Earnings Call Transcript - EXK Q2 2024

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Endeavour Silver Corp. Second Quarter 2024 Financial Results Conference Call. Please remember that all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be a chance for questions. I will now hand the call over to Allison Pettit, Director of Investor Relations. Please proceed.

Allison Pettit, Director of Investor Relations

Thank you, operator, and good morning, everyone. Before we get started, I ask that you view our MD&A precautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A and financial statements are available on our website at edrsilver.com. On today's call, we have Dan Dickson, Endeavour Silver's CEO; Elizabeth Senez, our Chief Financial Officer; and Don Gray, Endeavour's COO. Following Dan's formal remarks, we will open the call for questions. And now over to Dan.

Dan Dickson, CEO

Thank you, Allison, and welcome, everyone. It's been a productive second quarter at Endeavour Silver as gold reached new all-time highs and with silver starting to follow, the company's cash flow and financial position should continue to benefit from these higher prices. At Terronera, there was significant advancement of the upper platform surface infrastructure, and the overall project progress reached 65% at June 30. Terronera is on track for commissioning in Q4 2024, and we're excited for it to contribute to our production profile next year and become a cornerstone asset. Q2's silver equivalent production totaled 2.2 million ounces or 1.3 million ounces of silver and 10,500 ounces of gold. We are in a great position to meet the upper range of our 2024 production guidance. Silver equivalent grades have been in line with expectations, with gold grades slightly higher and silver grades slightly lower. This is expected to be similar going forward, and therefore, we expect a similar production profile for the second half of the year. We reported top line revenue of $58 million, up 17% year-over-year due to higher metal prices compared to Q2 2023. Cost of sales totaled $48 million, up 28% from Q2 2023 due to the strength in the Mexican peso contributing to higher labor, power, and consumable costs and continued inflationary effects from 2023 that flowed into 2024. At Guanacevi, purchased material from local miners increased to 18% of throughput and accounted for $5 million of our cost of sales. In Q2 2023, purchased material was $1.5 million. With higher purchased metal prices, the availability and costs of the purchased material have both increased. There are a number of benefits of purchasing the local material, and management expects the purchase of materials to remain elevated for the foreseeable future. The higher prices also mean higher royalty expenses, and we are generating mining profits increasing our special mining duties, which are impacting our cost metrics. Direct operating costs, including mining, processing, and site administrative costs are within management's expectations. Cash costs and all-in sustaining costs benefit from the higher gold credit than estimated at the beginning of the year, offsetting the higher royalties, special mining duty, and increased purchased material. The company reported a net loss of $14 million for the three-month period ended June 30, 2024, compared to a $1 million loss in Q2 2023. Excluding certain non-cash and unusual items, as well as items that are subject to volatility, which are unrelated to the company's operations, the adjusted loss was $1.0 million compared to the adjusted earnings of $1.6 million in Q2 2023. With production and construction results previously released, today's substantial share price action was unexpected, and still the magnitude is somewhat puzzling. With higher precious metals prices, there is clearly an expectation for better earnings, and I believe this is one data point over time, we will deliver on those expectations. As of June 30, 2024, the company's cash position was $68 million and working capital was $65 million. The company raised $14.7 million through share issuances primarily to fund Terronera. During the quarter, the company completed its first drawdown of the Terronera senior secured debt facility, drawing $60 million. Subsequent to the reporting end, the company completed a second draw of $50 million and has an additional $45 million committed and available for future drawdowns, expected in the third or fourth quarter. As I mentioned earlier, the Terronera project reached 65% completion, with more than $204 million in the project budget spent to date. Project commitments totaled $260 million, which is 96% of our $271 million capital budget, and remains on track for commissioning in Q4 2024, as we continue to advance on schedule. Over 1,250 meters of underground mine development were completed in Q2 for a cumulative total of 4.5 kilometers, and our mine crews continue working in portals one, two, and four declines. Development has cut through the Terronera vein, and we have started to develop test stopes. On the upper platform surface, infrastructure construction is 88% complete, with concrete and structural steel erection fully complete and mechanical piping and electrical installation well underway. The excavation of the tailings storage facility maintenance key tranche is about 95% complete, and the lower platform is nearly 50% complete. Concrete work on the lower platform is scheduled to start early Q3 and remains the critical path for commissioning in Q4. Through June 30, 87 to 95 procurement packages are now complete, and it's now really an exercise in execution and productivity over the next six months. The company anticipates commissioning using temporary power with LNG and power generation to be operational subsequent to commissioning. Temporary power has been planned and is expected to be available for Q4. Similarly, there will be other minor structures under construction during commissioning. Lastly, from a community relations standpoint, local community support continues to be a major commitment, a plant operator training program was established, and a comprehensive training and support service plan is being prepared for groups and individuals seeking to form businesses that can provide local business and services within the community. Again, for a wholesome construction update at Terronera, I encourage you to visit our website, where you'll find our early photo gallery showcasing the latest development progress and information on Terronera. Before we move to the Q&A part of the call, I would also like to highlight that we published our 2023 Sustainability Report titled 'Transformation in Motion' in May, which provides a deep dive into Endeavour's sustainability commitments, performance, and ongoing approach to responsible mining. You can view the full report and the company's strategy on our website under the Sustainability tab. With that operator, I'm happy to open this up to some questions. Let's please proceed to that session.

Operator, Operator

Thank you. The first question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Jake Sekelsky, Analyst

Hey, Dan and team, thanks for taking my question.

Dan Dickson, CEO

No problem, Jake. Happy to take them.

Jake Sekelsky, Analyst

So just starting with the finished goods build during the quarter. I'm just curious if ounces were withheld for higher prices this quarter, or is this just a function of timing?

Dan Dickson, CEO

Just the timing function. I believe our last shipments kind of went out about the 28th, we didn't sell anything in advance. And obviously, because of where we are in the position of building Terronera, we're not holding back sales and don't expect to hold back sales at this time.

Jake Sekelsky, Analyst

Okay. That's helpful. And then just on foreign exchange. I'm just curious; do you think the peso has weakened to a level where you might consider putting broader company hedges in place? Or do you want to see a bit more weakness there?

Dan Dickson, CEO

I do think there's a little bit more weakness coming in the Mexican peso, just based on government policy, but it's always difficult to determine when that weakness will show up and how long it will persist. At this time, we have no plans to enter into any more FX hedges. We were required to enter into FX hedges under our build, under the debt facility, and we are required to enter into operational FX hedges when we move into operations, but we haven't made a determination on when we'll put that in place. Again, I think we'll see some more weakness in the Mexican peso, but we'll see.

Jake Sekelsky, Analyst

Got it. Okay. That’s all for me. Thanks again.

Dan Dickson, CEO

Thanks for the questions, Jake.

Operator, Operator

The next question comes from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes, Analyst

Thank you very much, operator. Good afternoon, everyone. My first question is kind of higher level on the operating environment in Mexico. Obviously, there was an election. The new administration has yet to take office. But I wondered if maybe with the election in the rearview mirror, there's a bit more clarity as to the priorities from a regulatory standpoint on the incoming administration? Thank you very much.

Dan Dickson, CEO

Yeah. I mean, you're correct that on June 2nd there was an election, the MORENA Party won, and the outcomes were better for them than originally expected. The new President, Claudia Sheinbaum, is a successor to effectively AMLO, and it will be interesting to see how closely she follows the platform in her first couple of years in office, which is expected to be relatively close. She has privately indicated that mining should be more favorable than under AMLO, and she is definitely more pro-business. However, the reforms that were put in place have been lost through a variety of factors, and we are still waiting on the Supreme Court decision. There has been some chatter that those reforms may be repealed, but we will have to see that in front of the legislature in the fall. Thus, considerable uncertainty still remains with the current government. In Mexico, there has been a lot of rhetoric coming out of AMLO, but I think that will dissipate. Ultimately, it's still one of the best jurisdictions in the world to operate from a mining standpoint. Again, I don't think some of the compliance requirements being put in place will impact Endeavour significantly because we have departments that can handle that. But until these changes go through and are properly approved or legislated, it's difficult to comment on it.

Lucas Pipes, Analyst

Really appreciate your perspective. That's helpful. You noted the additional $45 million available at Terronera in the second half of 2024. I wondered if there are any specific project milestones attached to that release? If so, could you please comment and elaborate on those? Thank you.

Dan Dickson, CEO

No, there are no specific milestones required for that. The independent engineers representing the banks do the reports, look at our monthly report and we have the best estimations to go by, but everything remains on track and we think that amount will be available over the next six months.

Lucas Pipes, Analyst

Terrific. Dan, really appreciate your comments to you and the team. All the best. Best of luck.

Dan Dickson, CEO

Thanks for the questions, Lucas. Good to hear from you.

Operator, Operator

The next question comes from Craig Hutchison with TD Cowen. Please go ahead.

Craig Hutchison, Analyst

Hi, guys. Just wanted to know about the underground development rates. It looks like it did pick up nicely in the second quarter. In the past, I think there were some underground technical issues. Can you comment on how that's going? Are you tracking to plan, behind, or ahead of schedule? Just any sense in terms of the underground development work?

Dan Dickson, CEO

Yes. No, it's a really good observation Craig. Ultimately we are tracking the plan now; initially, when we started, there was a learning curve just understanding ground positions and water conditions. I think we have a better understanding of the ground conditions than we originally expected based on technical reports. Water management is in line with expectations, if not slightly better. So, things have been going relatively well. We have good days and bad days, but we're hitting our mark and expect to have the mine development complete so we can meet our tonnage expectations for 2025.

Craig Hutchison, Analyst

Okay. And just in terms of the overall progress at 65% completion year-to-date, can you give us some sense of how you arrived at that number? I imagine it's a combination of dollars spent versus your budget and the milestones. But can you provide insight into achieving the remaining 35% over the last three to four months stretch?

Dan Dickson, CEO

Yes, that's a fair question. To put it plainly, we were at 53% at the end of the first quarter, and now we are effectively at 65%. That's an increase of 12%. If you apply that over the next two quarters, that takes us to 77%, then to 90%. One item that might not be complete by commissioning, but would be close, will be our LNG and power generation plant due to delays in permitting. We will begin commissioning with diesel generators, and possibly into commercial production. Ultimately, we are not tracking for 100% completion by commissioning. Our expectation is to be between 85% and 90% complete by that time, with some minor structures still under construction.

Craig Hutchison, Analyst

Okay. That's great. For my last question, regarding commissioning by year-end, do you anticipate producing some concentrate at that point, or is that more likely in early Q1 next year? Thanks.

Dan Dickson, CEO

Yes, that's getting quite specific. I would hope to communicate that we expect to have some concentrate by the end of the year, that's our expectation. Obviously, moving from commissioning to commercial production depends on capacity and ensuring we're meeting our capacity numbers to declare commercial production, but there will be some tonnes produced during commissioning. It’s just a matter of how much and when that timing hits.

Craig Hutchison, Analyst

Great. Thanks, guys, and good luck.

Dan Dickson, CEO

Thanks for the questions, Craig.

Operator, Operator

Our next question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.