Earnings Call Transcript - EXK Q4 2023

Operator, Conference Operator

Thank you for your patience. This is the conference operator. Welcome to the Endeavour Silver Corp. Full Year 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please proceed.

Galina Meleger, Vice President of Investor Relations

Thank you, operator, and good day, everyone. Before we get started, I ask that you view our MD&A for cautionary 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 www.edrsilver.com. With us on today's call is Dan Dickson, Endeavour Silver's CEO as well as Elizabeth Senez, our Chief Financial Officer; and Don Gray, Endeavour's COO. Following Dan's remarks, we will then open up the call for questions. And now over to Dan.

Dan Dickson, CEO

Thank you, Galina, and welcome, everyone. As we begin this year's earnings call, it's crucial to recognize the rapidly changing environment that influenced the mining sector in 2023. Unstable market conditions led to fluctuating and decreasing equity prices, adversely affecting company valuations in the precious metal sector and creating a noticeable gap from the actual commodity prices. Amid this broad market situation, we faced rising operating costs, which complicated our operations. This trend was evident among all Mexican mining firms, experiencing cost pressures from various fronts. To illustrate, over the past three years, the Mexican consumer price index has increased by over 21%, with our industry feeling heightened effects as vital inputs like steel, reagents, and other consumables faced supply shortages. Additionally, from Q4 2021 to Q4 2023, the Mexican peso appreciated by almost 20% against the US dollar, affecting our local purchases and labor expenses. Reflecting on the year, I can affirm that our operations team showed remarkable commitment in overcoming these challenges. Today, I want to highlight not only these obstacles but also the strategic initiatives we've put in place to ensure our company's growth and success. This year, we produced 8.7 million silver ounces equivalent, meeting our guidance after two years of surpassing it. Production was near the lower end of the guidance range due to a reduction in output from Q3, mainly because of mine re-sequencing adjustments aimed at improving ventilation and worker safety. This temporary operational disruption resulted in decreased mine output and ore grades. I’m pleased to report that Guanacevi's performance improved significantly in the fourth quarter as planned enhancements were successfully and swiftly implemented. Guanacevi's production not only returned to historical levels but our recovery strategy exceeded expectations with silver and gold grades, as well as plant throughput surpassing our estimates. The refurbishments completed at the beginning of Q4 improved our operational capabilities, allowing us to exceed historical throughput levels of 1,200 tonnes per day. These upgrades resulted in increased costs in the latter half of the year but cost metrics saw significant improvement in Q4. Despite the challenges in Q3, Bolanitos' performance remained stable with increased silver output even though gold production was lower in the fourth quarter. From a financial perspective, we reported revenue of $206 million with sales costs totaling $169 million, resulting in operating earnings of $37 million and mine operating cash flow of $40 million. After accounting for exploration, general and administrative, and other investment expenses, we reported a net income of $6 million, or $0.03 per share. For the year, Guanacevi generated $14.3 million in free cash flow while Bolanitos contributed $2.5 million. Our sales costs rose 6% compared to last year, primarily due to a strong Mexican peso and inflationary pressures on consumers. These factors, combined with lower than expected ore grades and mine output influenced by re-sequencing in Q3, contributed to increased cost metrics for the year, with cash costs and all-in sustaining costs reaching $13.49 and $22.93 per ounce, respectively. Both figures were higher than our initial guidance; however, Q4 showed improvement as costs significantly declined from Q3. Our cash costs and all-in sustaining costs for the fourth quarter were $12.54 and $21.48 per ounce, respectively. The remediation efforts carried into early Q4, and the positive momentum from these initiatives is expected to continue. Looking ahead to 2024, managing costs and enhancing efficiencies will be priorities. Despite ongoing inflation and a robust local currency, we are actively implementing business improvement initiatives to address these challenges. At year-end, our cash amounted to $35 million, and working capital was $43 million. Cash decreased in Q4 as funds were allocated to development activities at Terronera, with long-term prepayments increasing significantly due to deposits made with contractors and for equipment. Working capital has decreased as we continue to invest in the Terronera project. This investment has led to increased non-current assets, including $22 million in construction deposits related to Terronera and $23 million in value-added tax. We've filed for processing of the VAT receivable and are working with authorities for timely collection; however, we conservatively categorize these as non-current assets until payments start. According to the requirements of our $120 million senior secured debt facility, we must mostly self-fund development through cash reserves before utilizing the facility. Thus, we are well-positioned to fulfill the project's financing needs and anticipate completing our first draw in March. During Q4, we raised gross proceeds of $39 million through an At-The-Market transaction, with an additional $24 million raised after year-end to ensure adequate funding for the development of Terronera. Collectively, we have sufficient capital, and we are confident that our actions will bring the Terronera project to completion while also supporting high-value organic growth initiatives at Pitarrilla. Pitarrilla is our next project pipeline in the Durango State of Mexico and holds one of the world's largest undeveloped silver deposits with almost 600 million ounces of silver identified. Now, let’s provide an update on the construction at Terronera. In January 2024, we completed a risk assessment for remaining expenditures and developed an updated initial capital cost and execution plan. Similar to trends at our producing mines in Mexico, we are encountering comparable challenges at Terronera during construction. The effects of a stronger Mexican peso, persistent inflation, and constrained equipment and material markets have led to an 18% increase in our updated initial capital estimate to $271 million from $230 million. Despite these capital pressures, project development is advancing as planned, consistent with previous guidance, with commissioning expected in Q4 of 2024. At year-end, we reached 46% completion of the overall project compared to the initial guidance; however, due to modifications in the adjusted initial capital expenditure, management estimates 43% completion as of December 31st. We have invested $122 million in direct development, with project commitments totaling $171 million, which is 63% of the updated capital budget. In Q4, we focused on crucial items such as completing earthworks for our upper mill platform, procuring equipment, and progressing on the plant's concrete work, achieving significant advancements in constructing our process plant. For construction progress photos, I encourage you to visit our website's Terronera page. A few highlights from Terronera showcase our commitment to responsible, sustainable development, and collaboration with local stakeholders. In terms of safety, our robust culture has established a strong safety record on the project. We completed the year without any lost-time accidents over 172 workdays, translating to about 600,000 man-hours. We significantly enhanced safety protocols, particularly during the rainy season and notably in Q4 when we prepared for Hurricane Lidia, a Category 4 storm. Our site managed to withstand the storm with only minor exterior damage and fallen trees. The effectiveness of our drainage system played a key role in maintaining site safety and access roads. As a precaution, we suspended on-site operations for safety reasons. Thankfully, power and normal operations were restored quickly. We also contributed to local relief efforts with our onsite team assisting local communities in recovery. Throughout the year, we have focused on optimizing mine development efficiency. To achieve this, we strategically recruited top talent and successfully transitioned to an in-house mining team after starting with mine contractors. This shift aimed to enhance development efficiencies, which became evident in Q4, where we achieved our daily advancement targets through improved blasting techniques, water management, and better ground conditions. At year-end, our total underground development exceeded 2,200 meters, representing a significant 70% increase compared to Q3. The upward momentum in advancement rates suggests a positive trajectory ahead. During the quarter, we successfully broke through to the surface at Portal 4 incline, and preparations are underway to finalize the portal structure in Q1 2024. Most construction activities at the plant site have progressed well, with surface construction nearing 50% completion. The advanced stage of concrete work is setting the stage for vertical construction, which commenced in January. By year-end, concrete work was nearly finished in both the grinding and flotation zones and was being prepared for the general contractor to initiate structural steel and mechanical installations. We also began constructing the access road linking the lower platform to the Tailings Storage Facility area and the upper mill platform during Q4. Our workforce at Terronera has expanded to over 520 employees and contractors on-site. In procurement, all essential equipment was ordered by year-end, and our team is focused on acquiring bulk materials such as structural steel, piping, and electrical cabling. Furthermore, our community relations remain strong, with full support from the municipality, and we continue engaging and educating local authorities as we progress with the project. I've provided a lot of information on 2023, so let’s now look at what lies ahead for Endeavour in 2024. We enter this year positioned solidly, both financially and operationally, with several strategic initiatives in place to promote future growth. We anticipate our production of gold and silver will be consistent with 2023, and managing costs will remain a crucial focus to counter the impact of rising expenses. Guanacevi and Bolanitos are established assets, and we plan to invest over $30 million in sustaining capital to enhance their performance and maximize output. Equally significant this year will be advancing our growth profile, with $9 million allocated across our exploration portfolio to sustain our successful history of growth through drilling. For example, we intend to invest over $5 million at Pitarrilla across various initiatives and plan to conduct a 6,000-meter drill campaign aimed at high-grade zones and robust structures within the existing resource. The data we gather will guide subsequent steps, with the goal of assessing this project as an underground silver mine. Ultimately, the combination of Terronera and Pitarrilla aligns with our long-term vision of becoming a 20 million ounce senior silver producer, providing a compelling value proposition in the silver market. Given the favorable macro conditions for both gold and silver, our growth strategy is well-timed to drive strong performance for our shareholders in the upcoming years. Importantly, over the past few years, we've intentionally reinvested in the business for sustainable long-term growth. With less than a year until Terronera begins operations, we can expect the benefits of these investments to flow to our shareholders. The focus for 2024 will be on executing the Terronera project, which is genuinely transformational. Once completed, we expect Terronera to nearly double our production, significantly enhance our cost structure, and yield substantial free cash flow for our shareholders. We anticipate an exciting year for Endeavour and our stakeholders. While we face some capital-intensive months ahead as we ramp up production, we're looking forward to the strong free cash flow expected in 2025. Before we open the floor to questions, I’d like to welcome Elizabeth Senez, our newly appointed CFO, to our executive leadership team. Libby joined us in January, and we are excited to have her on board as a finance leader with a strong Latin American focus, bringing over 20 years of valuable experience in accounting, corporate finance, and treasury. On behalf of everyone at Endeavour Silver, I also want to express our gratitude to Christine West, our former CFO, for her remarkable contributions over the last 16 years. Throughout her tenure, Christine demonstrated incredible dedication and commitment to our company’s success. Christine, we wish you all the best in your retirement. Now, alongside other management team members, we are ready to take your questions. Let's open the lines.

Operator, Conference Operator

Certainly, 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 questions.

Dan Dickson, CEO

Hey, Jake, how are you?

Jake Sekelsky, Analyst

Well, well, how are you? So just starting with ASIC guidance for the year, can you speak to or maybe quantify the positive impact that the recent move in the gold price might have from a gold credit perspective?

Dan Dickson, CEO

Yes. Well, for the year, just for all the listeners, we'll produce about 5 million ounces of silver and about 35,000 ounces of gold. Obviously, a $100 impact on increase in the price of gold has a significant impact from a byproduct standpoint. We did our budgeting, I believe, at 1840 for the year on gold. And obviously, today, we're sitting around just shy of 2200. That impact will, first of all, significantly drive down on a per ounce basis byproduct basis. Specifically, when it goes right into our cash costs and where our guidance was, it's beneficial, but I think it's still early days, and we'll stick by our guidance of using 1840.

Jake Sekelsky, Analyst

Okay. That's helpful. And then just at Terronera, can you just touch on the remaining exposure from a CapEx standpoint to broader inflationary pressures? And what else as long as you locked in then?

Dan Dickson, CEO

Yes. I think at this point, Jake, the inflationary pressures have probably taken away just the fact that we've done most of our key procurement even on bulk items now. When we re-estimated the price of Terronera, the initial CapEx going from $230 million to $270 million, we adjusted our Mexican FX rate to 17.3% in our budget. And so as long as the Mexican FX rate stays there, I think we'll be all right. Now it just comes down to productivity at site and making sure we execute. Again, there's always going to be small headwinds, whether it's inflationary or if the peso continues to appreciate, but the impact and what's left to build over the next kind of nine months is small as long as we produce.

Jake Sekelsky, Analyst

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

Operator, Conference Operator

The next question comes from Heiko Ihle with H.C. Wainright. Please go ahead.

Dan Dickson, CEO

Hey, Heiko, hopefully, your question comes through. You sound a little digitized at this time. Apologies, Heiko, from our end we couldn't get what you're saying, everything's come through digitized. Operator, if we can maybe go to the next question and put Heiko back in queue, if possible.

Operator, Conference Operator

Certainly, the next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Thank you very much, operator. Good morning, everyone.

Dan Dickson, CEO

Good morning, Lucas.

Lucas Pipes, Analyst

I'll try not to sound like R2-D2, but first, I wanted to add my congrats to Elizabeth and then Christine, I hope you enjoy retirement. Dan, maybe a first question on the cost side. What else can be done? What else are you looking at to mitigate costs kind of going forward? Would appreciate your thoughts. Thank you.

Dan Dickson, CEO

Yes. Guanacevi, we still have opportunity for productivity. So in Q3, we had ventilation issues that made it extremely warm for our employees to work underground. And as we got deeper into the El Curso area, it got hotter. In Q4, we put through a new ventilation system and ultimately increased our pumping of the water that was coming out. We got a lot of benefit from that in Q4, but there's still some benefit to come in Q1, and that just comes down to productivity. So when the mine got overly hot, we had to give more breaks to our employees and put them in cooling chambers to effectively make sure that they're operating in a safe manner. And I think at this point in time, with the ventilation and where the temperature is underground, they can work fully. And so there's productivity gains that could be realized at Guanacevi and then it's working across both Bolanitos and Guanacevi and making sure we're procuring and going out to a number of different vendors and trying to get some bulk work done on that. And there's always abilities to kind of look at what we're doing from a purchasing standpoint, what we're doing from a productivity standpoint. Making sure that ultimately, our mine development is a big focus this year that we are getting our advance rate as expected and putting some incentives to ensure that we're doing that as a group. So there's a lot of little things that we can do. Obviously, they are mature assets at Guanacevi and Bolanitos, and this kind of diminishing returns over the years. But I think with what we've seen in Mexico regarding all those cost pressures, we have to look at anything that's available to us to try to reduce our costs on a per tonne basis.

Lucas Pipes, Analyst

Thank you for that. And switching over to Terronera. What does the workforce stand today? And what's kind of your employee count versus which is contractor labor? I think you've mentioned that as kind of a key driver of productivity and efficiency going forward. And then in terms of the ball mill, has that been transported to the plant yet? Or is that expected in Q1?

Dan Dickson, CEO

Yes. No, for sure. To answer the first question. So at December 31st, we were 520 total employees and contractors. Of that 520, about 120 were direct employees. Through this year, we do expect to peak around 700 on-site. With regards to our ball mill, it's a good question. I mean, I touched a lot on Q4 and what was happening at the site. Our SAG mill and our ball mill are already at site, and they have been placed. So it's been an exciting kind of Q1, but we'll have a full update of Q1 generally in April from a construction standpoint.

Lucas Pipes, Analyst

All right. Well, I really appreciate it. I'll turn it over. Best of luck.

Dan Dickson, CEO

Thank you, Lucas.

Operator, Conference Operator

The next question comes from Stephen Soock with Stifel. Please go ahead.

Stephen Soock, Analyst

Hi, Dan and team, congrats on a good quarter. My question is just more on Terronera and the underground rates. I think this was kind of a critical path item and great to hear they've come up so notably over the last quarter. Can you just comment on if those are tracking to your original plan or is there a catch-up to do there or are you seeing additional efficiencies that you hadn't counted on at this point in the transition and just a little more color around how that's progressing? Thanks.

Dan Dickson, CEO

Yes. It's a very good question, Stephen. Our plans ultimately are about four meters of advance per critical heading per day. We were able to achieve that in Q4, and we've seen that in Q1. There's always a little bit of opportunity with the redesigning of our mine plan. We continually redesign our mine plan. I'd almost call it dynamic just based on ground conditions, water flow, and a number of things that we've done. We've got a very seasoned team on site, and they've been phenomenal, I would say, over the last six months. So we are hitting our advance rate as planned to make sure we're in commissioning for Q4 of this year.

Stephen Soock, Analyst

Perfect. Great to hear. That's it for me. I appreciate it.

Dan Dickson, CEO

Thanks, Stephen.

Operator, Conference Operator

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

Craig Hutchison, Analyst

Hi. Good morning, guys. Thanks for taking my questions.

Dan Dickson, CEO

Good morning, Craig.

Craig Hutchison, Analyst

Good morning, Dan. Maybe a similar question to Stephen just with regards to critical items. You guys mentioned the Tailings Storage Facilities on the critical path. Any updates on kind of where that stands? And you did mention that you're going to provide an update in Q1, but any kind of numbers you can kind of give us in terms of where the overall project sits here in mid-March, 43% at year-end kind of where are you in the 50s now and anything on that would be helpful? Thanks.

Dan Dickson, CEO

Yes. You're correct. And maybe to kind of expand on Stephen's question. Right now, we see the critical path being mine development and the Tailings Storage Facility and probably the Tailings Storage Facility, which was originally outside of the build, wasn't expected to be a critical path item, but just on timing of when we got started on that lower platform and where the tailings dam is. It's right there with mine development. I'm happy to say that in Q1, all our work has begun on the TSF, with the expectation that, that work will be done mid-year. So there's still some time around it. Again, productivity around the TSF starts off a little bit slow, but it's picked up. And hopefully, we can make it so it's no longer a critical path item, and it remains to be the mine development.

Craig Hutchison, Analyst

Okay. Great. Maybe one last question for me. You guys are planning to use the debt facility this quarter. Is that still on track? Will it be the full amount or in increments?

Elizabeth Senez, CFO

I'll take that one. This is Libby Senez. We are planning to draw down the first draw this month, but not the full amount.

Craig Hutchison, Analyst

Okay. Thanks, guys.

Dan Dickson, CEO

Thanks, Craig.

Operator, Conference Operator

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

Heiko Ihle, Analyst

Can you guys hear me okay?

Dan Dickson, CEO

You sound phenomenal, Heiko.

Heiko Ihle, Analyst

I'm in my house. I don't know what happened earlier. So I hung up and dialed back in. So if this question was asked, my apologies in advance. Dan, earlier on this call in your prepared remarks, you mentioned early Q4 for commissioning, reading into this, we're looking probably at October or maybe early November, so seven months away. Has that timeline changed at all? I just went through the February 12 press release and it also just states Q4. And I mean we probably had more like mid Q4 in our model, and this is obviously quite a bit better. And if this timeline has changed, what exactly helped moving forward please.

Dan Dickson, CEO

Heiko, we've always publicly said that we are Q4 commissioning, and we've never indicated whether that was going to be October, November, or December. I think that buys us a little bit of time and we initially had planned in our feasibility study kind of a three to six month commissioning phase. In our model right now, maybe it's a little bit shorter than the six months and closer to that three months. The expectation at the outset since April 2023 until today, as we've publicly been saying it's a Q4 commissioning for 2024.

Heiko Ihle, Analyst

Got it. Okay. Building on that, and just thinking a lot here, the cost curve for Terronera, obviously, has a ramp-up associated with it. In your internal model, has anything with this ramp-up curve changed compared to where you maybe were a year or two ago before it really started getting fully built?

Dan Dickson, CEO

To be honest.

Heiko Ihle, Analyst

Like the cost per ounce.

Dan Dickson, CEO

Yes. We haven't come out publicly on operating costs. Clearly, from our existing operations, we've seen operating cost pressures increased because of the Mexican peso due to the inflation rate. Publicly in our feasibility study, we put out an $87 cost per tonne on the operation. Again, that was at the 1,750 tonne per day. When we announced the construction decision for Terronera, we talked about the 2,000 tonne per day scenario, which brought our cost per tonne down to $80. Now clearly, with the pressures that we've seen across the space, that $80 per tonne probably is not going to hold due to increases in steel prices and reagents pushing that up. We haven't remodeled all that. As we approach operations and going into commercial production, we'll probably update the market at that time with regards to those. But just knowing the operations and where those pressures have been, I don't think it will be significant or change the outcome of what we do at Terronera.

Heiko Ihle, Analyst

Perfect. That's fair. Apologies for the bad connection again and I'll talk to you soon.

Dan Dickson, CEO

Thank you. No apologies necessary.

Operator, Conference Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Dan Dickson for any closing remarks.

Dan Dickson, CEO

Well, thanks, operator, and thanks for everybody attending this year's 2023 earnings call. Hopefully 2024 turns out to be a wonderful year. I know in the last two weeks, we've had a real push on gold prices, and hopefully, that translates into the silver price. I know we're still sitting close to 9:1 ratio. Ultimately, we see some appreciation in the gold price that will translate over to the silver price. It's our job to execute this year on Terronera. I think we'll have a very wonderful 2024 and hopefully beyond that. Thank you, and have a good day.

Operator, Conference Operator

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