district to fast-track the growth of our inferred pipeline. This will include scout drilling on three new targets outside the area burdened by the Franco-Nevada stream. At Wharf, we're finalizing preparations for brownfield drill programs aimed at adding very high returns to our mine life. With that, I'll hand the call back to Mitch.

Mitchell J. Krebs, CEO

Thanks, Aoife. Before moving to the Q&A, I want to quickly highlight Slide 13 that summarizes our top priorities for the remainder of the year. Following every conceivable challenge thrown our way, we've arrived at this inflection point that we've been working towards for almost four years. With the safe ramp-up and optimization initiatives at Rochester remaining a top priority, we will continue pursuing the opportunities at our other assets that I mentioned earlier. As we reach the free cash flow inflection point in the second half, we look forward to beginning the deleveraging process and ending the year with a lot of momentum as we head into what should be a very strong 2025. Our U.S.-centric, exclusively North American precious metals assets offer investors a unique investment proposition that is extremely well positioned for success, particularly in this current metals price environment and with silver supply-demand fundamentals better than I’ve ever seen them. With that, let's go ahead and open it up for questions.

Operator, Operator

Our first question will come from Michael Dudas with Vertical Research Partners.

Michael Dudas, Analyst

I have three quick questions. First, Mitch, relative to Rochester, it seems like things are going quite well, you're hitting some milestones. As you reach the end of Q2 milestones, how do you feel about productivity and getting to a more normalized basis on this mine given all the changes that have occurred over the last three years?

Mitchell J. Krebs, CEO

Yes. I'll hand that one over to Mick in a second, but I think it's fair to say that as we get into the second half of the year at that run rate of around 88,000 tons a day, there'll still be a lot of optimization work to do, particularly around crush size to ensure we reach our intended 5/8-inch average product size onto the new Stage 6 leach pad. There'll be some fine-tuning, but we will still experience a significant drop-off in our cost structure, driven mostly by the volume pickup. Hopefully, we'll head into 2025 with some of those tweaks behind us, allowing for further improvements in productivity and cost. Mick, did I leave anything out?

Michael Routledge, COO

It's good. Q2 is really about steadily running at that average rate of 88. We're already seeing that we can run a little bit higher than that, which gives us the opportunity to study that rate out at 88,000 tons for the second half of the year. As we dial in the crush size, we're aiming for the technical report, which detailed a five-year plan, and we have confidence that we should be able to successfully execute this throughout the second half of this year. If everything aligns, we should land on the recovery curves and performance that we expected.

Michael Dudas, Analyst

Secondly, regarding Palmarejo, I am encouraged about some of the activities you're doing there on the exploration front. What are your thoughts on the opportunities outside the royalty boundary, which would be very helpful given current gold prices?

Mitchell J. Krebs, CEO

Yes, we share your excitement. There are three levels of opportunities in my mind. First, there's the extensional work right to the east of the Franco-Nevada property line or the AOI boundary. These are extensions of resources like Nacion and Independencia where we are currently mining. This represents more near-term opportunities. Next, if you move further to the east, we acquired a large resource from Paramount Gold and Silver in 2015, which is in the Guazapares area. In the medium term, we plan to twin some of that historical drilling to get a resource onto our books. Longer-term, our team has been busy sampling, mapping, and developing some drill targets that represent significant opportunities for new sources of production to the east. Aoife, do you have anything to add?

Aoife McGrath, Chief Exploration Officer

No, I think you've fully covered it, Mitch. Yes, there are definitely short, medium, and long-term opportunities available. It’s a typical case in exploration; until the foundational work is done, we cannot fully understand the cost and activity involved. We've been very busy over the past two years with mapping and sampling. As we learn more about the area to the east, we're seeing similar levels of prospectivity as we observe in the current project. So, we are pleased with how this is progressing.

Michael Dudas, Analyst

Appreciate that. Lastly, good to see the hedging roll off in Q2. Given the current prices, what are your thoughts on any hedging potential going forward?

Mitchell J. Krebs, CEO

Our current thinking on this, Mike, is we had hedges in place during the construction of the Rochester expansion to provide an insurance policy as we navigated this capital-intensive phase. Currently, we have no hedges beyond the end of Q2 and no immediate plans to add any, at least as things stand today. Tom, do you have anything else to add?

Thomas Whelan, CFO

No, that's correct. People understood the need on both sides, for our equity holders and creditors. Everyone understood the importance of hedging, but once the ramp-up is complete, we have no plans to continue that.

Operator, Operator

And our next question will come from Mike Parkin with National Bank.

Michael Parkin, Analyst

I have a couple of questions mostly tied to Rochester. Are you seeing any labor tightness at Rochester, similar to what Barrick is talking about in Nevada?

Mitchell J. Krebs, CEO

Yes. We discussed this earlier this morning; we've had to add some personnel due to this expansion, although not a substantial number. Our team has not faced extreme difficulties filling most roles. However, we do see some challenges with skilled trades such as electricians, mechanics, and welders, as other industries are also competing for these trades. Regarding Rochester, we have been quite successful on the labor front. Mick, do you have anything you'd like to add?

Michael Routledge, COO

We've had an efficient expansion, with only a 20% increase in headcount, and we managed to onboard new hires early to support operational readiness. This has allowed for a very smooth ramp-up. We’re seeing some typical turnover, especially for specialist skills like electrical work, but nothing is causing significant concern.

Mitchell J. Krebs, CEO

There's a lot of excitement at Rochester, as you can imagine, with a good mine life ahead, a strong culture, and a long track record in the community. This all contributes to a workforce that enjoys their work here, which is a significant asset.

Michael Parkin, Analyst

You took down the old crushing circuit to access better grades. Can you provide insight into what you'd expect to be stacking on a blended grade basis? Will that improve over the year?

Mitchell J. Krebs, CEO

This year, now that we're in the Yankee area, we have higher-grade material available, particularly on the silver side. This was a major incentive for getting into that ex-pit area when we did. We're prepping that area for mining in 2024, and the grades appear to be as advertised. You will see improvements in the silver grade profile compared to previous years based on our access to the Yankee zone.

Michael Routledge, COO

That’s accurate. While the gold grade at Rochester tends to be inherently low, we expect a decent boost in the short term from the Yankee area. We're looking forward to seeing that material move through the system.

Michael Parkin, Analyst

Regarding your leach curves, gold is typically steeper than silver. When do you expect to achieve a steady state recovery rate? Should we assume it takes a few more quarters after achieving maximum throughput around quarter-end?

Mitchell J. Krebs, CEO

That's a great question. I would expect by the third quarter, when we’re on the call to discuss Q3 results, we'll have some data to share about recovery rates. By year-end, we should have even more visibility.

Michael Routledge, COO

Yes, exactly. We anticipate steady recovery on both silver and gold through 2025 as we optimize operations.

Operator, Operator

Our next question will come from Kevin O'Halloran with BMO Capital Markets.

Kevin O'Halloran, Analyst

Could you clarify the LCM adjustment at Rochester? Was that included in this Q1 LCM adjustment, or should we expect it in future quarters?

Mitchell J. Krebs, CEO

Tom, do you want to take that?

Thomas Whelan, CFO

Yes, we added approximately 900,000 ounces of silver and 6,000 ounces of gold. We updated our model as a change in estimate and recorded that in Q1. The LCM would have been much higher had we not made that adjustment. The team gathered sufficient data and confidently supported higher recovery curves on historic pads for 2024. There may be another adjustment in Q2, depending on silver prices and how quickly we start to see that silver flow through, but definitely no adjustments post-Q3.

Kevin O'Halloran, Analyst

Great. Can you comment on where you're looking for upside at Rochester concerning the grade profile, beyond this year?

Mitchell J. Krebs, CEO

Great question. In 2024, our budget for Rochester is around $9 million, a significant increase compared to recent periods, given our focus on the expansion's construction. In the past, we had limited focus on the area around Rochester; however, we've recently developed a broader vision for the region. Aoife's leadership over the last few years has propelled our thinking towards potential higher-grade materials on our existing land package. Most of our focus now is on the eastern side of the existing pit, an area called East Rochester. About three to five miles south of the Rochester pit is a historic mining area called Nevada Packard, and we believe there is potential for some higher grade there as well.

Aoife McGrath, Chief Exploration Officer

To reiterate, the mine life between those two pits is phenomenal. We're now looking more seriously at the area between them, and our improved geological models are showing potential for higher-grade materials. Most of our investigations will focus on the permitted area already identified. We're increasing our understanding of the geology every day, positioning ourselves well given the runway we have with this mine ahead of us.

Michael Routledge, COO

Additionally, there's a potential area underneath our old leach pad, referred to as the wedge. It’s currently designated as waste, but we're cautiously optimistic based on recent horizontal drilling results suggesting it may be higher grade than previously accounted for in the plan.

Operator, Operator

Our next question will come from Joseph Reagor with Roth MKM.

Joseph Reagor, Analyst

I did have a question regarding cash flow for Q1; there was a $55.2 million impact from deferred revenue recognition. What was driving that? Should we expect that to be lower in the quarters ahead?

Mitchell J. Krebs, CEO

Tom, do you want to cover that?

Thomas Whelan, CFO

Sure. In the financial statements, you’ll see references to some gold prepaid activity. We had a prepaid element at Kensington, which we use to manage short-term working capital. Last year, we also added prepaids at Rochester and Wharf. It’s a method to smooth out working capital as we've gone through this period of expansion. We renewed our prepaids, carrying $55 million outstanding at the end of December. We paid that back and then drew down on it again. This was a helpful way to manage working capital, particularly given the first quarter has three lump payments, and we anticipate that these balances will decrease in the second half as we generate free cash flow.

Joseph Reagor, Analyst

Thanks for that. About the overall company performance in Q1; it seems like you're ahead of your plans, and the guidance at Rochester is still a bit wide. Will you tighten that up later this year?

Mitchell J. Krebs, CEO

That’s a fair point, Joe. As we move past the second quarter with the run rate at Rochester, refreshing Rochester's full-year guidance makes sense. You can expect that probably as we consider third-quarter results.

Operator, Operator

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

Brian MacArthur, Analyst

Can you review your NOLs and tax pools in the United States? As Rochester ramps up and generates cash, with Wharf and Kensington in the U.S., will most of that be reflected on the bottom line?

Mitchell J. Krebs, CEO

Absolutely, it’s an often-underappreciated asset that we will start to utilize. Tom, could you update Brian on this?

Thomas Whelan, CFO

Yes, there are over $630 million of NOLs, so we won't be paying any federal income tax in the near future. You should be forecasting zero federal income taxes for the foreseeable future. We do pay tax in Nevada due to state taxes and a small amount at Kensington as well, but nothing material.

Brian MacArthur, Analyst

Regarding Nevada, do you pay taxes, or do you get to credit all the capital you've just spent?

Thomas Whelan, CFO

We have a Nevada net proceeds tax that we will start paying right away.

Operator, Operator

This will conclude our question-and-answer session. I would now like to turn the conference back over to Mitch Krebs for any closing remarks.

Mitchell J. Krebs, CEO

All right. We appreciate everybody's time today and look forward to speaking with you all in August to discuss our second-quarter results. Have a great rest of the day. Thanks again.

Operator, Operator

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