Earnings Call Transcript - EXK Q4 2021

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Year-End 2021 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. I would now like to turn the conference over to Trish Moran, Interim Head of Investor Relations. Please go ahead.

Trish Moran, Interim Head of Investor Relations

Thank you, and good day, everyone. Before we get started, I ask that you please view our MD&A, the 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 edrsilver.com. With us on today's call is Dan Dickson, Endeavour Silver’s CEO; as well as Christine West, our Chief Financial Officer; Don Gray, Endeavour’s COO; Dale Mah, VP Corporate Development; and Luis Castro, our VP Exploration. Following Dan’s formal remarks, we will open up the call for questions. And now over to you, Dan.

Dan Dickson, CEO

Thank you, Trish, and welcome, everyone. 2021 was a good year for Endeavour Silver both financially and operationally. Guanacevi and Bolañitos each performed well, and the performance offset the impact of suspending the operations at our El Compas midyear. In 2021, on a consolidated basis, we produced 8.3 million ounces of silver equivalents, a 27% increase over the prior year. This put us above the top end of our guidance, which we revised upwards in October. Last year's strong performance was driven primarily by two factors: first, increases in the volume of ore processed, ore throughput and recoveries; and secondly, more importantly, a higher average realized silver grade. Revenue rose by 20%, marking a 5-year best bolstered by volume and price growth. Most importantly, this higher revenue translated into increased profit and cash flow with earnings per share of $0.08 and more than $32 million in operating cash flow before changes in working capital. Our cost per ounce metrics were higher than our previous year and above guidance. All-in sustaining costs and cash costs were higher than guidance by 1% and 3%, respectively. Industry-wide inflation has been and continues to be a challenge. In 2021, it impacted everything from labor to power to consumables across our operations. Additionally, Guanacevi saw higher expenses associated with third-party ore purchases and operating development. Furthermore, royalties were higher, and we triggered a special mining tax due to Guanacevi's significant production at higher silver prices and profitability. Our financial performance led to a strong balance sheet at year-end. We had cash of $103 million and no long-term debt aside from normal course leases. The total working capital of $121 million includes unsold bullion inventory held at a cost of over $15 million, while this bullion had a market value of about $31 million at December 31. With the current prices, we have started to draw down this balance in 2022. Our strong balance sheet sets us up well to build out Terronera. Going into 2021, Terronera was an advanced exploration project. Last fall, it was reclassified as a development project following the completion of a feasibility study and confirmation of its economic viability. The study highlighted many improvements in the project, including increased production and throughput. Upon completion, we expect Terronera will nearly double our production and cut our cost profile in half. The updated study also increased our reserves by 33%, and we believe there is high potential for further growth. Ongoing drill campaigns are showing very encouraging results, and our goal is to publish the latest exploration results in the coming weeks. Clearly, Terronera is transformational. While we await the formal construction go-ahead, the project is moving forward. In 2021, $12 million was spent on land acquisitions, initial development and mobile and processing equipment. There is an additional $9.5 million budget for the first quarter of 2022 for site clearing, final detailed engineering, early earthworks, temporary cap and procurement of other long lead items. We'll be seeking Board approval for construction upon completion of a debt financing package and receipt of some amended permits. I'd also like to highlight that while we've been delayed slightly on financing, we are still targeting the first half of 2024 to complete commissioning. With our eyes on the future, last year, we started rationalizing our portfolio and dealt with a couple of assets that were no longer the right fit or were too small for us. Early in the year, the Guadalupe Calvo project was optioned to Ridgestone Mining and El Cubo was sold to Guanajuato Silver. In August, we suspended operations at our small El Compas operation. We also completed a couple of smaller acquisitions to enhance our flagship assets. First, we added two more properties adjacent to the existing historical mine work in the Guanacevi. And secondly, at Parral, we bought out a 1% NSR royalty which we now own 100% of with no royalties encumbered. Additionally, we purchased the Bruner Project, which is located in the well-known Walker Lane District of Nevada. Our focus remains on the larger growth projects that will accelerate our vision of being a premier senior silver producer, namely Terronera, Parral and now Pitarrilla. In mid-January, we announced the signing of the definitive agreement to acquire the Pitarrilla project from SSR Mining. Pitarrilla is situated in Durango State, which has a long history of mining and is known as a mining-friendly jurisdiction in Mexico with several mines in operation, including our Guanacevi mine. It's one of the largest undeveloped silver deposits in the world with a historic M&I resource of 525 million ounces of silver and grades close to 100 grams per tonne, plus amounts of lead and zinc. There has been significant comprehensive work done by SSR to advance the project, and many key permits are in place. As a potential Tier 1 asset, Pitarrilla is an exciting project for us. As soon as the transaction closes in Q2, work will immediately commence to redefine the historical resource to a current resource, assess the number of targets and advance the project to an updated economic study. We talked about the previous year as well as our exciting future. Let's wrap things up with what's in store for 2022, starting with the guidance for 2022. Our production outlook is on par with the average over the last three years, and managing costs will be a key focus as we try to offset the impact of rising costs. Guanacevi and Bolañitos are mature assets. We have plans to invest more than $34 million sustaining capital to optimize performance and maximize output over the coming years. Equally important on the list of things to do is to further expand our mineral reserves and resources. Proven and probable reserves for silver and gold increased by nearly 30% last year, and we have 13 million earmarked across our exploration portfolio to continue our long successful track record through the drill bit. 2022 is going to be an exciting year for the three cornerstones of our growth pipeline: Terronera, Parral and Pitarrilla, each of which provides significant opportunities to contribute to our future growth profile. As noted, Terronera is expected to move from funding and approval phase through to construction in the coming months. At Parral, we expect to initiate a PEA in the second half of 2022. And as mentioned earlier, the acquisition of Pitarrilla is expected to close in the second quarter, and once closed, the work will begin. Our goal is to define a current resource by the end of this year. Overall, it's going to be another busy year. And with that, I'd like to open up to questions, operator.

Operator, Operator

The first question comes from Joseph Reagor with ROTH Capital Partners.

Joseph Reagor, Analyst

So big picture question that's been asked on a lot of these calls is just how are you guys handicapping the impact of supply chain inflation? Like are you guys doing anything proactively to prevent any impact on that? And then kind of a second question to that. What inflation rate do you guys assume on costs across the board for this year compared to last?

Dan Dickson, CEO

Yes. Thanks for the question, Joseph. I mean the two-pronged for 2022 in our budgets, we had 6% to 9% inflation just depending on what it was — whether it was labor or whether it was direct cost input. We had seen power costs increase significantly last year towards the end of the year, and that was all included in our budgeted information. So it ranges depending on which inputs are going into the product. Like I say, labor was 6% to 8%, power costs were up almost 28%. Ultimately, we saw that reflected in our 2021 costs as well. Some of that's been dealt with in our budgets, but of course, the actual may differ quite significantly from what we estimated. And we'll see how that plays out. On a bigger picture, what we're expecting from inflation, I think it's going to continue, and we get a lot of questions on inflation with regard to our capital expenditures and ultimately, Terronera. I think we've done a good job with Terronera in the fact that we've procured some long lead items, most notably our mobile fleet. Some of it's already on site, with more coming in March. We ordered that equipment midyear and started moving to ensure we could lock in some of these prices. Nonetheless, we won't be able to lock in everything. Steel regarding the plant will still fluctuate. We do have contingencies built into our feasibility study as we work through that. We'll update the market on where we think prices will ultimately end up. I think we've done a really good job of trying to keep this moving forward to align costs with our expectations, which are in line with the feasibility study. We'll do our best. Of course, inflation is prevalent across the entire industry, not just with us, and we expect that to continue through 2022.

Joseph Reagor, Analyst

Okay. Kind of a follow-up to that and specifically with like Terronera. Would you guys consider delaying the start of construction if — I think a lot of people believe some of the supply chain inflation is temporary. Do you guys think about that as like maybe it's in the best interest of the long-term value of the project to push back until inflation pulls back a touch?

Dan Dickson, CEO

Yes. I mean, of course, you consider that. But in our instance, how imperative and transformational Terronera is going to be to us, we aren't going to delay it. We're trying to push it through. The fact that it’s going to double our production and cut our cost profile in half will completely change our profile as a company. Terronera right now in our feasibility studies shows a 12-year mine life. Ultimately, we expect it to be there for 20 to 25 years. While trying to time markets or inflation may be tempting, if inflation is up 10% in 2022, it's likely to remain elevated in 2023 or 2024. So we're committed to pushing it forward, and it's critical to our company.

Joseph Reagor, Analyst

Okay. And then one final thing, if I could. What percentage of the overall cost structure at your mines is fuel, diesel?

Dan Dickson, CEO

Yes. It's an underground vein mine, so it's less than 7%. I mean, it fluctuates somewhere between 6% and 9% in any given year depending on where fuel prices are. For open pits, diesel is a significant cost for us. Our second-highest cost after labor is actually power costs through Electricidad, the CFE in Mexico. So as far as diesel is concerned, like I say, it's 6% to 9%, so not a major proportion compared to open pits.

Operator, Operator

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

Matthew Key, Analyst

This is actually Matt Key here asking a question for Lucas. My question is around the long-term grade expectations at Guanacevi. Obviously, really strong implied grade guidance for fiscal year 2022. But I was kind of wondering how we should be thinking about grades longer term. Is it possible that we get back to kind of 2018, 2019 levels in the near term or is that kind of past us at this point?

Dan Dickson, CEO

At this point, it's past us. So we put out guidance just for the following year, which right now is 2022. The grades will be similar in 2022 as what we have in 2021. Looking beyond that, it's really about our reserves and resources, which are outlined in our AIF. The grades should continue in 2023, 2024. But at this point in time, we're not back to the levels seen in the past. We have had a significant discovery with El Curso; it's continuing to grow, and that's where some of those significant grades are coming from. However, as prices increase, which is our expectation this year and next year, you could see that grade diminish because your cutoffs change in the mine as well. But right now, for 2022, we see grades to be similar as what we recorded this past year.

Matthew Key, Analyst

Got it. That's really helpful. And just last one from me. I was wondering if you could kind of help frame up what you're seeing as the most promising long-term exploration projects once we get past Terronera here in the next couple of years. And if you could also maybe provide a potential timeline on how you see that next big growth project on the horizon development-wise.

Dan Dickson, CEO

Yes. I mean you're asking me to kind of pick among our projects, but right now, we have two great growth pipeline assets behind Terronera. You've got Parral, which is smaller but still showing exploration success. At the end of 2019, we had 40 million ounces defined, plus lead and zinc. We believe we need to grow that to 60 million to 65 million ounces to achieve scale significance for Endeavour, which has to be cost-effective and economically viable. In 2020, we didn't drill due to COVID, but in 2021, we began drilling again and received very good results earlier this year. We'll continue to drill Parral in 2022. By halfway through the year, we hope to have a sufficient resource base to perform a preliminary economic assessment on that. The other asset, Pitarrilla, is potentially a Tier 1 asset. It is one of the world's largest undeveloped silver bodies, and we're extremely excited about it. As you know, we had a recent conference call regarding its acquisition from SSR Mining. This transaction is intended to close in Q2, after which we will focus on building that current resource. As for a timeline between Pitarrilla and Parral, it ultimately depends on future prices. We expect a two-year build process for Terronera, and we hope that one of the other projects will come alongside that in the near term. For Pitarrilla, we aim to redefine the resource, which is currently considered a historic resource done by Silver Standard. We plan to conduct our examinations and issue a technical report, hopefully by the end of this year, followed by an economic study on Pitarrilla for 2023. So for Pitarrilla and Parral, you're looking at a timeframe that should see construction progress in 2024 or 2025. I think we have one of the leading growth profiles you can find in our sector.

Operator, Operator

The next question comes from Mark Reichman with Noble Capital Markets.

Mark Reichman, Analyst

So the first question is just really on the Terronera financing. I know you were looking to put an $80 million to $100 million debt facility in place. I was just wondering whether that is still kind of the plan and how those negotiations are going? And if you think you'll have those wrapped up by the end of the second quarter, given that 24-month construction period.

Dan Dickson, CEO

Yes. You're exactly right. We are looking for debt in the range of $80 million to $100 million. We have $100 million in cash and $120 million in working capital on our books. The process took a little longer in Q4 and Q1 due to the coronavirus, which impacted technical due diligence by the banks. However, we’ve since completed that process. We are hopeful to have a commitment from the banks by the end of this quarter.

Mark Reichman, Analyst

And then the second question is, your plate is pretty full at this point with a good pipeline of projects. But would you still entertain any smaller producing acquisitions and what does the landscape look like out there right now for M&A, I guess, in light of the higher prices?

Dan Dickson, CEO

Yes. I mean we have a corporate development group. Dale is on the call here with our management team today, and we're always looking whether it's a growth asset or a greenfield exploration asset for two reasons. One, we believe we can always improve our asset base. If there's an asset we can acquire at the right price, we would definitely consider adding it to our portfolio, especially if it generates cash flow. The landscape is always changing. In our current environment, things shift faster than they have before. There have been a few deals we've observed over the past year. There’s a scarcity in the silver market. Ultimately, we’re focused on remaining a primary silver producer to keep our revenue mix above that 51% threshold, which not many of our peers have managed. Hence, we're actively seeking primary silver assets, but finding profitable ones remains challenging. Nonetheless, we are continuously on the lookout, and if there’s an attractive opportunity, we won’t hesitate to pursue it.

Mark Reichman, Analyst

Okay. And I think you've already kind of touched on this earlier on the Parral project that you already have the indicated and inferred resources there of approximately 435 million ounces. You're looking to achieve 60 million to 65 million. As it stands today, without any more additional drilling, what do you think you could end up with? I mean do you feel like at this point, you're pretty close to target, and so the updated report that you're planning to put out, do you have pretty high confidence that you will meet that threshold?

Dan Dickson, CEO

Yes. The 60 million to 65 million target is our goal, and we have budgeted the Preliminary Economic Assessment (PEA) for the end of the year. Of course, ongoing drilling is essential and we need positive results. However, if you look at our 2021 drill results, they are more favorable compared to what we released in 2016 to 2018 on Parral. I expect this trend to continue, and if it does, we should reach that target.

Operator, Operator

The next question comes from John Tumazos with John Tumazos Very Independent Research.

John Tumazos, Analyst

I was noticing that your tonnes processed through the year, mined and milled, rose 17%. And the cost per tonne also rose 17%. Usually, the gain in volume helps to reduce the rate of increase in unit cost. Was there something special going on with the mine that was idled or a downtime or a special maintenance?

Dan Dickson, CEO

No, John. In our case, you're correct. Our processed tonnes were slightly up, but ultimately, our cost per tonne and operating cost per tonne were up as well. This is largely a result of inflation. We saw costs rise across the board, most notably in power costs. From August to December, our power costs on a monthly basis increased by about 30%. We also experienced a rise in labor costs last year, particularly for our professional labor, including geologists and engineers. Ultimately, these inflationary pressures are prevalent across the industry, and we're striving to manage our costs effectively.

John Tumazos, Analyst

If I can ask another. I was very excited for you when you bought the Bruner Project for $10 million cash. The predecessor company had permitted the project and represented that it was partly built. I don't know if they spent $25 million on it or $50 million on it. And initially, your disclosures were very succinct. I just assumed that you weren't talking much about it because you got such a good deal. Could you elaborate now that you've had possession of it for six months and is it something that could be producing 40,000 ounces in a couple of years?

Dan Dickson, CEO

We like the Bruner Project. We were opportunistic. We love the price we paid for it. For those unfamiliar, it has a historic resource of 300,000 ounces of gold and 13 million ounces of silver. It had a historic PEA that suggested a NAV value of about $80 million, which contemplated a 35,000 to 40,000 gold ounce operation. However, there is nothing that's partly built on it; it is a greenfield exploration project, so there is no substantial infrastructure. I'm not sure what the predecessors indicated in the past, but I can assure you it is a greenfield exploration project. We are advancing it this year and plan to convert the current historical resource into a current resource. There are a lot of targets at Bruner that we're excited about, and it represents a very opportunistic deal for us. The predecessor faced some debt issues, and we seized the opportunity to acquire it for just $10 million. There’s still a lot of work to be done there, and we would like to acquire additional land to explore around it. Nonetheless, we expect to have more results from that project at the end of this year.

John Tumazos, Analyst

So with this ranked, where does it fit in your queue of projects, after Pitarrilla, Parral, Terronera or would El Cubo be ahead of it? Or sort of where does it stand in your hierarchy of projects?

Dan Dickson, CEO

At this point, it probably ranks behind Parral and Pitarrilla just due to their more advanced stages. But ultimately, the required work has to be done. We will let the drill bit tell us where it ranks by the end of 2022.

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, thanks, operator, and thanks to everyone listening to our 2021 earnings call. I think 2022 is going to be a good year. Obviously, we see prices elevated, and I hope things in Europe become a little more stable because ultimately, we hope for a resolution there in the coming months. But we'll continue to do what we're doing, again, trying to advance our development project with Terronera and hopefully come to a construction decision on this shortly. Ultimately, we will continue to further advance Parral and Pitarrilla, where we believe we have one of the leading growth profiles in the sector. Thank you to everyone for attending, and I'm sure we'll talk again soon in the coming months.

Operator, Operator

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