Earnings Call Transcript - EXK Q3 2020

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Endeavour Silver Corp. Third Quarter 2020 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 to ask questions. I would now like to hand the call over to Galina Meleger, Director of Investor Relations. Please proceed.

Galina Meleger, Director, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2020 third quarter financial results conference call. With me on the line today we have the company's Chief Executive Officer, Bradford Cooke; our Chief Financial Officer, Dan Dickson; our Chief Operating Officer Don Gray; and our President, Godfrey Walton. Before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2020 and future years, including revenue and cost figures, silver and gold production, grades and recoveries, and the timing and expenditures required to develop new silver mines and mineralized zones. While we do not intend to and do not assume any obligation to update such forward-looking information, other than as required by applicable law. On behalf of Endeavour Silver, I'd like to thank you again for joining our call. And I will now turn it over to our CEO, Brad Cooke.

Bradford Cooke, CEO

Thank you very much, Galina. And again, welcome everybody to this conference call on our third quarter financial results. I think, first of all, I'd like to welcome Don Gray to the group. This is his first earnings call as our new COO. And then, also, I would especially like to recognize Godfrey Walton, who was with me when we went to Mexico in 2003, looking for an asset we can build a company around. This was Godfrey's last earnings call and so kudos to Godfrey. It was a great run. Moving on to our press release this morning, I'd just like to open with comments on the quarter. It was our best quarter in 18 months. In fact, our best quarter in a long time when you consider the changes of revenue, cash flow, and earnings, all sharply higher this year compared to the same quarter last year. Our cash costs and all-in sustaining costs were significantly lower year-on-year, and this improved operating performance combined with the higher precious metal prices generated a significant return to profitability again for the first time in six quarters. As a result, our cash and working capital positions also increased substantially during the third quarter. So let's now drill down a little bit into the numbers. Our revenues were up 29% to just shy of $36 million in the quarter. And our cash flow jumped almost 400% to $10.3 million year-on-year. Net income or earnings came in at a positive $0.5 million compared to almost a $7 million loss a year ago. I should point out that we did carry a significantly increased metal inventory through the quarter end, largely because of the summer run-up in metal prices and the significant correction at the end of September. So we chose not to sell a significant amount of silver and gold at the end of the quarter. We carried it in inventory. The cost of that inventory is about $6 million, but the mark-to-market of that inventory at the end of September was in the order of $15 million. What that implies is that if we had sold that metal, our earnings would actually be in the $10 million range, not the $0.5 million range. Production in the quarter was just shy of 1 million ounces of silver and 10,000 ounces of gold per 1.8 million ounces of silver equivalents. I mentioned already our balance sheet cash was up 47% to just shy of $45 million, and working capital was up in the $54 million range, up 21% year-on-year. Moving to the operations. Guanacevi continued to outperform with both silver and gold grades well above plan. We were affected by significant rainfall in the rainy season in Q3. As a result, throughput was only 911 tonnes per day in the quarter with a 1,200-tonne plant. That implies that as we bounce back here exiting the rainy season in Q4, there's actually more production at lower costs in our future at Guanacevi. I should point out, however, that the improved grades are accompanied by higher royalty payments. We're mining a property at Guanacevi where there are very significant royalties paid. So our costs will slowly rise as the metal price rises, just due to the royalties. Bolañitos continues to improve. It's not quite on plan yet, but we achieved 1,075 tonnes per day into a 1,200-tonne plant. Again, implying that there's still room for improvement on throughputs. Gold grades were on plan; silver grades remain below plan, but costs were fine. All three assets generated free cash flow in the quarter. Last but not least, El Compas is pretty much on plan. Throughput steady, gold grades on plan; silver grades below plan, but we're doing fine there and making a little bit of money. It's our smallest mine. Guanacevi, our largest mine, has by far the biggest impact on our financial performance. So I think on that note, operator, let's wrap up my comments and open it up for Q&A.

Operator, Operator

Thank you. Our first question is from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle, Analyst

Hi, Brad. Thanks for taking my questions, and congratulations on a very, very good quarter here.

Bradford Cooke, CEO

Thank you.

Heiko Ihle, Analyst

I'm examining your deferred income tax asset, which decreased from $7.14 million at the start of the year to $5.3 million now. Looking at the segment disclosures on page 15 of your financials, it appears that the improvement is primarily linked to Bolañitos. Can we anticipate further enhancements in that area for the company? This is significant as it represents potential cash flow if you receive the payments.

Dan Dickson, CFO

Yes. Heiko, Dan Dickson here. Thanks for the question. Our deferred tax has actually decreased from $7 million to $5 million. We're using up that deferred tax asset, which is a non-cash item. We've made significant profits in Bolañitos this year, but we've been offsetting those profits against losses from previous years, utilizing our loss carryforwards. This ultimately reduces the value of that deferred income tax asset. We expect to see more profits in Q4, likely from Bolañitos and Guanacevi, which also has loss carryforwards. Therefore, I don't anticipate a current income tax expense in Q4, aside from the special mining duty, but we will continue to reduce that asset and incur a non-cash expense.

Heiko Ihle, Analyst

Got it. Perfect. Thank you. And then a completely different question. Can you just sort of walk us through how your plans in Mexico have changed since you restarted operations with safety related to COVID? Has there been meaningful changes? Are people adhering to the safety precautions properly? I mean, it seems like your safety record there is pretty good. So just if you could provide some more color, that would be great. Thanks.

Bradford Cooke, CEO

Thank you, Heiko. I'll start with a brief overview before handing it over to Godfrey and Don. We were fortunate to swiftly implement our COVID precautions, including our prevention and emergency response plans. Overall, these measures have worked effectively, keeping COVID from affecting our operations significantly. Our workforce in the mines and plants experienced minimal disruption due to COVID, although some office employees were impacted, all of whom have since returned to work. I'll let Godfrey and Don provide more detail on our plans since the first and second quarters.

Godfrey Walton, President

Hi, Heiko. This is Godfrey. Yes, we actually have a pretty intense protocol to make sure that we do stop the cohort at the gate, as Brad mentioned. We make sure that every worker as they come in has their temperatures checked, they’re sprayed down, and that everybody is wearing a mask 100% of the time. Every body is sprayed down for front and back, and your vehicles are sprayed down as you come in. So it's pretty intense. And unless you’re actually there, Don and I have gone through the last month or so; we’ve been in and out of different operations. I am very impressed with how far we've come. Yes, we've had a few cases, but typically, we’ve got about 11 to 15 active cases at any one time, and nobody seriously infected. But it has been done very effectively, I think. Don, do you have anything else to add to that?

Don Gray, COO

I think I'd just add that the screening is pretty comprehensive with temperature checks and checking symptoms and that sort of thing. So when there is somebody detected that could be coming in, we do send them right out for testing. The testing of our operations we can turn that around very quickly. So, if we do identify somebody that tests positive, we take the proper precautions for quarantining, and then also, our medical response has been quite good. So, we have a really good response; probably the response is better than you’ll find just about anywhere in the world. It actually is really good. From that perspective, we're taking the precautions and measures to take care of our people as well as to ensure that the operation can maintain continuity. Very informative.

Bradford Cooke, CEO

Sorry, just one more thing, Heiko. We have actually adopted at all our operations and increased the number of doctors just to help out with the screening and evaluation of people. I would say, we probably tripled the number of doctors we have on staff now just during this COVID period. This is because it takes up quite a bit of time for them during shift changes. If you've got a couple of hundred people coming through the gate, it takes quite a bit to get them all checked out and evaluated.

Heiko Ihle, Analyst

Very good. It's nice to hear the whole team chime in on an answer to a similar question. It's really good how you guys play off of one another. Thanks for taking my questions. I will get back in queue.

Bradford Cooke, CEO

Thanks, Heiko.

Operator, Operator

The next question is from Craig Hutchison with TD Bank. Please go ahead.

Craig Hutchison, Analyst

Hi, good morning. Good afternoon. I was wondering if you could give me some more clarity in terms of grades, and how we should think about Q4 here. In particular, Guanacevi; should we assume similar grades to Q3, which are obviously very high?

Bradford Cooke, CEO

Again, high-level short answer, yes. Godfrey?

Godfrey Walton, President

Hi, Craig. This is Godfrey. Yes, I think you're going to see grades continue at Guanacevi. A lot of the grades that we're getting are coming from a property called Ocampo, where we do pay a high royalty on it. So the grades need to be good. But it's also coming from third-party ore that we're buying, which is part of our sort of social license to continue operating at Guanacevi. I think the grades you're seeing at Guanacevi and Bolanitos are going to be similar in Q4 as they were in Q3.

Craig Hutchison, Analyst

Okay. Very good. And then just in terms of an accounting question, depreciation was fairly high in the quarter. Should we expect similar levels in Q4 as well?

Dan Dickson, CFO

Yes, Craig, Dan here. Ultimately, our depreciation is high; we're very conservative in that standpoint. We depreciate on proven and probable. So I would expect very similar depletion and depreciation in Q4.

Craig Hutchison, Analyst

Okay. Thanks, guys.

Dan Dickson, CFO

Thank you for your question.

Operator, Operator

The next question is from Joseph Reagor with Roth Capital Partners. Please go ahead.

Joseph Reagor, Analyst

Hey guys, thanks for taking the question. So I guess first thing, Terronera, any update there on the timeline to making a construction decision?

Bradford Cooke, CEO

Well, of course, it's subject to the feasibility study which is underway and expected next summer. But, Don, do you want to comment?

Don Gray, COO

Yes, we have awarded the feasibility study work to win consultants, and they are just getting started. We expect to complete the feasibility report around the middle of next year. After that, we will present our recommendation to the Board regarding when to begin construction. Currently, our timeline is based on the feasibility study, but it may change depending on any additional work we undertake.

Bradford Cooke, CEO

The current pre-construction schedule, once we break ground, is I believe 18 months to the start of commercial production. So we've got lots of work to do, but we're finally into the final feasibility process.

Joseph Reagor, Analyst

Okay. Fair enough. And then thinking about next year, I know it's a little early to provide guidance probably, but from a modeling standpoint should we be thinking about Guanacevi and Bolanitos kind of returning to normal operating rates near their planned capacity? Or should we be thinking about a certain percentage of plant capacity for the next 12 months?

Bradford Cooke, CEO

Yes, I don't believe we're going to reach an average of 1,200 tonnes per day at either operation next year. We will likely approach that level regularly. My caution about discussing full capacity operations stems from the unpredictability of rainy seasons and the ongoing presence of COVID. Therefore, we do plan to operate close to capacity.

Joseph Reagor, Analyst

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

Bradford Cooke, CEO

Thanks, Joe.

Operator, Operator

Your next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Hey, good day everybody. I wanted to ask a question on the direct production costs per tonne. There has been a lot of noise in that metric between COVID and then other challenges year-to-date? Looking at the third quarter, there was very nice performance across the board, but it's still over $110 per tonne. Do you think we can get below the $100 per tonne figure maybe back into the $80 to $90 range? We would really appreciate your thoughts and the various puts and takes here on that. Thank you very much.

Dan Dickson, CFO

Yes, Lucas. Thanks for the question. Dan here again. A very good question. It’s hard to speak to it just on a consolidated basis, and getting below $100 on a consolidated basis probably will be difficult only because a significant driver to all this is Guanacevi. Godfrey touched on it. We've been buying a lot of toll ore out of Garnet. It was almost 11% of our production in Q3. Ultimately, when that ore comes to us at these high prices, we take it. It keeps ounces in the ground for us for another day. Ultimately, it's high-grade ore. So, we pay a significant portion for it. We roughly make about 30% to 35% profit off that ore on a cash basis and we expect that to continue because those prices and we will go up more as this ore comes available. The other aspect is the El Curso concessions that we lease from Ocampo. We pay a $12 processing fee per tonne on that material, and then we also pay a royalty cost on that material. So, we picked up Versal concessions effectively at no cost, but we do pay a very high royalty on it. Over $20, we paid a 3% NSR on it. So effectively, in Q3, we paid about across all our tonnes, we paid almost $28 of royalty per tonne in there. That’s really driving up our cost per tonne. Guanacevi, and the reason why Guanacevi is at $146 for Q3 when ultimately we operated around $100 per tonne, it’s just basic mining, processing, and indirect costs. Bolañitos were right in line with our cost per tonne, in line with budget, in line with historical at $68. If we hit this throughput tonnage, we should be around that if not a little bit lower if we can get to 1,200 tonnes per day. At Compas, it’s just a high variability because of the size of the operation. It's only 250 tonnes per day. Ultimately, we spent almost $1 million, a little bit more than $1 million this quarter than what we planned. Because it's such a low amount of throughput, the scope of that operation really hits cost per tonne. It doesn’t have a huge impact consolidated, but obviously, on an operations level we get big variability there. We do expect to come down. We put in a lot of training; a real safety program is in place, trying to increase our level of safety commitment at Compas. We hope those costs will come down in Q4. We're monitoring it and we want to make sure those costs come down and improve the free cash flow, but I don’t see it coming under $100 consolidated. I hope we get into $100 million to $105 million for Q4.

Lucas Pipes, Analyst

That's very helpful. I appreciate that color. As a second question, just checking in on Chile. Can you update us on where you're spending your time there? What are some of the milestones that investors should be looking forward to over the coming, call it, next two to three quarters? Thank you.

Bradford Cooke, CEO

Who wants to take that one? Godfrey?

Godfrey Walton, President

Sure. I can take that one here. In Chile, we are currently drilling at the Paloma property. We're following up on some intercepts that we got last year in a first hole. We have completed a couple of holes now. We have not got any assays at this point, but expect to continue drilling until Christmas, and then the season will pretty much close down because we're up at about 5,000 meters. Once we have our results early next year, we'll be able to put those out. We're encouraged with what we see in the core, but we don't have any numbers yet, and we won’t until Q1 next year. It’s going to be the time for that. For the rest of the year, because Chile is in the Southern Hemisphere, most of the activity is happening now, or in the fall. So, we’re busy right now looking at other properties and evaluating what’s happening up at Cerro Marquez and talking to a variety of people about that property. It will go quiet during our summer and could become active again in the fall and through Christmas.

Bradford Cooke, CEO

Just to add to the context of our portfolio in Chile, these are all high-impact, world-class targets. For instance, Paloma, we consider to be a multi-million ounce gold target. We’re just getting into the drilling now, so we’re going to be patient. It's a big area to drill. Like Godfrey said, we’re seeing all the things we want to see in the core: silica, hydrothermal alteration, sulfides, and other geological factors that indicate the presence of gold, but we don’t have the assay yet.

Lucas Pipes, Analyst

Got it. Gentlemen, thank you very much for the information, and best of luck.

Bradford Cooke, CEO

Thank you.

Operator, Operator

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

Joseph Reagor, Analyst

Hey guys. I just had one more. At El Cubo, any update there? I mean with higher prices, is there some, let's call it, mineralized material that was outside the resource that might come in? Or have you been able to get any further in talks for neighboring projects? Just any color you can give us.

Bradford Cooke, CEO

Well, the good news is that with these ore prices, we're getting a lot of inbound inquiries about possible sale. The bad news is that the higher prices don’t change the amount of ounces in the ground. Our decision to close is based on exhausting reserves, and the remaining resources we felt were just too small for us to restart a 1,500-ton plant. We have been, as you know, actively scouring the district for opportunities, and continue to do so. But no decisions have been made yet, whether to buy something and restart or just sell the whole thing.

Joseph Reagor, Analyst

Okay. Thanks.

Bradford Cooke, CEO

Sure.

Operator, Operator

The next question is from Chris Thompson with PI Financial. Please go ahead.

Chris Thompson, Analyst

Hey. Good morning, guys. Brad, I think it's probably a question for you. It's a little bit broad. Obviously, with higher margins, we're experiencing right now, on the back of good metal prices and obviously you reduced costs. That speaks to higher cash flow. I wonder if you could just give us a sense of how you would apportion this cash flow by way of preparation for Terronera, and obviously what's happening with Coral, and maybe the need for mine life expansion through drilling and discovery at your operating assets?

Bradford Cooke, CEO

Yes. Good point and good question. Chris, thanks for your question. Obviously, with a rising cash balance and we’ve really only had one quarter of that, it gives us a lot more flexibility in what to do. Historically, we've balanced our capital spending from our cash flow model each year. We spend, at least for the three mines, only out of our cash flow. Not only have we got lots of free cash flow, it opens up other possibilities. For instance, we took two years off from drilling Terronera while we focused on our economic studies. As of September, we've resumed drilling on a number of very interesting undrilled veins of tar in artery and continue boosting the resources there. Same thing at Parral; we took a one-year break from drilling Parral, which is intended to follow Terronera in our development pipeline. I think it's safe to assume that there will be aggressive drilling programs on both Terronera and Parral next year. In terms of allocating some of our free cash flow, there are two projects. We'll continue with our Brownfield exploration around Guanacevi and Bolañitos. Those programs aren't going to grow or shrink; they're just steady on. Chile we're drilling Paloma now, and we hope to be drilling it next year as well. So there's a kind of discretionary exploration expense that we'll consider and then, of course, just building up our cash for the equity component of the $100 million CapEx to build Terronera. Those are our considerations. No decisions made yet; we typically do year-end planning. Just to give you an idea of what we would do.

Chris Thompson, Analyst

Great. Brad, thanks a lot. Thank you.

Bradford Cooke, CEO

Thank you.

Operator, Operator

This concludes the question-and-answer session. I'd like to turn the conference back over to Bradford Cooke for any closing remarks.

Bradford Cooke, CEO

Well, thank you all for tuning in for our third quarter call on our financial results. It's been a great quarter. We expect bigger and better as we go forward, and we've got, I think, one of the best outlooks in the sector with leverage to cash flow, not only from higher metal prices but falling costs. We have leverage to production growth through our own organic growth profile; there are not one but two projects awaiting development: Terronera, which is largely permitted, and Parral, which, even though it's an advanced exploration project, looks like it has the potential to be developed down the road. Last but not least, leverage to new discoveries, potentially world-class, with three drill-ready targets in Chile. It’s a very exciting time for us with a catalyst-rich time for the company, and we've come through that transition phase where we've undertaken in the last six quarters operational turnarounds to try and get out of the doldrums during the bear market. We've succeeded, so there are lots of catalysts to drive value for shareholders over the next year. Thank you very much.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.