Earnings Call Transcript - EXK Q4 2022

Operator, Conference Operator

Thank you for being patient. This is the conference operator. Welcome to the Endeavour Silver Corp. Full-Year 2022 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 to ask questions. I will now hand 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 would 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 Silver's CEO; Christine West, our Chief Financial Officer; and Don Gray, Endeavour's COO. Following Dan's formal remarks, we will open up the call for questions. And now, over to Dan.

Dan Dickson, CEO

Thank you, Galina, and welcome, everyone. I will keep today's call as brief as possible as all the details were published in today's news release, but make sure I hit some of the key points for our investors. Endeavour Silver had a solid 2022 in what can be categorized as a challenging cost environment. Our production exceeded guidance, which helped alleviate the upward pressure on costs. Inflationary pressures across the entire spectrum of the inputs were felt throughout the entire mining sector, and it was no different for us. We continued to de-risk and advance Terronera. Ideally, a financial package would be complete. However, things outside our control have pushed that into this year. I'm confident we'll have clarity on this matter in short order. We continue to be excited about the acquisition of the Pitarrilla project, both solidifying our presence in Mexico and furthering our strategy of delivering industry-leading growth. On a consolidated basis, we produced 9 million ounces of silver equivalent metal with both silver and gold production exceeding the upper range of guidance by 17% and 4% respectively. For the second consecutive year, we've significantly exceeded production guidance. Guanacevi was a star performer yet again, accounting for over 70% of consolidated production, with silver and gold grades well above plan. In fact, Guanacevi had record throughput grades averaging 512 grams per tonne silver and 1.44 grams per tonne gold, while the plant approached an average throughput of 1,300 tonnes per day in Q4. Overall, the mill performed well with recoveries averaging just under 86% for silver and just below 90% for gold, demonstrating consistency and stability at slightly higher throughput. The performance of our operating mine Bolañitos remained steady. There was increased silver production offset by lower gold production. We continue to evaluate opportunities to increase mine life at Bolañitos and are cognizant of Bolañitos in the current landscape. The operating team has done a good job meeting their targets. Our strong operating performance enabled robust financial results, particularly in Q4, as gold and silver prices strengthened; we were able to take advantage of the higher prices by selling most of the silver inventory. As a result, revenue rose by 27%, marking a 10-year best bolstered mostly by volume. The higher revenue translated into increased cash flow with mine operating earnings of $51.5 million, up 42% from 2021. Operating cash flow before working capital changes of $54 million was again up 68% compared to 2021. Specifically, at the site level, Guanacevi delivered mine free cash flow before taxes of $30 million, and Bolañitos contributed just over $1 million. Our earnings for the year were $6.2 million or $0.03 per share. I'm particularly pleased that we're able to deliver operating costs on a per ounce basis that are relatively in line with guidance despite the industry-wide inflationary pressures. We ended the year with cash costs of $10.65 per ounce, which is about 7% over our guidance and all-in sustaining costs of $19.97 per ounce, which is below the lower end of guidance of $20 per ounce. However, industry-wide inflation has been and continues to be challenging. Our direct costs per tonne were up 16% compared to the previous year, as we saw cost increases in many of our key inputs. Fortunately, the increased Guanacevi grades offset the increases in direct costs, but cost control will continue to be a key focus for the company going forward. Our financial performance led to a strong balance sheet at year-end. We had cash on hand of $84 million with no long-term debt, aside from normal course leases for equipment. Working capital totaled about $94 million, which includes unsold volume held at cost of $6 million, but has a market value of $15 million. This past year, we were very busy and productive at Terronera, preparing the site for full-scale construction. We spent $41 million on initial development using our own existing cash, while we continue to confirm a viable debt package. During the year, the project team delivered several achievements. The full mobile mining fleet is now on-site, comprised of 30 units. All the major plant equipment has been pre-ordered, with the majority of the equipment scheduled to arrive in the first half of 2023. Upgrades to the road access totaling 7 kilometers are well advanced. This work will improve slope stabilization and drainage, as well as enhance transportation access. We commenced construction of the permanent care. We commenced the back excavation of the plant site and we commenced the first portal access. We are optimistic and excited to provide the market with full details of the financing package in the near future and to announce a formal construction decision. The Board has approved an additional $26 million in development expenditures for Q1 2023 while we continue to advance the project. At the outset of 2022, we began executing on our three-year sustainability strategy, which is anchored on three pillars: people, planet, and business. We launched or expanded many initiatives to further embed sustainable practices across our organization and create real value for our stakeholders. We took several steps to increase employee development, engagement, and inclusion with positive results across the company. In addition, we amplified our community investments in Mexico, aligned with our priority areas of education and employability. Over the past year, we devoted a significant amount of time and effort across our organization to better understand the potential risks and opportunities related to climate change. These are discussed in our first climate disclosure report that will be published next week, aligning with the TCFD framework. While it's still early days on integrating climate initiatives, we are trying to be thoughtful and diligent in determining the most effective steps for us as we deepen our understanding of the impact of climate change initiatives on our company. Most importantly, our view of climate change is not solely fixed on risk; there are also great opportunities in front of us. The world is beginning to realize the importance of metals to support the transition to a low-carbon economy. The products we provide sit at the very beginning of the supply chain for essentially everything needed and used in modern society. I encourage you to read our climate report when it's published next week. For 2023, our production outlook continues to be strong with another year of robust grades from Guanacevi. We are targeting to produce between 8.6 million and 9.5 million ounces of silver equivalent, a midpoint which marks the fourth consecutive year of production growth. The combination of higher consolidated throughput and produced ounces allows for a projected unit cost of $10 to $11 per ounce for cash costs and $19 to $20 per ounce for all-in sustaining costs, similar to 2022. At Guanacevi and Bolañitos, we have plans to invest more than $35 million in sustaining capital to optimize performance and maximize output. Of course, as everyone knows, this company has been built through the drill bit, and we are aiming to invest $10 million into exploration for 2023, with the largest portion of $3 million being allocated to Pitarrilla while Parral has a $1.5 million budget. I want to emphasize how excited we are about the notion of unlocking value through exploration and advancing both Pitarrilla and Parral. Both are expected to advance through economic studies early next year. The scale and impact of Pitarrilla will be very significant for us. In December, we confirmed an indicated resource of nearly 600 million ounces of silver plus material amounts of lead and zinc. This year, we plan to extend a historical ramp to better understand the feeder structures we identified in the deposit. With continued success, we ultimately hope to identify a business case to model an underground operation at Pitarrilla. In closing, it's going to be another busy year. I'm very excited about our outlook as we continue to expand our growth pipeline, particularly at a time when silver demand is beginning to strengthen. I think that wraps up my formal comments for today. Let's open up the lines for questions.

Operator, Conference Operator

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

Marcus Giannini, Analyst

Hi, everyone. This is Marcus Giannini calling in for Heiko. Thanks for taking our questions.

Dan Dickson, CEO

Marcus, nice to hear from you.

Marcus Giannini, Analyst

Yes. Yes. Likewise. So you talked about cost control being a key focus for this year and in particular, business improvements. Given that we're now in March, can you provide a bit of color as to where exactly your efficiencies are expected and how much of that has already been incorporated year-to-date? And maybe if you could just touch on any cost improvements you've already seen, that would be great. Thanks.

Dan Dickson, CEO

Yes. I mean it's a difficult question because we saw costs increase across the board last year. I mean, cyanide and power costs were significant contributors at Guanacevi and Bolañitos with TCs and RCs, power costs. For us, it really comes down to making sure that on a daily basis, a weekly basis, on a monthly basis, we're reviewing our cost reports, reviewing the inputs that are going in, particularly at Guanacevi. We have significant pumping that happens at Guanacevi that uses and costs a lot of power and money. We have seen a little bit of a decrease from kilowatt hour costs at Guanacevi and Bolañitos. When it comes to actual improvements, we think we do a really good job at Bolañitos; it's Guanacevi where we can be better at waste management, managing our waste, managing the tonnes, being more efficient on a productivity basis and moving tonnes. I don't know if we've seen that come through yet here on March 1, 2023. It's something that will take time throughout the year. And there are not big cuts that can be made. The inputs that we need are the inputs that we need; inflationary pressures on that have been there. We have seen a slowdown in Q4, and hopefully, that continues through 2023. But it's our job as management to continue to look at it, and we will continue to cut costs where we can.

Marcus Giannini, Analyst

Okay. Awesome. Yes. Thanks for the color, obviously, a lot of moving parts there. And then, switching over to Terronera. You're sitting on over $80 million in cash, just under $94 million of working capital. How far down would you be willing to take your balance sheet if it means minimizing capital raise and building out Terronera?

Dan Dickson, CEO

Yes. I mean I think the key part to that is the fact that we are looking for a debt financing package, and that debt package would be anywhere between $100 million to $120 million. The initial feasibility study for Terronera is $175 million. We recognize, and when we do have that debt package, we'll likely update the market on where that capital cost is. But to answer your question, ultimately, what we want to see and we kind of have on hand just for the two operating assets, somewhere between $30 million and $40 million as a cushion. I think we can get there if we get that debt finalized.

Marcus Giannini, Analyst

Okay. Excellent. Yes. Just one last quick one. Seeing as you incurred $3 million in smelting and refining costs, any thoughts on where you see these costs trending in 2023? I'm assuming the prices are set in and under contract?

Dan Dickson, CEO

Yes. We renew our concentrate contracts, our off-take agreements on an annual basis. I think the key component there is the relatively similar, a little bit lower for Bolañitos. The key component of all that when it comes down to is the energy cost at refineries. And as those costs oscillate, it does impact us. I think for the year, we have, like I say, it's about similar to a little bit lower at Bolañitos. Of course, at Guanacevi, we produce a dore bar that we ship.

Marcus Giannini, Analyst

Got you. Okay. Awesome. Thanks for taking my questions. I'll hop back in queue.

Dan Dickson, CEO

Thanks, Marcus.

Operator, Conference Operator

The next question comes from Jake Sekelsky from Alliance Global Partners. Please go ahead.

Jake Sekelsky, Analyst

Hey, Dan and team, thanks for taking my questions.

Dan Dickson, CEO

No problem, Jake. Nice to hear from you.

Jake Sekelsky, Analyst

You too. So Dan, you touched on moving Pitarrilla and Parral through the economic study stage. Do you guys have any visibility on the timeline there for those?

Dan Dickson, CEO

Yes. I mean, part of that visibility also depends on our exploration ground. So Pitarrilla, we plan to do 5,000 meters. And really, those drill meters will happen when the ramp extension is completed, which we expect to be done mid-year, so the start of Q3, and then we'll drill. Ultimately, for Pitarrilla, the studies would happen in 2024 just because of the scale and scope of Pitarrilla. For Parral, we had a plan to start economic studies in 2022, but with the acquisition of Pitarrilla, that pushed it back a bit. This year, we're drilling close to 3,000 meters at Parral, and that drilling has been completed. Our expectation is to move towards economic studies at Parral, so start those studies at the end of the year, possibly publishing early 2024.

Jake Sekelsky, Analyst

Okay. That's helpful. And then just on inventory management for this year. I mean, obviously, you guys did a good job of taking advantage of higher silver prices in the fourth quarter of last year. Silver prices have come down this quarter. Do you guys expect to take a similar approach with inventory management?

Dan Dickson, CEO

Yes. A similar approach is probably the right way to say it. I think as we get into the build of Terronera, we get less flexibility just depending on where our balance sheet is. We made some sales at the beginning of the year here when we hit into the 2024 on silver. But as you say, we've come down into the 2020s level. We'll see how it goes here in March. Obviously, our balance sheet is in great shape. So we do have that flexibility for the first six months. And as I said, as we move through the year, we'll see how we manage it.

Operator, Conference Operator

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

Craig Hutchison, Analyst

I have a question about Terronera. Once the financing package is secured, based on the work that's been done so far and the planned spending for Q1, what is the expected timeline for the first production? How long will the construction period take?

Dan Dickson, CEO

Yes. Ultimately, in the feasibility study, the production period or construction period is a two-year process. Our goal with being able to advance it is still to be commissioning at the end of 2024, so a full year's production effectively in 2025. But hopefully, if things go well, knock on wood, we could have first pour obviously in the back half of 2024, maybe commercial production at the end of 2024.

Craig Hutchison, Analyst

Okay. Great. And is there any color in terms of the timing of the amended permits? Anything happening there?

Dan Dickson, CEO

No, our permit team confirms that Terronera is fully permitted. With the feasibility study, we have the necessary permits to begin construction, which we have already advanced significantly. There are amended permits for operational flexibility, so we don't specifically need permits for construction. However, over the 12-year mine life, we desire various flexibilities, including pushing a staging area out 300 meters. We have submitted many of the required documents but still have some remaining submissions. Our communication with the permitting departments and various authorities, such as Semarnat and Conagua, has been very positive, and over the past three months, we have received approval for smaller permits. Everything continues to progress, and I want to emphasize that we hold all the necessary permits to commence construction and ultimately begin operations. We are simply amending permits for operational flexibility.

Craig Hutchison, Analyst

Are those amendment permits a consideration in terms of the due diligence that's being done by the financing groups?

Dan Dickson, CEO

Yes. Yes, they are.

Craig Hutchison, Analyst

Okay. And just that Guanacevi, with respect to the royalties that are obviously quite high in Q4, can we expect similar levels of dollar amount royalties for the balance of this year, just given you are back in those same areas in Terronera, et cetera?

Dan Dickson, CEO

Yes, I want to be cautious about that. In Q4, we experienced higher royalties due to the volume we sold during the quarter. We sold over 1 million ounces of silver, which incurs royalties as per our contracts. Currently, with silver priced between $20 and $25, we are paying a 13% royalty. The timing of when the royalties are recognized upon production doesn't always match when the sales occur. Therefore, while Q4 saw increased royalties, on an annual basis, our production from the El Curso area remains consistent, subject to a slightly adjusted royalty agreement with Frisco.

Craig Hutchison, Analyst

Okay. And let me just ask one last question. With respect to Bolañitos, how confident are you regarding reserve extensions to be able to mine at a similar rate next year at Bolañitos?

Dan Dickson, CEO

After 2024? Yes. We have resources that we can convert into reserves. I mean, clearly, right now with Bolañitos is effectively operating at breakeven. And there are a number of reasons to operate a mine at breakeven. First thing, obviously, the optionality to Bolañitos and to that production. The second is proportional allocation of our costs. Thirdly, we have talent there that ultimately, if one day Bolañitos doesn't operate, we want to make sure we can keep that talent to move them to Terronera that would come in. But we do expect and have confidence that we can extend Bolañitos' life. We are getting to the point where we're hitting cession boundaries, so we're not discovering three years or two years; we're finding three months or six months at a time. Our exploration team continues to have some success. We've just got more work to do on that exploration. So level of confidence, I'm confident. I wouldn't say I'm jumping up with joy, and I'm not distressed, so somewhere in the middle of all that. We never had more than a two-year reserve life at Bolañitos for the last 16 years. And I can say our exploration team has done a very good job there. There's a lot of concessions that surround us that have a lot of opportunities still, and we just have to work through that.

Operator, Conference Operator

The next question comes from Mark Reichman from Noble Capital Markets. Please go ahead.

Mark Reichman, Analyst

Yes. Just a couple of questions. You've already laid out your guidance for 2023. From a production standpoint, it looks relatively flat compared to 2022. So it seems to me that grade and prices will make the big difference. When you think about next year in terms of whether it's going to end up lower or higher than 2022, what do you see as the key variables in terms of getting that cost down? You've already laid out your guidance on the cash cost and the all-in sustaining costs. But if you do this financing package and the interest rates have come up, so you will have the additional interest expense. What would be the variables that you think could drive a better year in 2023?

Dan Dickson, CEO

Yes. Of course, we put out the range of 8.6 to 9.5 million ounces for our guidance. I think, for us, the ability to exceed that plan or hit the high end of that range really comes down to our operating team at Guanacevi and ultimately at Bolañitos for that matter. The El Curso area of Guanacevi. I don't know if we're going to beat grades like we did in 2022. But I think there's an opportunity to stay a little bit above those grades or at those grades. I think we're set up really well. We did a lot of development in 2022, which will give us some efficiencies this year. But at the end of the day, the reason we put out our 2023 guidance is because we expect that's where we're going to be. I would point to 2021 and 2022, where we revised guidance upwards two years in a row, and we actually exceeded those revised upward guidance; but we'll see how this year unfolds.

Mark Reichman, Analyst

Well, I think a lot of people are looking at Terronera. You talked about the construction decision in the coming months. When you're looking at the financing package, what's the biggest holdup there? The biggest hurdle to clear? Is it getting an acceptable rate? Is it those permitting issues? What do you think would be the breakthrough in securing that financing package? And how early in the year do you think you would incur more debt?

Dan Dickson, CEO

Yes. I mean, at the end of the day, it's a project loan financing. The key aspect of the project loan financing is ESG and ultimately getting commercial banks, some big banks onside from an ESG standpoint. What's required for that is an Equator's principle and ESOP report. That includes over 100 changes of different specific reports. We've spent over the last year documenting a lot of that and building processes and procedures to meet those clear principles. It's not about terms; we know what those terms would be. It's about the timeline getting through that due diligence, and a project loan financing bank will typically hire an external engineering firm to do that due diligence and write reports and effectively pull apart our feasibility study or our plans. That's all happened and been completed. Like I said, I won't get into what happened necessarily this past year at this point, but there are things that were out of our hands, but it's been moving forward. Our team has done a really good job on it, and I expect, as I said in my outset, clarity in relatively short order on that.

Operator, Conference Operator

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

Lucas Pipes, Analyst

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

Dan Dickson, CEO

Good morning, Lucas.

Lucas Pipes, Analyst

Dan, I also want to follow up on Terronera. I believe the 2021 feasibility study pointed to $175 million of CapEx. Things unfortunately changed quite a bit from 2021. I think you mentioned there could be some offsets to inflation, but just order of magnitude, is it $200 million or is that too high to think about? Or do you think you can keep it below that? Thank you very much for any color.

Dan Dickson, CEO

Yes. Lucas, I mean, that's a very fair question. The two quick answers handle the right ballpark, but I'll get maybe a little bit more detail into that. Ultimately, we completed that report in March of 2021. I think it's dated July of 2021. We published it and ultimately filed it in September of 2021. I think our engineering team and our development team, with our external engineers, did a good job capturing some of that inflationary stuff that we started to see in 2021. But of course, nobody is perfect with that. I say that because our mobile fleet is entirely on site with 30 units. If you compare what we paid to what was in that feasibility study, we're right on point. The 12 key components that we've purchased for the plant are relatively in line with what we saw in our feasibility study. There are changes though, and there are things that we haven't locked in. Ultimately, what we've been looking at over the last year or year-and-a-half, as we push through this financing package and advance Terronera, is optimizing from that feasibility study. So going from a 1,700 tonnes per day to 2,000 tonnes per day has been looked at over time. That can offset some of the inflationary costs that we've seen, both from a capital standpoint and coming from an operating per tonne basis as well. So we have been leaning towards a larger plant and ultimately more output from the mine to offset some of that inflationary cost. When we have the detailed financing package in place, we will provide the market with where we expect the capital to be and what type of size that Terronera will be. It's not significantly different. But as you say, higher throughput will help offset some of the inflationary pressures that we've seen.

Lucas Pipes, Analyst

Very helpful, Dan. I appreciate that. And then one of the earlier questions touched on 2024 all-in sustaining costs. I wanted to follow up on that and maybe be slightly more pointed. I know it's early, but directionally, should we expect all-in sustaining costs to come down in 2024? Or is the current level maybe the best ballpark for the coming years? Thank you very much.

Dan Dickson, CEO

Yes. I mean at the end of the day, Lucas, we put out 2023 guidance because we have clarity on that. For 2024 all-in sustaining costs, it's highly dependent on where we sit with Terronera. Guanacevi and Bolañitos are mature assets; we kind of know what their costs are, and they have been very similar for about 12 years until the last couple of years, where they've really picked up. Like I said, I don't think that's specific to Endeavour Silver; I think that's what we've seen across the whole mining space. We're trying not to put guidance out for 2024. I would just say you point to Guanacevi and Bolañitos would be similar. We know what we have; we know what we're at. But there are things that go into that; the all-in sustaining cost per ounce is great. Guanacevi will be important. Of course, our resource grades are very similar to what we have in reserves, so that might continue. But if Terronera can come online and into 2024 and the timing of that comes online in 2024, it will be highly dependent on our consolidated all-in sustaining costs. I think when we come to next year, we would probably give guidance on our existing operations and then guide Terronera separately depending on when we see the end of construction or expect the end of construction. That's probably the best way I can answer you at this point for next year. Let's see how we perform this year; hopefully, we can be in line or even beat it. If we can, that will bode well for 2024.

Lucas Pipes, Analyst

That is very helpful and very clear. Dan, I really appreciate the color and to you and the team, best of luck.

Dan Dickson, CEO

Thanks, Lucas.

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

Thanks, operator, and thanks to all our investors and listeners today. Again, as I said in my formal comments, I think 2023 is going to be a very busy year for Endeavour. Of course, pushing forward at Pitarrilla and Parral is important for our pipeline. But if we can get to a formal construction decision on Terronera in relatively short order, I think that will be the next catalyst for everyone. Thanks a lot, 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.