Earnings Call Transcript - EXK Q2 2023

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Second Quarter 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 to ask questions. I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please go ahead.

Galina Meleger, Vice President of Investor Relations

Thank you, operator, and good morning 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 edrsilver.com. With us on today's call is Dan Dickson, Endeavour's CEO; Christine West, 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, Galina, and welcome everyone. I would like to start by acknowledging the tremendous achievements we made at Terronera in Q2, which advances our strategy in pursuing high-margin production growth. During the quarter, we obtained formal Board approval committed to project loan financing, established a seasoned team, and now construction is well underway. Terronera is a unique opportunity that will reposition the company to generate significant free cash flow, bringing us one step closer to achieving our mission of becoming a premier senior silver producer. Nevertheless, despite continued positive production performance, the headline for this quarter continues to be pressure on costs. As a company with operations in Mexico, we are facing the challenge of rising costs for which we remain vigilant to mitigate the impacts. Like all our peers, macroeconomic factors such as industry-wide inflation and a strengthening Mexican peso have continued to put pressure on consumables and labor costs across our operations. Unfortunately, we expect these trends to continue for the near-term. In terms of production, consolidated Q2 silver equivalent production was up 8% year-over-year to 2.3 million silver equivalent ounces, bringing us to 4.7 million silver equivalent ounces for the first half of the year. This performance puts us well in line to achieve this year's production guidance of 8.6 million to 9.5 million silver equivalent ounces. Compared to the same period prior year, both silver and gold production are up 10% and 6% respectively. While our Guanacevi operation was generally in line, higher tonnes milled were offset by lower grades. Adjustments to the mine sequencing during the quarter resulted in lower grades compared to our planned and recent quarters. However, we expect to return to higher grades for both the third and fourth quarters. As compared to Q1, both silver and gold grades decreased by 20% in Q2. Performance of our other operating mine, Bolañitos, remains steady. Increased gold production was offset by lower silver production in Q2. The Bolañitos operations team continued a strong effort to meet or beat their targets including mined and processed tonnes. Moving to our financials. We reported topline revenue of $50 million with a cost of sales of $37.5 million for operating earnings of $12.5 million. After exploration, G&A, and other expenses, we reported a net loss of $1.1 million or negative $0.01 per share. Excluding non-cash mark-to-market adjustments on marketable securities, our adjusted earnings totaled $2.1 million or $0.01 per share this quarter. At the site level, Guanacevi delivered mine free cash flow of $5 million and Bolañitos was pretty much breakeven. Regarding operating costs, we've seen pressures across several inputs. Our direct cost per tonne were up 15% this quarter. At the time of guidance, our inflation assumptions were 5%. However, year-to-date, we've seen those costs of key inputs like steel used for ground support and consumables such as zinc and cyanide continue to increase well above our assumption. Additionally, labor costs are having a significant effect with the strengthening of the Mexican peso. The peso has strengthened to a 7-year high. Originally, our 2023 guidance had assumed a 21:1 Mexican peso to US dollar exchange rate. However, we're currently looking at 17:1. This is up 14% year-to-date which is increase in our local cost in U.S. dollar terms. All these factors manifest themselves into overall higher costs. Both quarterly cash costs and the all-in sustaining costs are above our upper bounds of our guidance at $13.52 per ounce for cash costs and $22.15 per ounce for silver all-in sustaining cost per ounce. As a result, management expects costs to be higher than cost metrics, previously provided in our 2023 guidance. Inflation is an industry-wide issue that's expected to persist throughout the year. We're closely reviewing our purchasing practices to see where and how we can mitigate the impact. Containing costs will continue to be a key focus as we work to improve the efficiencies of our operations. Management anticipates cost metrics for the remainder of the year to align with H1 2023 actual costs. At June 30, we had cash on hand of $43 million and working capital of $78 million. To maintain flexibility on project execution, we initiated a $60 million ATM filing in Q2. Completion of the definitive loan documentation for the $120 million senior secured debt facility is expected soon with closing and drawdown expected in Q3. After the quarter, we further enhanced our liquidity by selling a 1% stake in Capstone's Cozamin Royalty to Gold Royalty Corp. This sale will bring in a cash injection of $7.5 million in Q3. We originally obtained that royalty through a concession division agreement back in 2017 for less than $500,000. Let me give you a quick update on construction at Terronera. At the end of Q2, we reached 30% completion. We have spent $70 million to the end of Q2 on direct development. Project commitments totaled $144 million and we are tracking in line with the optimized plan both on timing and on budget. During the quarter, we had steady momentum on engineering, surface construction at the plant site, mine development and establishing internal processes to best execute the project. If you're interested in seeing photos of the construction progress, I encourage you to visit our website under the Terronera page. A quick recap. On-site personnel has increased to over 450 employees and contractors. Detailed mill and surface facilities engineering is over 70% complete. Engineering was finalized to request proposals for the mill construction contract including structural steel, mechanical, piping, electrical and instrumentation. Access road construction is substantially complete. The focus on early road improvements have greatly facilitated construction ramp-up especially prior to the rainy season. The camp to accommodate 550 personnel is substantially complete. Nearly all dormitory units have been installed. Several final living units remain pending. Mine development is advancing on two fronts with over 600 meters completed as at June 30. In the meantime, a new portal is being prepped to access the lower part of the ore body. Bulk earthworks for the plant is nearing completion with nearly 300,000 cubic meters of material moved. Excavations were completed for the coarse ore reclaim tunnel, grinding areas, and now rebar installation has begun. On the procurement side, deliveries are advancing on schedule with shipments arriving at the company's laydown warehouse. Major equipment deliveries in Q2 include jaw and pebble crushers, vibrating screens, flotation cells, and the concentrate bag system. And lastly on the community side, we continue to partner with local schools to support education campaigns and cultural celebrations. Looking ahead, our main focus is now progressing mine development, advancing concrete work for the mill platform and awarding the mill construction contract which will kick off the next major phase of construction. I think that wraps up today's formal comments. Myself, Dan, and Christine are happy to answer any questions that you may have. Operator, could you please open it up for Q&A?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle, Analyst

Thank you, Galina, Dan. I assume you can hear me okay?

Dan Dickson, CEO

We can hear you well, Heiko.

Heiko Ihle, Analyst

Excellent. Hey, on Terronera, I went through your July press release again earlier today and I compared it with your note today. I mean Dan also, you obviously provided some more color earlier on this call as well, but I still got to ask, are there any factors that are giving you a bit of a headache both from an availability and pricing point of view? It seems like the camp is mostly done and mine development continues at a good pace. But is there anything that we should maybe know about? I assume the answer is no, but I just want to double-check.

Dan Dickson, CEO

It's a valid question. As you've mentioned, we are experiencing significant inflation across our operations. Don and his team have managed procurement effectively, securing many key components ahead of schedule. I've mentioned in previous calls and press releases that our entire mobile fleet is already on site, and many essential plant components were procured early. We expect some deliveries in the second quarter and the rest later this year. Most of these purchases align with our expectations and the feasibility study based on our optimized plan. We've done well in this regard. However, there are always concerns, which is part of our management responsibilities. Meeting our mine development targets over the next year to a year and a half is crucial for keeping the Terronera project on time and on budget. While there may be challenges along the way, we remain hopeful for cost advantages. Currently, we are about 30% complete at Terronera and feel we are progressing well relative to our budget.

Heiko Ihle, Analyst

That was a very nice lead over to my next question. Obviously, the Mexican peso has increased quite a bit. You mentioned earlier in this call and also in your release we were at 17.12 right now. What are you using in your model for the remainder of the year? And I don't know if you have a longer-term modeling number for the peso as well please?

Dan Dickson, CEO

Yes. For the remainder of our year, we're generally putting our cost guidance right around what we did with H1. So we averaged just above $17 for H1, maybe it's closer to $18, so $18 to 1 is probably a comfortable estimate. For the long-term, we'll look at that at the end of the year. We're kind of going through our budgets for 2024 at this point and just getting that kicked off. Through different discussions with various banks, we do expect the peso to continue that depreciation that we've seen for the last 20 years. But again, we don't have a crystal ball when does that turn around and we no longer see appreciation in the peso. Hopefully, in the next six months, but again, we don’t have a crystal ball on that. And when we come out with guidance for 2024 we typically state what we're using for an FX rate at that time.

Heiko Ihle, Analyst

Got it. Okay. Clear. I’ll get back in queue. Appreciate your time.

Dan Dickson, CEO

Thanks, Heiko. Thanks for the questions. Good to hear your voice.

Operator, Operator

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

Craig Hutchison, Analyst

Hi guys. Thanks for taking my questions.

Dan Dickson, CEO

Hey, Craig. How are you?

Craig Hutchison, Analyst

Good, well, thanks. Just on Terronera with regards to the Mexican peso, can you give us a sense of how much is exposed to, I guess, domestic currency the peso versus how much is exposed to the US dollar?

Dan Dickson, CEO

Yes. I mean, obviously labor costs are significantly exposed to the peso compared to the dollar. A lot of the items that we've procured have been in US dollars and we've committed $144 million of the $230 million. So for the $90 million left to be exposed, we're expecting somewhere between $30 million and $50 million to be tied to the Mexican peso. So not significant at this point in time.

Craig Hutchison, Analyst

Okay. Great. And then in terms of your operations, what's the kind of rough breakdown at Guanacevi and Bolañitos in terms of the exposure?

Dan Dickson, CEO

Yes. Yes. 30% to 35% of our – I think Bolañitos is around 32% and Guanacevi a little bit higher, around 34% or 35% of our costs are incurred in labor. Obviously, labor is completely exposed. So for the remaining 65%, about half is tied to the Mexican peso. So in total, you're looking at 55% to 65% of our costs are tied to the Mexican peso.

Craig Hutchison, Analyst

And just on the financing and just you talked about the inflation and some pressures you've seen on FX. Is there a potential to upsize that from the $120 million that's sort of been agreed to at this point, or has it sort of been finalized and that's the number we can expect?

Don Gray, COO

Yes, it's been finalized. As a management team, we believe that this is the upper limit we want to accept regarding our debt. We have established a $60 million ATM facility that we haven't utilized for protection purposes. If we exceed the $230 million, we would prefer to raise that through equity to avoid becoming too leveraged with debt.

Craig Hutchison, Analyst

Okay. That makes sense. All right. Thanks, guys.

Dan Dickson, CEO

Thanks for the questions, Craig.

Operator, Operator

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

Lucas Pipes, Analyst

Thank you very much, operator. Good afternoon, everyone. I also wanted to start out on the cost side and maybe more broadly kind of what sort of measures you're taking today to ring-fence cost inflation? Are there things you're looking at the operational level? I would appreciate any additional color you might be able to share. Thank you.

Don Gray, COO

Yes. Thanks, Lucas. It's a difficult thing to ring-fence inflation and ultimately the strengthening of the Mexican peso when it comes to labor. But from an efficiency standpoint and making sure we're operating as best we can, I think we've done that well at Bolañitos. At Guanaceví we can be better at that. We're looking at improving our ventilation and our pumping, reducing our electricity usage with pumping and being more efficient from that standpoint. We're also looking to be more efficient on our advances underground, making sure that we're using the right amount of explosives and the right amount of steel rather than potentially using more than what we should have been. And so I think it's really an efficiency standpoint from our operations team that we can find little wins here and there and whether it's about the inputs going into the number of units that we're using as opposed to those costs of those units. Because there's only so much you can do from a – like for example, the strengthening of the peso, our labor costs we need those labors. The question is do we need as much labor as what we have. That's where we can make those adjustments. Of course, we've been kind of in a good fortune like Guanacevi the discoveries we've made in 2019 in the high grade. I think some of that grade is going to pick up in the back half of the year that will improve our cost on a per ounce basis. It's little things and being vigilant on those little things and making sure we're operating as best as we can.

Lucas Pipes, Analyst

Thank you for that. And a follow-up on Guanaceví. The higher grades with the El Curso ore body. How sustainable is that over the – you mentioned the back half of the year but as we look into 2024, should we continue to see those benefits improve or kind of stabilize at the second half level? Thank you.

Dan Dickson, CEO

Yes, I think it would stabilize. We do have a good life with El Curso remaining. I mean, obviously we have Milache, we have Santa Cruz, Sur, and other areas that we're able to mine, but Santa Cruz or El Curso is kind of the heart of where our production is coming from and that will continue for the foreseeable future, especially into 2024 and 2025.

Lucas Pipes, Analyst

I appreciate that. Thank you. And then one quick last one from me. Just with Pitarrilla, what's the outlook there and major milestones for the market to look forward to?

Dan Dickson, CEO

Yes. No that's a very fair question. I'm glad you brought that up. Well for us, Pitarrilla, as most of our listeners probably know, we purchased that in 2023 for $70 million and we've really been pushing there. And to the end of 2023 and early 2024, we did a lot of relogging of the historical data. And for this year, we have a $3.3 million budget and most of that's to push the ramp to what we think is or what our predecessors thought was a manto zone and it was about 300 meters away to get there. We've had some delays. We've had some workarounds on the old historical ramp. It looks like we're going to have to push a parallel ramp, which means rather than being 300 meters, we'll have to be 500 to 600 meters ourselves, which will delay our drilling program and end up being either late Q4, more likely into 2024. So we're not going to have as much news on Pitarrilla this year, which was expected to come at the end of the year from a drilling standpoint and an economic analysis next year. So that will push into next year just because of this ramp. But we do have big expectations still with Pitarrilla. Obviously, we've defined a resource of over 600 million ounces, but we are looking at an expectation of seeing if we can make this an underground operation similar to what Silver Standard had looked at back in 2009. Obviously, I always wish things went faster than what sometimes they do. And hopefully, we can still get through that economic analysis in 2024.

Lucas Pipes, Analyst

I really appreciate all the color and detail. To you and to the team best of luck.

Dan Dickson, CEO

Thanks, Lucas. Thanks for the questions and for the call as well.

Operator, Operator

The next question comes from Justin Stevens with PI Financial. Please go ahead.

Justin Stevens, Analyst

Hey, everyone. Most of my questions have been crossed off, but I got one last one. Obviously, the Guanacevi grades took a hit in Q2, but you're expecting an uptick in Q3 and beyond. Was the sequencing impact there mostly development related? And if so do you think you'll be able to sort of stay ahead and keep enough stopes and high-grade sections to keep that grade pretty flat going forward?

Dan Dickson, CEO

Yes. Several factors contributed to that sequencing. We lost one of our high-grade stopes, and we spent a lot of Q2 working on that and fixing it so we can return to it in Q3. Development has lagged a bit, but not significantly, and we have a recovery plan to ensure our development keeps up to avoid changes in our plans. This is a common challenge in underground operations—to ensure we have enough mine development without overextending ourselves by extracting too much ore, as that can lead to issues down the line. However, we anticipate stabilization in Q3 and Q4, with grades expected to be slightly lower than in Q1. I believe Q1 had particularly high grades that we planned for, but the grades will likely fall somewhere between Q2 and Q1.

Justin Stevens, Analyst

Just on that the high-grade stope, was that just like an isolated ground condition issue or…

Dan Dickson, CEO

Yes, we believe it was isolated. I'm always looking at that but we've had very good ground in El Curso and continue to expect to have good ground.

Justin Stevens, Analyst

Great. Could you provide an update on the timeline for the drilling at Bruner and the progress of re-evaluating that resource? Should we anticipate that by the end of the year?

Dan Dickson, CEO

No, I think that's going to fall into 2024. We haven't really pushed on Bruner this year. We did get all our drilling permits. But again, there's no plans and we want to make sure that we keep that cash...

Justin Stevens, Analyst

Priority is obviously on Terronera and everything?

Dan Dickson, CEO

Yes, exactly, exactly.

Justin Stevens, Analyst

Yes. Great. All right. Thanks and look forward to seeing the uptick back in Q3.

Dan Dickson, CEO

Thank you. Thanks for the questions, Justin.

Operator, Operator

The next question comes from Cosmos Chiu with CIBC. Please go ahead.

Cosmos Chiu, Analyst

Hi. Thanks, Dan and team. Maybe my first question is on Bolañitos. I think in the MD&A you mentioned that Q2 experienced higher gold grades, increased throughput offset by lower silver production and lower silver grades. I guess, my question is that higher gold grade and lower silver grade, is that going to continue? And is that going to revert some time into the future?

Dan Dickson, CEO

Yes. Thanks for the question, Cosmos. I mean, we actually get quite variations between Bolañitos between gold and silver. In general, I think our silver equivalent grades were in line with expectations with budget and Bolañitos is performing as expected. Q3, Q4, it would probably line up pretty good with H1's gold grades and silver ratio. And then going forward, similar to that point.

Cosmos Chiu, Analyst

Great. And then looking at your guidance, Dan, as you mentioned production guidance has been maintained. Cost guidance has been maintained. But as we talked about on this call, there are a lot of questions about inflation, foreign exchange, FX rates. And you, I guess in the MD&A you even made the comment that some of these inflationary pressures are expected to continue in the near-term expect actual cost metrics to be higher than cost metrics previously provided by the company's 2023 guidance. So what does that mean? Are we potentially looking at for the full year cost to potentially come in higher, or is that just looking out into Q3? I wasn't too sure about the wording around…

Dan Dickson, CEO

No. Yeah, I can be more clear on that Cosmos. Ultimately, as you said, from a production standpoint, we're at 4.7 million silver equivalent ounces produced. Our upper bound range is 9.5 million silver equivalent. So we're tracking really well from a production standpoint to the upper bound. Unfortunately from a cost standpoint, all-in sustaining costs have been $22.15, cash costs have been near $12 or $12.21 for the first half of the year. We're expecting our costs to be above the upper bound range of our guidance. So we're not restating the number, but we do expect for the second half of the year our cost metrics to be similar to H1, which again puts us above the upper bound range of our original guidance.

Cosmos Chiu, Analyst

Understood. I believe you were saying, Dan...

Dan Dickson, CEO

No, no it's good. I'm glad you understood, just wanted to make that clear.

Cosmos Chiu, Analyst

Okay. I guess, as we talked about what are the key components of the Mexican peso, I just looked at it again. I don't think right now you are hedged in any way in terms of Mexican peso. And then as you mentioned you don't have a crystal ball, I don't have a crystal ball either. So is there any thinking behind potentially hedging away that risk longer term, especially with some of the costs associated with Terronera?

Dan Dickson, CEO

Yeah, it's a very good question. And there's two parts to that almost. From an operating standpoint, we aren't going to enter into any FX hedges for Guanaceví or Bolañitos. I think a lot of the literature that we still get is we expect peso to stay relatively strong through 2023, but to reverse course and get back on historical trend of depreciation against the US dollar. So that's part of the thought patterns on why nothing from an operating standpoint. From a Terronera standpoint, it's different, right? Because we have a big incurrence, because of the debt that we're putting in place with Soc Gen and ING, it's $120 million, there is an FX component hedging with regards to Terronera. It's not significant. Craig had earlier asked the question about what remains from an FX standpoint. We've provided that detail to those banks and we'll have to incur some FX hedging in place for the — as a covenant for the loan facility. Again for everybody else on the call, with that loan facility there's also a gold hedge requirement for the first two to three years amounts to between 50,000 and 60,000 ounces of gold on that three-year basis so averaging 20,000 ounces of gold per year. And we'll get into that detail when that gets all finalized hopefully this quarter, Cosmos.

Cosmos Chiu, Analyst

Great. And then one last question. As you mentioned, the rainy season is coming in Mexico. You've gone through many rainy seasons. I want you to talk about how you have prepared for it at the operations and at Terronera. I'm reading about upcoming major milestones at Terronera, but it involves a lot of delivery and some concrete work. I don't see a lot of major earthworks. How have you thought about the risks associated with the rainy season approaching in Mexico?

Dan Dickson, CEO

Yeah. Obviously, as you stated with our operations, we've dealt with rainy seasons for 17 years, 16 years at the operations. I think we are pretty well equipped to handle it and you don't see big changes in our production profile because of the rainy season. We've had issues in the past various years whether it's clay in the crushers that impacted but only on a, I'd say minute level. From a Terronera standpoint, I think we've done a very good job preparing for it. That's the reason we've put so much work into the roads and the drainage around the roads and requirements for drainage. But I'm probably going to pass this question off to Don who's sitting in Mexico and is on the call. He knows this very well and probably can give you a better answer than I can. Don, do you want to give Cosmos a little bit of color around the work we've done around rainy season for Terronera?

Don Gray, COO

Sure. There's quite a few things that we've done and similar to what we've done on other projects previously, and simple things like we pour lean concrete down in the bottom of the excavation, so that the contractor has something to work off of when it is raining, ready with pumps and things like that for excavations where they may accumulate rainfall, that kind of thing. The other thing is that we've done in some other places is put up some tents and overhead structures, real simple things. But if the contractor is prepared, which our contractor is, then we can get through it. So we've been prepared for it and are preparing for it and anticipate we can meet the challenge.

Cosmos Chiu, Analyst

Great. Thanks, Don. As you look out the window right now, is it raining?

Dan Dickson, CEO

Out the window right now it's — I've got mostly blue sky and a little bit cloudy afternoon. The clouds come in and we get the afternoon rains, but it's kind of typical for right now in this part of the rainy season.

Cosmos Chiu, Analyst

Perfect. Thank you, Dan. Sorry for putting you on this call. But again, thanks, Dan, for answering all my questions.

Dan Dickson, CEO

No, those are great questions, Cosmos, and always happy to answer them.

Operator, 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, thank you, operator, and thank you to everybody listening to our Q2 financial results call. I can tell by the questions. I think everybody understands the importance of Terronera and executing on Terronera over the next 1.5 years for Endeavour. Of course, management is always eager and happy to answer calls from analysts. And hopefully, we expect good results here in Q3 from a production standpoint and we maintain our eye on costs and try to drive that down as best we can. Thanks everyone and have a good day.

Operator, Operator

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