Earnings Call Transcript - EXK Q4 2020

Operator, Operator

Thank you for waiting. This is the conference operator. Welcome to the Endeavour Silver Corp. 2020 Fourth Quarter and Year-End Financial Results Conference Call. All participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be a chance to ask questions. I would now like to hand the conference 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 2020 fourth quarter and year-end 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'd like to thank you again for joining our call. And I will now turn it over to our CEO, Bradford Cooke.

Bradford Cooke, CEO

Thank you very much, Galina. And welcome everybody to this year-end financials call for Endeavour Silver. Maybe I'll just start with some highlights. 2020 turned into a very challenging year with the COVID pandemic, but ultimately, was one of our most satisfying years as our operational group really came through in the crunch. We drove our costs down and coupled with higher metal prices that drove significantly higher revenues, higher cash flow, higher earnings. We turned positive in terms of earnings for the first time in three years. And notwithstanding the government mandated two months suspension of mining operations throughout Mexico, we were not only able to meet our 2020 original production guidance, we delivered higher production and lower costs at each of the three operating mines. Perhaps last, but not least in terms of high-level comments. We obviously continued to focus on safety as our number one priority and for the second year in a row, Guanacevi, our largest mine, posted more than a million hours worked without a lost time accident. So, kudos to, again, to our operations team. Let me touch on some numbers in today's news release, and then we'll open it up for Q&A. So, as I mentioned in a very good year in 2020, and we've certainly finished the year with a bang, fourth quarter sales were $61 million, up 81% year-on-year. Cash flow was $22 million, up from negative $8 million a year ago. And net income was almost $20 million or $0.13 a share, up from a net loss of $18 million a year ago. Moving to the full year highlights. We posted $140 million of revenue, up 15%. Cash flow of $29 million before working capital changes, up from negative $9 million; and a net income of $1.2 million, up from a net loss of $48 million in 2019. Our production was solid at 6.5 million ounces of silver and equivalents. The only equivalent being gold, that was actually down 9% from the prior year due to the closure of a now non-core operation the El Cubo mine. Cash cost at $5.55 per ounce of silver net of the gold credits was down 57%. So, a significant reduction in cash operating costs. And all-in sustaining costs were $17.59 per ounce net of gold credit down 17% year-on-year. We finished the year with a very strong balance sheet, $61 million cash, $70 million working capital, and just a reminder that we started 2020 with $23 million cash. So, it was a heck of a year for adding cash to the balance sheet. So, those are the financial highlights from today's news release. I think, operator, why don't we open this up now for Q&A.

Operator, Operator

Certainly. We will now begin the question-and-answer session. The first question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Jake Sekelsky, Analyst

Hey, Brad and team, congrats on the strong fourth quarter and thanks for taking my questions.

Bradford Cooke, CEO

Yeah. Thanks, Jake.

Jake Sekelsky, Analyst

Just two quick questions on Terronera. Can you just provide us some color around the timing of the feasibility? I guess, are you seeing any delays in the timeline due to the pandemic? I know some of your peers have been seeing extended turnaround times on studies and whatnot. So, I'm just curious how confident you are in a timeline for that?

Bradford Cooke, CEO

We're still reasonably confident. We had our quarterly management meetings last week. And the report from our director of project development was that we're almost bang on 50% complete. The feasibility study is being conducted by our engineering consultant on our behalf, but our director of project development is very active, obviously in the whole process. We are targeting mid-summer receipt of the full feasibility study. And that would allow us to go to the board for a development decision thereafter.

Jake Sekelsky, Analyst

That's good to hear. And then just switching gears to exploration. In the release, you touched on some Greenfield exploration that the new concessions at Terronera, I'm just curious, what's the budget for that? And how much of a priority is that relative to exploration across the rest of the portfolio?

Bradford Cooke, CEO

Our budget for drilling at Terronera this year is $2 million, focusing on largely untested veins on this extensive property. We're concentrating on two main areas: the Southeast extension of the main reserve in the Terronera vein, which remains open to the Southeast, and an area about a kilometer further South along the same vein structure that splits into two or three parallel veins. So far, we've seen some promising results. The second area is one of the newly acquired properties to the West of our original holdings at Terronera, known as Los Cuates. This significant vein extends up to 30 and has been traced for three kilometers. We've just started testing various segments of that vein system. While it's still early in the process, we are optimistic that by the end of this year we will have both a new discovery and additional resources at Terronera.

Jake Sekelsky, Analyst

Okay. Got it. That's helpful. That's all from my end. Thanks again, guys.

Operator, Operator

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

Heiko Ihle, Analyst

Hey, Brad. Thanks for taking my questions.

Bradford Cooke, CEO

Hey, good morning.

Heiko Ihle, Analyst

Hey. Your firm recently exceeded $1 billion in market cap. Congratulations. Has this done anything to your investor base? And on that same note, have you seen people interested that are able to purchase shares that previously weren’t allowed to do so and have the whole thing feed on itself a little bit? Have you seen anything like that? Have you gotten phone calls from people you've never really heard of before funds that have mandates like a market cap minimum?

Bradford Cooke, CEO

Absolutely, Heiko. I don't know if we're seeing it yet, but in the coming 12 days, Endeavour is certainly under review to be added to not one, but two indices; we're certainly qualified or appear to qualify for the GDX inclusion and the GDX index. We're currently on the GDXJ. But we're also in line and could possibly qualify for the S&P TSX 500 index, both indices that actually do their additions in the third week of March. So, it's coming up here pretty quick. And we're hopeful that given our $1 billion market cap in U.S. terms, that we do qualify to meet these two new indices, which is not just index buying, but a number of investors, institutional investors who only buy index stocks. So, it could open the door for more institutional involvement.

Heiko Ihle, Analyst

Very helpful. Thank you. Shifting gears quite a bit. I was going through your $12.8 million in net deferred income taxes on page 39 of the financial statements. The figure includes $18.4 million of tax loss carry forwards. Are there expiration timelines for these assets? And if so, what's the timeline? And also we're now in March, albeit March 1st, have you managed to recover anything year-to-date?

Unidentified Company Representative, Company Representative

Yeah. Heiko, good question. Way to get into the depth of those financials note 26 or 36. In that note, we actually show the expiration dates of our loss carry forwards. We are recognizing an asset related to those temporary differences. I believe $9 million at Guanacevi and $3 million at Bolanitos. The timeline to actually chew through those loss carry forwards is about 16 months for Guanacevi and less for Bolanitos; that should be in 2021. So, less than 12 months. Q1 is continued.

Heiko Ihle, Analyst

Am I understanding you correctly that some of these are expiring this year?

Unidentified Company Representative, Company Representative

Sorry. There is …

Heiko Ihle, Analyst

You're looking at page 40, correct?

Unidentified Company Representative, Company Representative

I'm not looking at it, but I am familiar with the note. Typically, a loss carry forward lasts for 10 years in Mexico, and I believe some of them will begin to expire in 2025 for us. However, we will be utilizing those loss carry forwards in 2021 based on our profitability. In response to your question about whether we are using some of that up now, it's similar to our production in Q3 and Q4, which indicates that we are currently making a profit for tax purposes in Mexico. This trend is continuing into Q1. We released our guidance for 2021 and we expect to be profitable at these prices, so we will use a sufficient amount of loss carry forwards.

Heiko Ihle, Analyst

Got it. Thanks for taking my question. So, I'll get back in the queue and stay safe.

Bradford Cooke, CEO

Thanks, Heiko.

Operator, Operator

The next question comes from Joseph Reagor with Roth Capital Partners. Please go ahead.

Joseph Reagor, Analyst

Morning, guys. Thanks for taking the questions.

Bradford Cooke, CEO

Yeah. Thanks, Joe.

Joseph Reagor, Analyst

So, looking at kind of the results from the fourth quarter, Guanacevi, you had slightly higher direct costs there. It seems like part of that was related to the purchasing of ore. Was there any other factors driving higher costs there? And then, what are your thoughts on purchasing ore going forward?

Unidentified Company Representative, Company Representative

We did buy more ore, and with the increase in prices, more local miners are supplying third-party ore to our processing plant, which we need to process up to 10% of local ore according to the plant's original terms. Another aspect affecting our costs in the fourth quarter, which will continue into 2021, is the royalties and special mining duty. As we become more profitable in Mexico, we are paying higher special mining duties, which are included in our key performance indicators. Additionally, we have royalties from El Curso, a property we acquired in 2019, which although did not require upfront capital, has significant royalties associated with it. About 50% of our production in 2021 is expected to come from El Curso, and this will have a lasting impact on our cost structure.

Joseph Reagor, Analyst

Okay. And then, on the tax front, I saw some commentary, I can't remember from which government person. But basically that the Mexican government expects less investment in Mexico in the coming years, because their tax structure has become more cumbersome and more expensive and that they believe people are going to look to invest in South America instead. Do you think that there's any opportunities to see them kind of roll back some of the taxes they added kind of just after the last peak in the gold cycle? Or is that wishful thinking?

Unidentified Company Representative, Company Representative

I think it's unrealistic to expect any changes given the current government in place. There has been a lot of discussion in Mexico regarding the taxes imposed on Mexican and Canadian mining companies. The special mining duty was implemented in 2013, along with an environmental duty of 0.5% on gross revenue for precious metal companies. I doubt any of these tax measures will be reversed under this administration. While it would be beneficial for taxes to decrease across all regions, I believe it's prudent to be cautious and hope that the situation remains stable. We're prepared for that.

Bradford Cooke, CEO

I can provide more insight into this. Recently, a press conference in the state announced no new mining taxes, which could be seen as positive news. Currently, the total tax burden in Mexico is approximately 52% to 53%, comparable to Canada and other countries, making it not the cheapest place for investment. While there is a desire for increased investment, Mexico is facing challenges amid the COVID pandemic, which has led to a decline in employment and tax revenue for the government. Additionally, unlike Canada and the U.S., there hasn't been any financial relief for low-income individuals in Mexico. Therefore, I anticipate that the tax situation in Mexico will remain stable for now.

Joseph Reagor, Analyst

Okay. Just continue on that and maybe one other thing just real quick. Is that part of the reason the company is started to look at South American opportunities? And then, on that note, any update on what to expect from Parral this year?

Bradford Cooke, CEO

So, yes. We diversified in recent years our exploration projects. We have three active and world-class prospects in Northern Chile. We really like Chile as a country. And we're looking at other South American jurisdictions as well as North America. So not just exclusively Mexico. And then Parral after a one-year hiatus in terms of exploration drilling, we resumed in January, drilling our Parral project with a $2 million budget to try and grow the resource space there. We've basically got two more years to grow the resource space before Parral goes to economic studies and Terronera is up and running. We'd love to have our project development team move straight from Terronera to Parral in 2024.

Craig Hutchison, Analyst

Hi. Good morning, guys. Thanks for your question.

Bradford Cooke, CEO

Hi, Craig.

Craig Hutchison, Analyst

Just a question on reserves and resources, you still have fairly substantial indicated resources at Bolanitos. What are the opportunities to have some of those resources sort of converted into reserves? And do you see the mine life at Bolanitos extending well into next year at this point?

Bradford Cooke, CEO

Yeah. Bolanitos is a bit different than Guanacevi because the main area where mining is underneath the village of La Luz, which really prevents us from being able to drill from surface. So, almost all of our drilling in recent years of the La Luz vein system has been from underground. And, of course, that then it’s a cost-reward exercise to see how far ahead we want to drill. Can we convert indicated resources to reserves? Certainly to some degree. But we typically run a one-year reserve envelope and an additional couple of years of resources. And I don't think that's going to change just because of the constraints of drilling ahead of the reserve envelope, the oil pricing could have some beneficial impact on conversion of resources to reserves as well.

Craig Hutchison, Analyst

And can you remind me what's the budget for Bolanitos in terms of exploration this year?

Unidentified Company Representative, Company Representative

2,250,000 for Brownfield's exploration this year.

Lucas Pipes, Analyst

Hey, good morning, everyone. And well done on the quarter, congratulations there.

Bradford Cooke, CEO

Thanks, Lucas.

Lucas Pipes, Analyst

So most of my questions have already been asked, but then I'll add some follow-up questions. So, first on the purchased ore, can you remind us how we should think about margins on that business? Thank you.

Unidentified Company Representative, Company Representative

From a margin perspective, we typically pay around 60% of the value of the ore. When everything is finalized, we end up sharing about 35% to 40% for processing costs and royalties that are applied. Last year, approximately 11% of our total production came from toll ore, which is the highest historical level. Over the past decade, we've seen about 6% of our throughput from toll ore. Given current prices, I anticipate we will reach closer to 10% again this year, and we generally aim for that 40% profit margin from these purchases.

Lucas Pipes, Analyst

Very helpful. Very helpful. I appreciate that detail. And then, second follow-up question just on Chile. Brad, you mentioned how you like being there, what's kind of the priority in terms of allocating capital towards that region? And a very high level, kind of what are some of the catalysts we might be looking forward to when it comes to your Chile opportunities? Thank you.

Bradford Cooke, CEO

Thanks, Lucas. We've been in Chile for, I think, eight years. We've generally run $0.5 million to $1.5 million annual budgets. So, we've actually made a pretty significant investment to acquire, explore and prepare for drilling our three projects. We're currently drilling one of them. The Paloma project in the far North of Chile is arguably a 5 million ounce gold equivalent high sulfation epithermal target. So open-pit, potentially bleached. But early days yet. We just started drilling last year and we hope to have some results here in the next month or two. We're probably going to partner our copper-rich project. Cerro Marquez is a copper-gold porphyry. Again, we've spent several years and several million dollars grooming it. It's drill-ready. And we've had a lot of expressions of interest from copper majors. So, we've signed some confidentiality agreements and our preference is to bring on a partner at Cerro Marquez, which leaves our third project Aida and Aida is our extension of the Bolivian silver belt down into the northernmost Chile. And again, it's drill-ready. It's a massive alteration zone with very strong indications of open-pit silver. We don't have the drill permit yet. We expect it late this year and it would lead to a central program at Aida either this year or next year. So, we really like drilling, truly. We focused on world-class prospects when we acquired these things during the bear market. We're not done yet. We'll continue to try and grow that pipeline. And the whole goal of our Chilean exposure is to get into a discovery that has world-class potential and ultimately to add it to the development pipeline.

Unidentified Analyst, Analyst

Well, gentlemen, you seemed to have had a very, very good fourth quarter and that strikes me that the future in 2021 and beyond could be very substantial. And without pushing the envelope too far, could you comment on 2021?

Bradford Cooke, CEO

In terms of our public guidance, we've guided our production to be silver to slightly higher than last year. So, I think, a 6.1 to 7.1 million ounces of silver equivalent production is forecasted this year. Obviously, performance in Q4 with the lower costs and higher metal prices is a pretty good guide for how we're going to do financially this year. We don't provide financial guidance, but Q4 is certainly a good indicator.

Unidentified Analyst, Analyst

You mentioned that you'll use up the tax loss carry forward in Mexico this year. Are you confident about using it up safely, or is there some uncertainty?

Unidentified Company Representative, Company Representative

Using those loss carry forwards depends on production and our historical cost usage. We have multiple entities in Mexico and at Guanacevi from 2016 to 2019 where we faced financial challenges and accumulated those loss carry forwards. We hope to utilize these loss carry forwards over the next 16 months.

Unidentified Analyst, Analyst

Excellent. For what it's worth, I have been with the company since 2003, and I believe we are on an upward trajectory again. Thank you, gentlemen.

Bradford Cooke, CEO

Thanks for your questions.

Operator, Operator

The next question comes from Arcadia Economics. Please go ahead.

Unidentified Analyst, Analyst

Hi everyone. Thank you for having me. Congratulations on an impressive fourth quarter. My question is regarding the developments that occurred during the fourth quarter and largely into the first quarter, particularly concerning the silver squeeze and the manipulation of silver prices on the Colmex platform. Does Endeavour have any strategic plan to address this manipulation? I've heard one idea is to withhold 5% of production. I would like to know your thoughts on this and what the future holds regarding this issue.

Bradford Cooke, CEO

Thank you for your question. I have two different answers, as there are actually two separate issues here. Regarding our sales strategy and whether we choose to delay or speed up silver sales, that's typically a short-term decision based on our outlook for silver prices. In the past, when we anticipated a rise in silver prices, we've held back on sales, as we did most recently last September. We increased our finished goods inventory due to a drop in silver prices at the end of September, expecting it would rebound in Q4, which it did significantly. This allowed us to sell that accumulated inventory and earn additional profits. We occasionally use this as part of our sales strategy. Now, concerning the silver short squeeze, I have quite a bit to share, and I recently posted a comment on our website about it. I recommend you check that out. My perspective differs slightly from the mainstream view. I do not see it as a silver squeeze; instead, I view it as a classic pump and dump by some savvy investors who bought $35 call options on silver before posting on Reddit. Just prior to the Reddit post, those options were priced at $0.30 to $0.35, but after three days of promotion, they rose to $1.65. It seems that some intelligent investors capitalized on that situation for short-term gain. I do not believe there was an actual squeeze. Furthermore, it's challenging to create a squeeze in silver because banks typically have no strong position on the silver price. They generally hold physical silver in vaults and short paper contracts. Banks participate in fractional lending, meaning if you withdraw cash from your local branch, your funds are likely lent out multiple times. This scenario likely applies to silver as well, but it's not manipulation; it's simply how banks operate. If investors attempt to squeeze the market by buying physical silver, ETFs, or call options, the banks, which hold physical silver, would end up benefiting from the increased prices. They can adjust their positions as needed without incurring costs. They could manage this all the way to a thousand dollars per ounce of silver. Therefore, I don't believe there will be a significant squeeze in silver. Additionally, silver is unique among metals in the options and futures markets. It stands apart because it is primarily a by-product of other mining operations, such as gold mining. Major diversified producers of copper, lead, zinc, and gold usually sell forward their silver to secure revenue for these by-products. This causes them to be unhedged on silver, resulting in a much higher derivative book compared to other metals and physical silver. This situation is due to the forward sales of silver by diversified miners, which creates an obligation to purchase more physical silver. Since they have no strong market position, they offset this commitment with derivative strategies, ultimately shaping the silver market. For these reasons, I find it very difficult to envision a successful squeeze on silver, as the main beneficiaries of higher silver prices would likely be the banks and miners.

Unidentified Analyst, Analyst

Okay, this is my last question. Thank you for your answer. What is your projection for silver in 2021?

Bradford Cooke, CEO

Crystal ball, well, I'm not shy when it comes to forecasting internally, but I rarely do it externally. We obviously think that there's a silver bull market well underway, a precious metal market, well underway. It's probably got years to run. I say that for two reasons. In the case of precious metals, primarily gold, there's a whole backdrop of record low interest rates, massive government intervention, no change in the Fed view for at least two more years, maybe three. So the fundamentals underlying a higher gold price and therefore a higher silver price are very strong. But silver, again, is not just a precious metal. It's an industrial metal. And the industrial side of silver is really taking off. Silver is a green metal. You can't have an electronics industry without silver. You can't have solar photovoltaic power without silver. You can't have electric vehicles without silver. You can't have 5G technology, telephony without silver. And I think that there is an emerging appreciation finally among generalist investors that silver is a go-to metal in a green economy.

Unidentified Analyst, Analyst

Okay. Thank you very much for your answer.

Bradford Cooke, CEO

Thanks for your questions.

Operator, Operator

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

Bradford Cooke, CEO

Thank you, operator. And thanks all for listening in today. Obviously, this was a great year. 2020 was a great year for us, very satisfying after some challenging years. Q4 was a great way to finish the year, and I think it's a good guide to how we expect to do in 2021. Thanks again, stay tuned.

Operator, Operator

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