Earnings Call Transcript - EXK Q1 2021

Operator, Conference Operator

Thank you for waiting. This is the conference operator. Welcome to the Endeavour Silver Corp. 2021 First Quarter Financial Results Conference Call. All participants are currently in listen-only mode and the conference is being recorded. After the presentation, there will be a chance for you to ask questions. I would now like to hand the call over to Galina Meleger, Director of Investor Relations, for opening remarks. Please proceed.

Galina Meleger, Director, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2021 first 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; and our Chief Operating Officer, Don Gray. 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 2021 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. 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 would like to thank you again for joining today's call. And I will now turn it over to our CEO, Bradford Cooke.

Bradford Cooke, CEO

Thanks very much, Galina. And welcome everybody to this Q1 financial results call. Endeavour had a very good start to this year. There is a lot going on. We pre-released our metal production at 1.04 million ounces of silver, which is a 22% year-on-year increase, and 10,900 ounces of equivalents, up 31% year-on-year for silver equivalents of 1.9 ratio of 26%, compared to Q1 last year. Our costs were pretty much flat year-on-year, cash - six per ounce payable silver and after the gold credit all in costs were up a little bit, 8% to 1994, again that at the gold credit. And that led to revenues of $35.1 million, up 58%, that was partly due to obviously higher production, higher prices, but also we held back a little for sale during the first quarter, partly due to the downturn in metal prices in late March. And we fully plan to sell much of that inventory here to higher prices. That impacted our cash flow. We had $5.2 million of cash flow from operations, but that was up sharply from last year and of course a $12.2 million per share, so, up sharply compared to a loss of $16 million last year in Q1. A good chunk of that though is the reversal of our El Cubo asset, which we sold here just recently, offset partly by increased exploration activities, evaluation activities, and a higher tax expense. We would have had an adjusted loss in the first quarter, but that is offset by the rise in finished goods inventory. So, I got a busy quarter, a profitable quarter for us. Now we are looking for another very good quarter here in Q2. So, those really are the financial highlights from our release today. And I think rather than carry on, why don't we just open this up for Q&A and we would be happy to answer your questions.

Operator, Conference Operator

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

Heiko Ihle, Analyst

Hey there. Thanks for taking my questions. I just want to thank Don for everything he has done for the farm, then best of luck to you, and I think you are taking over a very well oiled machine here.

Don Gray, COO

Thank you very much. I appreciate that.

Heiko Ihle, Analyst

You have increased your finished goods inventory by quite a bit in the quarter. I mean, you at 530,000 ounces of silver, just under 1700 ounces of gold. In the past, you have done really well trading silver, but I mean, just briefly, where do you stand right now in regards to dollar terms of finished goods as of today? And philosophically, what do you anticipate future accumulations of finished goods might look like? And yes, I know that it might be more intelligent to ask this question after the AGM tomorrow. But, just curious, maybe your philosophies there.

Bradford Cooke, CEO

Yes. I think Dan and I share a similar view that this is a sales strategy that we have used from time to time. And it is based on the seasonality to silver and gold. Sometimes quarterly moves in silver and gold. We did this successfully last September when the metal prices fell sharply at the end of the month, and rather than sell all of our metal last September, we had to hold on to it because we felt that the market would rebound. In fact, there was a nice rebound, and we were able to take significant additional profit from the sale of that inventory in Q4 last year, and so this example is exactly the same. The metals had a great run in the first quarter. They tipped over and fell in March, rather than pushing all of our metal out at quarter end, we felt that there would be a nice balance here in Q2, and in fact, there has been.

Don Gray, COO

Yes, I would add to that question of where we sit today. Generally, we hold about 300,000 ounces of silver just because of outturn timelines. Ultimately, that can get down as low as 50,000 ounces of silver. We did sell a large portion of the 525,000 ounces of silver that we had at March 31, with this recent run-up into the 26 to 27. So as Brad touched on, it is more of a short-term strategy of watching short-term patterns and trying to sell not when the prices are falling, but hopefully when they're rising.

Heiko Ihle, Analyst

You have been extremely successful with this stuff in the past. And I hope it continues like that. So congratulations. And then just a quick clarification, the impairment reversal for El Cubo is completely done now that this is closed, or is there any lingering tax implications or other costs or anything that we should focus on for Q2 and beyond?

Bradford Cooke, CEO

For Q2, we would recognize the full gain on sale. So ultimately, what we reversed in Q1 as of March 31st was historical balance that would have been remaining after depreciation. And on April 9th, we would recognize the full sale. So there are contingent payments that would be coming. We have a fair value for the share value of Van Gold as of April 9th is what we recognized. So there will be a residual amount that we would recognize and gain in Q2.

Heiko Ihle, Analyst

Got it. Well wonderful and once again congratulations to both of you and thank you, Brad.

Bradford Cooke, CEO

Thanks, Heiko.

Operator, Conference Operator

The next question comes from Mark Reichman with Noble Capital Markets. Please go ahead. Mark Reichman, your line is now open.

Mark Reichman, Analyst

Thank you, I just wanted to focus a little bit on the cost. So, the all-in sustaining costs were impacted by the higher corporate G&A and the higher capital expenditures that went up to be, which I guess you could kind of look at as an investment. But then the direct operating costs were impacted by the higher labor costs. I was just wondering, if Dan could maybe talk a little bit about how he sees those costs trending. And for example, in terms of the all-in sustaining costs, I know the higher capital expenditures are to develop El Curso. So that should benefit down the road. So, how do you see those line items trending? Dan?

Daniel Dickson, CFO

Yes, thanks for the question, Mark. You are right, Q1s are a little bit higher. But at Guanacevi, we were well ahead from a mine development standpoint, one of our best development quarters in a long time actually, which ultimately just means either we will do less come year-end or continue on, but it should dissipate a little bit. We are getting ahead of ourselves now, which is great for future flexibility. And ultimately, we did have a budget from an all-in sustaining costs, which includes our capital expenditures, and that is unchanged for the year for Guanacevi. As far as labor costs impacting our operating costs, we are seeing a little bit of pressure on labor. I would imagine it is industry-wide, as things are picking up. A lot of companies are out there looking for operating staff and capable operating staff. We brought on a lot of really good people last year. We had a very good year, we feel from a production standpoint with what we are dealing with and 2020. Some of the bonuses went through on our labor costs in Q1 higher than what we include for year-end. So, that did impact Q1 a bit. Hopefully, we will see labor costs come down. But as we are seeing across the world, this global supply chain seems to be quite constrained right now and having issues with that, and I don't expect that to change in the next six months. So, maybe a little bit increase in our costs, but we are going to work our best to mitigate that. Maybe a little bit increase in our costs, but we are going to work our best to mitigate that and look for solutions and try to get our tonnage up, a little bit to where plan was. We were on plan from announced production standpoint. It would be nicer if our tons improved for actually - so hopefully our per-ton basis, our costs improved throughout the year, and we expect to hit our guidance that we delivered to the market in January.

Mark Reichman, Analyst

That is very helpful. Thank you, Dan.

Daniel Dickson, CFO

Thanks for the question, Mark.

Operator, Conference Operator

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

Cosmos Chiu, Analyst

Thanks, Brad, and Dan. And Dan congratulations, I guess the big day is tomorrow.

Daniel Dickson, CFO

Yes. Thanks, Cosmos.

Cosmos Chiu, Analyst

I guess my question is, what took so long. Joking aside, I do have some real questions here. At Guanacevi, as you talked about, royalties were higher in the quarter, due to higher royalties at Porvenir Quatro - sorry about the pronunciation. Could you talk a bit more about the mine plan, going forward for the rest of 2021? Should we expect tonnage to continue to come out from that area and hence higher royalties?

Daniel Dickson, CFO

Yes. I think the key to Q1 was we did have a little bit higher production from El Curso. It is between our program in the collateral mine which you are probably familiar with in Malachi. We did mine a little bit more from El Curso just due to some of the areas that we are in and a little bit less from Alaska where we don't have that royalty. But the impact on that royalties is when we did our guidance, we guided at $22 silver, $17.60 gold. We sold our silver at $27, and I think gold was slightly below that $17.60. So we had higher royalties on that basis. But also the grade that is coming out of El Curso. The grades of Guanacevi were about 15% on a silver equivalent basis above plan. And again, just an area of that El Curso so you saw our drill results that we put out a couple of weeks ago regarding El Curso and Guanacevi and what we were finding on Santa Cruz. So to our surprise, ultimately the grades have been better than what we expected. So, obviously, there is an increase in our costs and royalties, but our margins are still extremely good from that area.

Cosmos Chiu, Analyst

Sure. And that leads in well to my next question here, in terms of El Curso, and as you mentioned earlier, this month, you put out some very good drill results coming out of Guanacevi. I think I saw over 2000 grams per ton, a lot of it just want to confirm is coming from El Curso. And I guess the other part of my question after confirming is, I guess, in the press release, you mentioned, El Curso and Porvenir Quatro could all become one continuous ore body, potentially over 1.5 kilometers by about 600 or 400 meters. When would we find out more about this potential here, and then could you maybe talk about potentially when this concept, when continuous ore body could come into the mine plan now?

Daniel Dickson, CFO

Yes, there is a lot there. The drill holes that came out a couple of weeks ago were mainly from the El Curso ore body in feeling and step-out drilling there. We are also drilling the Santa Cruz silver ore body, which we are actually mining from as well, or just mining that or drilling at depth. And can you have positive results there. But I would say, a majority of the drill holes that came out two weeks ago are from the El Curso ore body. And if you go onto our website and even in our presentation, we have a beautiful longitudinal section between Porvenir Quatro and Malachi showing the ore body about Curso, which gives a pretty good understanding of the size and scope of that ore body. There are some slivers in there which is owned by Frisco, who we have acquired or leased the El Curso concessions from, that owned some slivers, and we are working with them to hopefully acquire some of that ground to be able to mine that as well, because we do think it is continuous all the way through. Obviously, we have drilled out Malachi. We have proved that Porvenir Quatro we actually mined a lot of that ore from that mine. So we feel it is continuous, but the scope and scale of it is pretty clear to see just through our website or presentation.

Cosmos Chiu, Analyst

Yes. I have seen that. I have seen that long section as well. So, I guess my question is, we will find out later on how this kind of all exploration results will impact the mine plan sometime later on?

Daniel Dickson, CFO

Yes, when it comes down to total resources and total tons in the resources, we are still drilling that area. And we will come up with a resource estimate later on in the year and publish that. Brad, I don't know if you have any more color you would like to provide with regards to El Curso and our drill results there.

Bradford Cooke, CEO

Yes, just to answer your question Cosmos. Crystal claim was that we leased from Frisco and the two gaps between our El Curso at Malachi and El Curso at Porvenir Cuatro, our other properties owned by Frisco, we expressed interests, they expressed interest. And so we are hoping we can consummate a way to add those gaps, if you will, to the existing lease agreement, and then we will be able to drill them and prove that that is one continuous ore body, the gaps themselves are only a couple hundred meters wide I think so. It is pretty easy to project that this should be continuous.

Cosmos Chiu, Analyst

Of course, maybe switching gears a little bit at Terronera. As you mentioned, you are targeting a feasibility study by Q3 2021. The last PA was sometime in 2020. And I think then, or maybe Brad, you touched on it, labor costs have increased. I don't think that is the only cost that has increased in the past year, steel prices have gone up, other input costs have gone up. So, I guess my question is, as you do this, finalize the feasibility study at this point in time. Have you seen cost increases, and have you factored into your study here and how are you managing that risk?

Bradford Cooke, CEO

So, I will answer from a higher level. Basically, the feasibility study is still underway. So, we still have an opportunity to finalize costs here in the next month or two. And the main cost drivers of these capitals are the design of the mine and the plant. Most of those we put plans in already. Dan, you want to add to that?

Daniel Dickson, CFO

Yes, I think it is definitely a risk, and you always look at it. And that is what we paid to manage to do. Ultimately, we are seeing some input increases, which could increase the capital upfront costs or sustaining capital. From an operating standpoint, we think there are a lot of levers there that we can improve our operating costs from the PFS in 2020. So ultimately, when all the numbers come out, which you are right, it'll be early Q3, we will have that we still expect to have a very economic project when it is all said and done.

Cosmos Chiu, Analyst

Okay, for sure. And Dan maybe one last question from me here. Dan as you take the CEO seat, Brad is not leaving, I guess he is going to be Executive Chairperson. And in a press release, it talked about Brad continuing with the company growing the company. One side of it is, for sure building to an era. The other side, I think we have talked about in the past is potential acquisitions. Bigger picture, Brad, we have seen some of your competitors divest or diversify into gold, diversify beyond. You have always talked about in the past, it is harder to make acquisitions, where silver assets, anything that you can share with us in terms of industry wide, or companies specific at this point in time?

Bradford Cooke, CEO

Sure. So in terms of growing the business through the drill bit, that is organically, I think we have been more successful, and most notably with finding new resources every year at our operating mines. But of course, the discovery of Terronera and the emerging resources that prowl. In terms of our silver gold mix, we have always been a silver dominant producer, but with the healthy gold credit, and we see more of that in our future Terronera a lot. Let me say that the operations this year probably are going to be about 60/40 silver gold revenue. Terronera, I think comes in around 65/35. Prowl is 100% silver. So not only are we, I think, one of the most, if not the most silver-focused of the silver producers to skew more towards gold with our existing development pipeline. That means to M&A and what I my view is that we have room to take on gold and still remain a primary silver producer, because there is nothing to buy in silver. We are not averse to buying a gold dominant asset. It is just that we would like to remain more than 50% silver by revenue even after M&A.

Cosmos Chiu, Analyst

Great. Thanks. Those are the questions I have. Congrats again, Dan and Brad as well.

Bradford Cooke, CEO

Thanks.

Operator, Conference Operator

The next question comes from Howard Flinker with Flinker & Co. Please go ahead.

Howard Flinker, Analyst

Alright, Brad. My two minor questions are: What price did you get in your sale via ATM in quarter one?

Bradford Cooke, CEO

That is Dan's question. Thanks for your question, Howard. Dan, you want to take that?

Daniel Dickson, CFO

That is a very good question. We would have averaged just above $5 per share price. It is actually in our financials. But I don't have it specifically off-the-top of my head right now. So a good question, Howard. But it is just north of $5.

Howard Flinker, Analyst

501, 502? Hello?

Daniel Dickson, CFO

Pardon Howard?

Howard Flinker, Analyst

167 million shares outstanding now as compared to the average?

Daniel Dickson, CFO

Yes.

Howard Flinker, Analyst

Right now, 167?

Daniel Dickson, CFO

Yes.

Howard Flinker, Analyst

Thank you.

Daniel Dickson, CFO

Just carrying on from your question. We had this ATM facility available to us all the way back to last July, but we just wanted to use it primarily for any equity portion of a Terronera project financing. And we were very patient we didn't touch it. And the nice run-up in the share price here in the first quarter. We did tap that ATM for $30 million. So, we closed out the first quarter with $86 million cash and $113 million of working capital. And so, I’m suffice to say that we now feel that any equity component that is covered.

Howard Flinker, Analyst

Thank you.

Operator, Conference Operator

The next question comes from Justin Stephens with PI Financials. Please go ahead.

Justin Stephens, Analyst

Hey, everyone. I think most of my questions have already been addressed. However, I have a couple remaining. You've shared some impressive results recently, which is great to see. It seems like you've already allocated a significant portion of your budget for brownfields drilling in the first quarter. Should we anticipate that you might not revisit your drilling budget until mid-year, provided you keep experiencing the successful results you've had so far?

Bradford Cooke, CEO

Yes. Justin, I would just say that we have done this in the past when we are having a good year and there is excess cash flow, then we look on how to put that cash flow to work and it is probably the case this year as well.

Justin Stephens, Analyst

Got it. And obviously we have seen the nice release out of Bolanitos. Can you give some rough timing for when we might see some of the Bolanitas’ results?

Bradford Cooke, CEO

I would assume that that would be up next, following Terronera results.

Justin Stephens, Analyst

Got it. Yes. And just on the Terronera results, obviously Q3 is surprisingly soon, I don't know how it got to be mail ready. But in terms of the drawing that you have done there, are you expecting any of that to make it into the updated resource that will then hit the feasibility study or is it going to be sort of more parallel development?

Daniel Dickson, CFO

No, what we are doing now, in fact, I think this year we put the pin in the reserve and resource at the end of last year. So, all of the work...

Justin Stephens, Analyst

Got it. Yes. That makes sense. Given the way these timelines work and things got to fit together. Perfect. That is it for me. Thanks guys.

Daniel Dickson, CFO

Thank you.

Operator, Conference Operator

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

Bradford Cooke, CEO

Well, thank you operator and thanks everybody for tuning in today. This is actually my final quarterly call on behalf of the management team of Endeavour, and I'm now formally handing the reins over to Dan and Christine, and I just want to say that we have had a great run, but we are not half done yet. I look forward to listening in on Dan in future calls. So again, thanks all and look forward to our second quarter financial results.

Daniel Dickson, CFO

Thanks, Brad.

Operator, Conference Operator

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