Earnings Call Transcript - CDE Q1 2023

Mitch Krebs, President and CEO

Good day, everyone. Before I begin, please note our cautionary language on forward-looking statements in today's slide deck and refer to our SEC filings on our website. I'll start with the main highlights on Slide 3 before turning the call over to Mick and Tom. Our results were slightly ahead of expectations, driven by a strong start to the year at our Palmarejo, Rochester, and Wharf operations, which offset a weaker quarter from our Kensington mine. As we have said, the first quarter is typically our softest quarter of the year due to weather and one-time payments. Overall, we remain on track to deliver on our full year guidance, which reflects a much stronger second half. That stronger expected second half is mostly driven by the post-expansion ramp-up of our Rochester mine in Nevada, which remains on track for mid-year construction completion. We are currently in the middle of the final quarter of elevated capital spending, making the final push to wrap it up and the balance sheet remains well-positioned to deliver what remains to be spent. Seeing the goal line at Rochester just ahead represents a key inflection point for the company, as we anticipate capital outflows to decline, silver and gold production levels to rise, and cash flow to begin increasing. The Rochester expansion has represented a significant investment for the company and will result in one of the world's largest open-pit heap leach operations. The team has done an amazing job, especially considering everything they have managed through. The project kicked off in May of 2020, was advanced throughout COVID-related restrictions, faced constant logistical and supply chain disruptions, battled decades-high levels of inflation and labor shortages, and most recently, experienced one of the most extreme winters in recent years in Northern Nevada. Despite all of that, the team achieved mechanical completion of the Merrill-Crowe processing facility ahead of schedule during the first quarter, and even more impressively, the project is now approaching 2 million hours without a lost time incident. Turning to exploration for a few minutes. At Kensington, our development and drilling program that kicked off mid last year is still in its early days but is having the intended results of adding near-term mine life, accelerating the amount of underground development, and identifying new targets for future drilling. Following an impressive 56% increase in gold reserves in 2022 that added a year and a half of mine life, recent drilling is indicating further extensions of several new zones in Upper Kensington, which bodes well for further mine life extensions. At Silvertip, the team completed the longest-ever drill hole at the site during the first quarter measuring about 1 kilometer. Results, particularly in the final 250 meters or so, have shown an increase in the occurrence of intrusive porphyry, suggesting the proximity of a heat source. It's also notable that we are seeing signs of other critical minerals including indium, germanium, and gallium as we continue enhancing our overall geologic understanding of the deposit. We believe the ultimate scale and nature of the Silvertip deposit is very exciting and represents significant potential value. However, our near-term priorities are to successfully commission and ramp up Rochester, generate free cash flow, and deleverage the balance sheet. We believe this is the right sequencing of priorities and will give the Silvertip team time to further grow and better understand this world-class orebody. The ongoing exploration success at Kensington and Silvertip underscores the effectiveness of our multi-year drilling programs in which we have invested approximately $245 million over the past 5 years to extend mine lives and build the pipeline for future growth. That investment added roughly 2 million gold equivalent ounces of reserves and just over 4 million gold equivalent ounces of resources. Those ounce additions delivered during a time when much of the industry was under-investing in exploration represent increases of 34% in reserves and 60% in resources. Before passing the call to Mick, I want to briefly touch on the recently enacted changes to the Mexican Mining Law. We are still assessing the full impact. It's obviously drawn strong opposition and is likely to face legal challenges. It appears the changes relate to new concessions as opposed to existing concessions like those at Palmarejo. We will obviously continue to engage in discussions with the government as the regulations supporting these changes are developed in the coming months. Finally, I want to briefly mention our recently published ESG report, which outlines the results we are achieving to maintain Coeur's reputation as a leader in advancing environmental, social, and governance practices. With that, I'll now turn the call over to Mick.

Michael Routledge, COO

Thanks, Mitch. Before discussing the operational results, I want to quickly add to Mitch's comments on ESG. Always mindful of our mission to pursue a higher standard, we are committed to operating safely, maintaining best-in-class governance practices, being responsible stewards of the environment, and fostering strong relationships in the communities where we operate. The numbers in the latest ESG report back up that dedication. Coeur's three-year trailing average in total reportable injury frequency rate decreased by 18% in 2022 to a record low. We achieved an 8.5% reduction in GHG emissions intensity compared to the baseline, on track to meet our stated goal of a 35% GHG emissions net intensity reduction by the end of next year. These milestones and many others we achieved this year reflect not only our commitment to Coeur ESG principles but highlight the overall improvement in every facet of our business. Turning over to our quarterly results. We are pleased with the start to the year and expect the company's 2023 production to be significantly weighted towards the second half, consistent with our production guidance we provided earlier this year. We guided towards a seasonally weaker first half in 2023 for the reasons Mitch mentioned earlier. Getting into more detail of the quarter on Slide 6 and starting with Palmarejo. Production was ahead of expectations for the quarter, thanks to higher silver grades and a very strong contribution from La Nación. Easing diesel prices, coupled with mill feed optimization efforts that led to reduced consumable consumption, drove lower operating costs for the quarter. The strengthening peso led to some upward pressure on costs in the latter part of the quarter. Overall operating costs decreased by 10% on gold and 2% on silver. Palmarejo continues to focus on mining and plant efficiency programs aimed at further reducing costs and increasing recoveries while maximizing mining rates. Moving on to Rochester, better-than-anticipated production was driven by continued positive residual effects of the solution breakthrough experienced in the last quarter, as well as continued benefits of site slope irrigation on Pad 4. As Mitch mentioned, the story of Rochester's first quarter was weather. Rain, snow, and massive temperature swings throughout the Western U.S. challenged the team from start to finish. Looking ahead, we anticipate continued strength in metal recoveries to offset lower weather-related ore placement in the first quarter, helping to keep Rochester on track for 2023 guidance. Despite the weather, we continued placing more ore on new Pad 6, with an expectation to place over 2 million tons on Pad 6 before starting the pre-leaching process towards the end of the second quarter, setting the mine up for a strong third quarter as previously discussed. As seen in the latest photos showing POA 11 construction, the project is currently at peak levels of activity. With mechanical completion of the new Merrill-Crowe facility, our focus is now on ramping up the system, culminating in first solution through the Merrill-Crowe expected around the end of the current quarter. Advancing the new crusher circuit remains the critical path item. Steel erection and equipment setting for the pre-screen is now well underway, and good progress continues to be made on conveyor erection as well as piping and electrical installation along the entire mile-long crusher corridor. Poor weather affected nearly every aspect of the project during the quarter, hampering the team's ability to move equipment, material, and personnel. These issues have placed some pressure on our total expected capital cost, and we anticipate the project to be at the high end of our guidance range around $670 million. All parts and materials for the crusher assembly are on site and we do not anticipate changes to the overall project construction completion. Turning over to Kensington where we experienced a slow start to the year. Reduced availability of drills, bolters, and the paste blend created mine sequencing issues leading to lower gold production in the quarter. The team is working successfully to catch up on paste placement, which is improving heading availability. We anticipate bridging most of the shortfall over the next two quarters. Lastly, at Wharf, results were slightly ahead of plan with the first quarter benefiting from higher grade material placed earlier in the year. The site team is doing a great job controlling costs. Along with the decline in diesel prices, per ounce costs were lower than anticipated. With three mines performing well and Kensington working hard to catch up over the next couple of quarters, we remain comfortable with 2023 production guidance of between 320,000 and 370,000 ounces of gold and 10 million to 12 million ounces of silver. With that, I'll pass the call over to Tom.

Thomas Whelan, CFO

Thanks, Mick. I will quickly run through our first quarter financial results and then provide a snapshot of our financial picture during the home stretch of the Rochester expansion. As outlined on Slide 4, despite lower gold production compared to a year ago, revenue was essentially flat versus the first quarter of 2022 as we benefited from stronger metals prices. Turning to costs on Slide 5, we saw signs of easing costs among three of our four largest cost buckets, which gives us optimism that inflation may finally be moderating. Finally, it is important to note that the first quarter financial results contain two one-time annual payments totaling $23 million related to the payment of the annual EBITDA, mining tax in Mexico, and the company-wide 2022 annual incentive payouts, both of which impacted our financial results. Turning over to Slide 7, we've consistently referred to this current period at Rochester representing the peak level of capital intensity. We are today at the peak of the peak, representing the heaviest period of investment with nearly $1 million per day being spent during the first half of 2023 at Rochester. As of March 31, approximately $634 million or roughly 95% of the total expected project costs have been committed with about $560 million incurred. All of our proactive balance sheet management initiatives over the last couple of years have prepared the company for this moment. As shown on Slide 12, we have total liquidity of $382 million, and we have a significant layer of downside price risk mitigation in place for the remainder of 2023 via our metals hedges. We're confident these actions provide the necessary flexibility to complete the Rochester expansion while also advancing other key near-term growth catalysts including development and drilling program taking place at Kensington. I'll now pass the call back to Mitch.

Mitch Krebs, President and CEO

Thanks, Tom. Before moving to the Q&A, I want to quickly highlight Slide 14 that summarizes our top priorities for the remainder of the year. We're now finally at the cusp of a major inflection point that we've been working toward for about three years. Our clear and critical priority during the remainder of the year is to safely and efficiently finish up what remains to be done at Rochester and successfully ramp it up during the second half of the year. In addition to Rochester, we also need to deliver results across the rest of the portfolio while investing in high-value exploration priorities, especially at Kensington, to set us up for higher returns as these new ounces are monetized in future periods. At Silvertip, we will continue enhancing our understanding of this prospective deposit and seek to further expand its size before revisiting how best to generate maximum value from this asset. And two quick final points, I want to highlight that this year represents Coeur's 95th year since it was incorporated. Not a lot of companies are fortunate to be around to celebrate 95 years. We are very proud of Coeur's long history as an American mining company and very much look forward to what lies ahead. Another celebration taking place here at the company this year is Wharf's 40th year in operation. There's one employee, Mark Schmeling, who has worked at Wharf his entire four decades, so he's celebrating his 40th work anniversary this year. Mark was Wharf's employee number one back in 1983 just before the mine began to operate with an initial mine life of three to five years. Fast forward to today and Wharf's mine life currently stands at 8 years, three years longer than when we acquired it back in 2015 from Goldcorp. Congratulations to Wharf and to Mark, and thank you. With that, let's go ahead and open it up for questions.

Mark Reichman, Analyst

Good morning and thank you for taking my question. So the first question is, the company did not provide any cost applicable to sales for 2023 at least for Rochester. And I was just wondering, now that you have kind of the first three months at Rochester, looking at those numbers post on an adjusted cost applicable to sales, gold and silver, what are your thoughts kind of for the remainder of the year in terms of the cost applicable to sales at Rochester based on the first quarter results?

Mitch Krebs, President and CEO

Yes. For the first quarter, we are in line with plan. We will have a lot of noise here in the next two quarters, which is really the driver behind that decision to wait to put out cost guidance for Rochester until this summer. Tom, do you want to go through just a few of those moving parts in terms of the noise that we will be seeing here in the next couple of quarters at Rochester?

Thomas Whelan, CFO

So Mark, expect guidance to be issued alongside the Q2 results. One key issue is where all the gold and silver will come from over the next three quarters. For example, a lot of our gold is coming from Stage 4 residual, meaning ounces and tons that were placed last year. This quarter, we have a mix; roughly half the tons went on the old Stage 4 leach pad and the other half went on the current Stage 6 leach pad, which Mick is busy ramping up and preparing for commissioning in the second quarter. Going forward, all tons placed will go onto Stage 6. However, those tons will come from the Stage 4 ex-pit crusher. Around mid-year, when the whole package is complete, we will start to see tons coming from the new crusher. Expect full guidance to accompany the second quarter.

Mark Reichman, Analyst

And then just a follow-up to that. In terms of Rochester, I know kind of where this tonnage is getting staged and all that. There's going to be some lumpiness in the quarterly numbers here and now. But would you kind of expect the third quarter to be your strongest in terms of Rochester? Kind of how are you thinking about the quarterly profile relative to the annual guidance at Rochester?

Mitch Krebs, President and CEO

Yes, good question. As Tom mentioned, the first quarter gained some advantages from the previous Stage 4. However, we expect this to decline somewhat in the second quarter. In the third quarter, we anticipate a significant increase due to the initial leaching of the fresh ore from area 6, which should lead to the highest production quarter of the year at Rochester because of this initial surge in output. Meanwhile, we will be working swiftly and methodically to increase the crushing rates in the latter half of the year, aiming to finish the year close to a crushing and stacking rate of over 30 million tons per year. Mick, is there anything I missed that could help clarify Mark's question?

Michael Routledge, COO

Yes, it was primarily about getting the heap leach in the Merrill-Crowe ready for pre-commissioning, and we anticipate commissioning towards the end of this quarter. This is the main reason for the production boost in the third quarter. At the same time, we're working on the crusher corridor to prepare for future tonnage. We expect to have around 2 million tons ready for pre-leaching, and we're almost at that point now. By the time we begin operations at Merrill-Crowe, we anticipate having about 3 million tons in total, according to our plan. Everything is proceeding as planned at this moment.

Michael Siperco, Analyst

Maybe if I could just follow up on that question about the ramp-up at Rochester. Maybe I'm not understanding. I hear you when you say that the third quarter should be the strongest. But if on a go-forward basis all of the ore is on the new pad, shouldn't we expect to see a gradual increase into the end of the year and then into 2024, or what am I misunderstanding there?

Mitch Krebs, President and CEO

No, that's okay. Mick, do you want to…?

Michael Routledge, COO

Yes. So, as we construct the base of the heap leach pad before we put it into operation, we'll have to put some higher size fraction in there to make sure that the French drain works really well. But we're effectively loading several million tons of material on there before we put any kind of cyanide leach irrigation onto it. So when we start that process, that's going to give with that wave of additional ounces in Q3, but that will drop back as we then finish off the construction of the crusher, the main crusher, the Leadman crusher, and then we bring that in. But as you appreciate with any large-scale capital project like this, there is a ramp-up curve. And we expect to be driving up that ramp-up curve across that second half of the year. And as we do that, then we will load more and more tons onto that heap leach pad. And that will gradually build Michael for sure, but we should see a lift in Q3. It will dip back down a little bit and then we will see that gradual ramp up through the end of the year into 2024.

Michael Siperco, Analyst

Okay, so it's a shorter leach cycle for that initial material that you are putting on. And then as that grows, then you will get into the more typical leach cycle. Is that the right way to look at it?

Michael Routledge, COO

So typically, you get the best benefit from your material on pad in the first 60 to 90 days. So yes, we will see that for all of that material that we have placed in the normal operation, you will be placing that continually and then seeing each of those blocks drop off. But with this, we are placing it all before we start. So you get that all at once and then beyond that the normal cycle.

Michael Siperco, Analyst

Clear enough. Thank you for that. If I could switch gears for a second and ask about liquidity, very clear in the presentation by my math and I think obviously yours, you have ample room under the facility and cash on hand for the completion of Rochester and the ramp up. Can you just refresh us maybe on any key covenants attached to the facility, anything that could prevent any kind of drawdown in sort of a worst-case scenario and any other levers that you might have the option of pulling on or that you might want to pull on in the near-term with respect to the balance sheet?

Mitch Krebs, President and CEO

No. Good question. Fair question. As you alluded to there, Mike, we are sitting here at this point pretty comfortable with the balance sheet relative to where we are at Rochester. Just as a refresh, that revolver has a $390 million size. There is $30 million of letters of credit against that, which leaves $360 million of capacity. We ended the first quarter with $60 million drawn. So there is $300 million of availability. The key covenant there really is the net debt-to-EBITDA ratio of 4.5x. So we have got some room there as we move through really this critical quarter right now before things start to step down starting in the second half of the year. In terms of other levers that we could pull, the hedging that we have in place has been a real key risk mitigant. There are other things around; we have done some opportunistic exchanges on some of our senior notes as they have traded down, that has created an opportunity for inbound holders looking for liquidity of those notes. We did just a small number of those, I think just after the end of the first quarter. That's an example of these incremental tools at this point that we still have to make sure that we manage in a comfortable way here through this critical final quarter. Tom, did I leave anything out that you'd want to add?

Thomas Whelan, CFO

Yes, no. No.

Michael Siperco, Analyst

Okay, great. Maybe if I could switch gears one more time and then I promise I'll pass it on. On Kensington, you talked a bit about what impacted production in the quarter. Can you talk about what the mitigation is? Do you have to do anything more? Do you need more equipment? Is there more time required for development? Or is it just that availability that impacted the throughput? And how do you expect production to sort of ramp over the rest of the year in line with guidance?

Mitch Krebs, President and CEO

Yes. Mick, do you want to answer Mike's question?

Michael Routledge, COO

Yes. So, absolutely you hit the nail on the head that the majority of those impacts came from how we described it in the documentation. The mitigation really though is as we talked about this multi-year development program that we're looking to increase the mine life at Kensington. And we are onboarding some development contractor groups to help us with that process in the early part of the year. As you know, onboarding new people sometimes takes a little bit of time. So they took a little bit of time to get up and get the momentum up, but we wanted them to do that very safely and very effectively. And now we're seeing that they're fully onboard and they are getting the job done as per the plan. And so, that's a big mitigation for us as we go forward. Because as they develop, then the development towards areas that may provide additional stopes and opportunities for us throughout the year to recover and get back on that plan for Kensington.

Mitch Krebs, President and CEO

And just to piggyback on Mick’s comments. Rochester obviously gets a lot of attention as a near-term growth catalyst, deservedly so, but there's a lot going on at Kensington in terms of this development and drilling program. I think we are invested; Kensington is our largest allocation of exploration funds this year. There's a hefty chunk of underground development capital and it really does set Kensington up as that kind of medium-term catalyst for us. So, we'll see a lot of near-term growth out of Rochester for sure. But as we continue to execute this program at Kensington and keep extending that mine life, opening up some additional underground flexibility and working areas, Kensington is going to come in after Rochester and form a nice kind of medium-term wave of growth out of that asset. So there's a lot going on up there. A lot of moving pieces as Mick was alluding to.

Michael Siperco, Analyst

And in the near term, like what you're seeing in I suppose April and May inspires confidence in that full year guidance number. Is that fair to say?

Mitch Krebs, President and CEO

April was still suffering from some of those challenges. The plan is, as we get into the second part of this quarter and then into the third quarter and beyond, is when we start to really see ourselves catching back up. Do I have that about right?

Michael Routledge, COO

Yes, absolutely. Over the next couple of quarters. And of course the power of the portfolio, Rochester is doing really well. We're moving along and we'll have a good balance of focus across the sites to support Kensington to get back up that curve.

Operator, Operator

And this will conclude our question and answer session. I'd like to turn the conference back over to Mitch Krebs for any closing remarks.

Mitch Krebs, President and CEO

Okay. Well, hey, we appreciate everybody's time this morning. Thank you. And we look forward to speaking with you all again this summer to discuss our second quarter results. Thanks again, and have a great day.

Operator, Operator

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