Endeavour Silver Corp.
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Thank you for standing by. This is the Chorus Call Conference Operator. Welcome to the Endeavour Silver Third Quarter 2014 Financial Results. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) At this time, I would like to turn the conference over to Meghan Brown, Director of Investor Relations. Please go ahead.

[Meghan Brown:]

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver Third Quarter Conference Call. On the line today, we have the company's CEO, Brad Cooke; as well as our CFO, Dan Dickson and our VP Corporate Development, Terry Chandler. Before we get started, I am required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2014 and future years, including revenue and cost forecasts, silver and gold productions, grades and recoveries and the timing and expenditures required to develop new silver mines and mineralized zones. The company does not intend to and does not assume any obligation to update such forward-looking statements or information other than as required by applicable law. With that, I will turn the call over to Endeavour's CEO, Brad Cooke.

[Bradford James Cooke:]

Thanks, Meg. Welcome, everybody, to our Q3 conference call. There's been a lot of fear loathing in our sector in recent months and in particular in recent weeks. It has been an interesting time for us all, I can assure that. There has been a lot of concern expressed in the silver mining sector with regard to operating and all-in class, whether or not miners can cut it at these prices. Endeavour is no different. We have had a lot of questions about our ability to hone our operations and keep our costs down. That is certainly a theme going forward. First, let's touch on the highlights for the third quarter though. In general, our revenue and earnings, cash flow and EBITDA were all lower in Q3 this year compared to last year, due to the combination of lower metal prices, slightly more mine production and a sharp increase in silver inventories and the corresponding decrease in silver sales. In fact, on that point, I would like to make sure people understand that if we would actually sold all of the metal that we produced during the quarter, our revenues instead of being $40.5 million, would have been $11 million higher. Our cash flows instead of being $4.4 million would have been $11 million higher. Our EBITDA at $2.2 would have been almost $4 million higher and the net loss of $11.5 million would have been at least $3 million less, so we are not enjoying a great quarter in Q3, but we had a great quarter in Q1 and two quarters back-to-back Q2 and Q3, where our costs were higher and forecasted to be higher largely because of the increase in capital exploration s spending for all-in sustaining reasons. We finished the quarter off with the cash cost at $10.70 per silver payable ounce and all-in sustaining costs at $20.18 per silver payable ounce. The volumes were 0.5 million ounces of silver and almost 1,000 ounces of gold. Capital investments in exploration expenditures, however, did peak in Q3 and are declining quickly here in Q4 as scheduled. I will touch on the operations and then we can wrap up my initial comments and open it up for Q&A. Silver production dipped a little bit to 1.6 million ounces, but we are still well on track to meet our silver production guidance. For the year gold production was down bit to 14,000 ounces and we are trying to get to the bottom end of our guidance for the year. Silver equivalent production was 2.5 million ounces at 60

[Operator:]

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question today comes from Benjamin Asuncion of Haywood Securities. Please go ahead.

[Benjamin Asuncion:]

Good morning, guys. Thanks for taking my questions. Two things here to focus on, first, just touching on San Sebastian. What are your thoughts on development timelines given where current spot metal prices are?

[Brad Cooke:]

Well, we have been thinking Ben, if you recall fast tracking the project, but with the current metal prices we are just going to treat it as a normal development project. What does that mean in terms of timing? We probably have another let's say six months of the change of slow use permitting to do following the umbrella permit, which we received in October. During that time, we will continue to do some drilling to see if we can step out a long straight to Southeast. Obviously, we are doing our mine plan and preparing some initial economics around that mine plans to bring to the board. I don't have any numbers to give you at this point. The PEA will be out sometime in the first half next year, but we did run some sensitivity on our back of envelope resource and that project is not terribly sensitive to silver price. I think we can say that this point. If we get our progress in this first half of the year and we publish our PEA, we will then go to the board looking for a decision. Obviously, it will depend on the state of the markets and our metal price outlook at that time. If we decide to go ahead, let's say a decision by the end of the first half of next year, then we would get straight into ordering long lead time items, breaking ground and that would be probably a minimum one year construction cycle to see the primarily the plant built. That is also obviously some mine development to do and we would look for the initiation of production sometime in the second half of 2016 and thereafter.

[Benjamin Asuncion:]

Okay. Perfect. Just touching on cost improvements, I realize that you have sort of tightened the belt quite a bit sort of over the past 12 months or so. Going forward, where do you see potential for more improvement? I guess, kind of at the mines and where do you think that - do you have some flexibility or opportunity to reduce costs further?

[Brad Cooke:]

On an operating side, I think Guanacevi pretty much is what it is for now. We have done a little bit better on operating cost per ton this year compared to last year at Guanacevi, but don't know if there is a whole lot of low-hanging fruit to be gathered on the operating cost side there. Bolanitos, we are actually seeing a slight rise in operating costs, partly to do the global credit gold grades and partly because it's also now becoming a mature mine with more haulage per tonne. Cubo obviously has been the one that we have been very focused on getting costs down. We did have two good operating quarters Q4 last year Q1 two of this year, [tough] quarters in Q2-Q3 and we are absolutely focused on trying to get four looking more like Q1 and Q3. Where there is operating costs gains is at El Cubo.

[Benjamin Asuncion:]

Okay. Just touch on El Cubo further then, so based on the current operating cost structure and where you see potential for improvement let's call it in grades and costs. What are your thoughts on the ongoing operations at where we are seeing kind of 15.5 silver right now?

[Brad Cooke:]

We are I think pretty steady as she goes Guanacevi and Bolanitos, and we are doing several different models. What if scenarios at El Cubo, and if we have to live with $15 or $16 silver at Cubo, there is three approaches. One is care and maintenance. Obviously, if we don't feel that we can make any money at these prices then we should just shut it down and preserve the resource for the future. However, I think there is a two other bona fide opportunities here and we do need to understand them more before we can make a decision at year end. One of them is obvious on the grade side, maybe run it at half the capacity and gets the grades up, but it is a function however partly of mine development, because most of the higher grades that we have discovered in the (Inaudible) some scenario are not developed, so we would need that development bullet to get those grades. Then the third scenario is actually we know the plant is quite capable of doing significantly more than 1,500 tons a day, because we had individual days well above that, so we are modeling significantly higher throughput and pedal to the metal to get both, the tons and as best we can the grades up in order to knock the cost down. All three models are being examined, but we will be going to the board in December, with our recommendations and then we will bring guidance in the near…

[Benjamin Asuncion:]

Perfect. Well, thanks a lot. I will hop back in the queue.

[Brad Cooke:]

Thanks, Ben.

[Operator:]

The next question comes from Chris Thompson of Raymond James. Please go ahead.

[Chris Thompson:]

Hi. Good morning, guys. I guess I am just looking for a little bit of color I guess on the statement what you mentioned relating to I guess Bolanitos may be dropping this report from 1,600 1,200. Can you just talk us through that said that strategy Brad?

[Brad Cooke:]

Yes. We hope to be La Luz, the new La Luz Asuncion discovery sooner than we are currently budgeting in our mine plan, which means there is a shortfall of tonnes from reserves, so we are going to see a tapering of production in the first half of the year down to 1,200 tonne mark plus or minus. Then as soon as La Luz Asuncion is developed and starting to produce then we will see an increase in production again at Bolanitos. I would assume in the second half of next year, we would see that taper up instead of taper down.

[Chris Thompson:]

Okay. All right. Just, Brad, if you can just talk, I guess, I am looking at the unit cost for El Cuba alignments. I guess Q3 against Q3 or Q2 against Q2 this year last year, they look good, but they haven't really sort of come down so much. I mean 108 per tonne. For this quarter $113 and last quarter. For instance, any idea of how much of a little we should be modeling there walking forward here?

[Brad Cooke:]

Sure. We will talk about both, cash cost annual and sustaining costs, because we have had a pretty aggressive capital program El Cubo underground for last two years. On an operating side, we are targeting mid-90s and we have been there and we think and we think we can get back there. On an all-in sustaining basis, we have obviously almost double normal sustaining cost of Cubo now for two years and that that has been primarily responsible for the opening up for the (Inaudible) zone. We are seeing some higher grades starting to come to the plan from that particular zone and the sort of the toughest decision, Chris, to be honest is not so much on the operating; side, although that is always a battle. I think the tougher decision is whether to make a significant additional investment in capital next year in order to open up a larger higher grade areas or to minimize capital and just trying and get at the high grate as best we can. I should also point out that on the operating side, there are other things currently going on, some of which involves the union that we feel are critical to getting the costs in the money at current prices and we can't give any assurance on those obviously. It is two-way street, but we are working very hard on that. We hope to have many of those goals accomplished by year end.

[Chris Thompson:]

Great. Then finally just I guess if you could just sort of just comment I guess on the success you guys are having obviously we are going to see your new reserve resource estimates early next year, but looking for better color on I guess the success potential for replacing production for this year with reserves next year, the sort of conversion factors we should be modeling for each month?

[Brad Cooke:]

I can only give you qualitative answer to that. Guanacevi we are very enthusiastic about the future Guanacevi, which is a bit of a surprise. We had similar expiration success there this year and we will bring some news on that before year end. Bolanitos, we are working on some things to extend my life for the next ration and acquisitions and it does have the shortest mine life for the group, but we have always enjoyed (Inaudible) Cubo is perhaps the obvious explorations potential of the three mines. We have many untested targets at El Cubo. In terms of replacing reserves, we don't have any issues at Guanacevi or Cubo. The only area that we are going to have to work real hard on to replace reserves Bolanitos.

[Chris Thompson:]

Great. Okay, guys. Thank you very much.

[Operator:]

The next question comes from Doug Miller, private investor. Please go ahead.

[Doug Miller:]

Yes. Hello. Recently on Keith Neumeier of First Majestic has announced that they are going to be withholding some metal from the market, because it recently [silver] futures market. I believe it is in the area of around 100,000 ounces. He also commented that he was going to be contacting the CEOs of other primary silver mines. First, I am wondering, has he contacted you? Secondly, what is your position with respect to his comment? Thank you.

[Brad Cooke:]

Thanks, Doug, for your questions, actually just a quick correction. I think he withheld about 1 million ounces of silver at the end of September.

[Doug Miller:]

1 million ounces, sorry, you are right.

[Brad Cooke:]

Yes. That is right. We are actually first company in the group to start doing that in 2009. We have done it a couple of times since then. As you saw from our third quarter, we did see an increase of silver inventory not for 1 million ounces, but we got to 0.5 million ounces in the third quarter. It is not something we do all the time. It is primarily to see if we can increase the sale price of our metal. That might be a different strategy than what Keith is talking about. I think he is alluding to just putting the metal in the bank and sitting on it and that is not something that we do. Our shareholders primarily look to us to deliver value through growth. Then after that, hopefully through dividends, so it is not in our long-term agenda to just sit on silver for instance. We do it though from time-to-time, when you were first in this sector to that. I haven't heard from Keith and I know that there were some comments he made in an interview about the possibility of a group of silver miners we are already doing the same thing and reducing supply maybe that will help the metal price's primary. To us primary silver producers as a group represent less than 30% of the total floor supply, the chances of us being able to affect the silver price by withholding metal is slim to none, so we think that it's smarter for us to just try to do the best we can for our stockholders on our sales strategy. Does that answer your question?

[Doug Miller:]

Yes. Thank you very much.

[Brad Cooke:]

Thanks Doug.

[Operator:]

The next question is a follow-up question from Benjamin Asuncion of Haywood Securities. Please go ahead.

[Benjamin Asuncion:]

Hey, guys. I had just one thing to touch on here. Just looking at kind of reserve and resource updates coming at year-end and carrying values of the assets, another thing that you still carry a significant value for El Cubo on the books. Any thoughts on where you are aligning in terms of silver prices or potential adjustments to those values.

[Dan Dickson:]

Hey, Ben. Dan Dickson here, end of the day you are living to El Cubo and what would that do almost - the company and meet those number of variables that go in obviously the new reserves and resources will impact that, but also mainly where we view the long-term silver price. Realistically, we look out to the market. The analyst community, the buying community of where they think the silver price is going to be we count that into our model quarter. At quarter end, the price at the end of Q3 ended at $17, obviously were significantly below that, something that we will be looking at. The impact on us, obviously it is an accounting adjustment, so it is non-cash. It would be whether it affects our debt and at this point we don't see it affecting our debt. If it did trigger covenant, something we have always talked with the bank with. They understand and that is just an accounting entry not necessarily a cash flow entry. At this point in time it is probably as much as I could allude to. Where we finalize, where we expect silver price to be for the future is something that we handle at the board level when we go through budget approvals in December, so I think we will leave it to till January, when we come up with guidance where we prices to be long-term that will be in our financial statements.

[Benjamin Asuncion:]

Perfect. Thanks a lot.

[Operator:]

The next question comes from Andrew Kaip of BMO Capital Markets. Please go ahead.

[Andrew Kaip:]

Good afternoon, Brad.

[Brad Cooke:]

Hi, Andrew.

[Andrew Kaip:]

Your discussion on El Cubo on your three options that you would be presenting to board, I am just wondering the third option that you present actually moving towards increased capital spending to try to access for the zones you have identified and to be able to really boost production and lower on a per unit basis operating costs. Have you guys given this much thought and is there any more information that you could provide to us on say, where you think your operating costs might go under that scenario and what advantages that you might be able to reap from online perspective.

[Dan Dickson:]

Hey, Andrew. It is Dan again. It is probably best that I take this. Brad was trying to hit all three iterations at the high level in fact the amount of models that we have been remodeling looking at lower production higher production, same production care and maintenance. We probably got about 20 different iterations at this point and we are still looking at to cut that up. We haven't brought the final mine plan to speak to the board or final decision to the board which comes like a thing December and we come out to the public in January. At this time, with where prices are how many things that we still are looking at and trying to sign on. We probably hold back from detailed disclosure on that January, but those are very fair and question and something that we are still trying to answer get through all information as you can probably imagine that a lot of stuff, not just internally making decisions but legal decisions and dealing with the union and how those discussions go also will help dictate where and what iteration of the model that we can go with, with El Cubo.

[Brad Cooke:]

I will chip in there as well. Basically, we would not treat it as a bona fide option unless we thought a bona fide chance is getting us to free cash flow at these prices.

[Andrew Kaip:]

I completely understand. Then the other question I have is on San Sebastian. Congratulations on the recent granting of the MIA. Can you give us a sense of what other steps you have to take with that project to get it to a point where you can be in a position for talking about development?

[Brad Cooke:]

Sure. I guess management's assumption is that all other things being equal, we should be ready to go to the board in the late second quarter next year. What happens that is more drilling updated resource before we go to the board mid-year. Obviously the PEA based on our own scoping study and what else, permitting, yes, changes soil use permits. Under the umbrella MIA, there are individual permits for mine plans and tailings and we are already located the areas and done initial engineering on each of the three sites. We actually took the board there two weeks ago, last week actually, for our own annual on the ground board meeting, so I could see what we are proposing and I would like to think that, and this is a forward-looking statements, we will give the project a go in the second quarter.

[Andrew Kaip:]

Then what kind of size are we looking at initially? What are your intentions or what are you thinking just sort of broadly speaking before and if you are able to answer that question?

[Brad Cooke:]

Sure. What's in the existing, yes, there is 500-tonne per day operation within the 2,000-tonne per day footprint. Now that we have the MIA, our engineering group is actually working diligently on all of the related engineering for the changes soil use permits, the detail permits that come under the MIA. Then we can actually fly - perhaps even before year end for an expansion of the 500-tonne rate to whatever our preferred rate is after our scoping study review. We are thinking minimum 1,000. Quite possibly, higher.

[Andrew Kaip:]

Then what kind of CapEx range are you thinking for this kind of approach?

[Brad Cooke:]

Again, it is too soon for any real numbers, so all I can do is look to comparables in the sector and say that 1,000 tonne per day operation would produce just under 2 million ounces of silver a year and maybe 13,000 ounces of gold year CapEx for that might be in the order of 50 million all-in and that's just looking comparables. If we go to 1,500 tonnes per day then we are talking closer to 3 million ounces of silver and 20,000 ounces of gold. That started to look like the El Cubo rebuild which came in at about 70 and if we go higher still it will be because of growth in the resource.

[Andrew Kaip:]

Okay. Thank you very much.

[Brad Cooke:]

Thank you.

[Operator:]

The next question comes from Scott Morrison of Dundee Capital Markets. Please go ahead.

[Scott Morrison:]

Good afternoon, everyone. Just a question on Bolanitos, for the first half next year if you plan to be running 1,200 tonnes per day, what does your OpEx look like on a per tonne basis, on a gross basis?

[Dan Dickson:]

Hey, Scott, it's Dan again. In the first half of the year, we probably won't be at that 1,200 tonne, but we are still predicting 1,600 tonnes per day now. We will be producing 1,600 tonnes per day into December, so we are going to taper down towards that 1,200 tonnes per day. Again, we come out with former guidance in January, so I would look for more hard numbers at that time. Obviously from administrative standpoint, we spent about 1.5 on indirect cost there, so you split that amongst with [tonnes]. We are hoping mining cost per to stay similar then processing end up through supply cost. We are hoping it is actually not that much of uptick, so at this point we don't see a significant uptick in our cost per ton. Again, we haven't finalized that and we don't, with guidance for that until January.

[Scott Morrison:]

Okay. That helps. Then moving on to the debt, do you guys have target for year-end debt position or is there any update to that?

[Dan Dickson:]

Yes. At the end of the quarter, we were at $27 million. We have to be at $25 million per credit facility with Scotia by July of 2015. I guess at this point in time, we would say our target is to at 25 million for July of 2015. We do think we are going to get there a lot sooner. It's just a matter of how we can move money through countries and timing of that stuff, so we are not to be materially different from the $27 million from your end plus or minus two let's say.

[Scott Morrison:]

All right. That is it for me. Thank you.

[Operator:]

The next question comes from Andy Schopick, a private investor. Please go ahead.

[Andy Schopick:]

Thank you. My questions have been answered. I guess, the only comment I have to make is certainly not been a fun time for many of you trying to manage this business in the mining industry.

[Brad Cooke:]

Thanks, Andy. Absolutely right, everyday is a new day today and we have to run a business to make money, so everybody in our sector is doing pretty much the same thing. Even top-notch companies like (Inaudible) when I talk to them. They are doing the same process we are, cutting costs, enhancing revenues, carrying back people and everybody says the same thing. We do what we have to do to make to build the business.

[Andy Schopick:]

Thanks again.

[Operator:]

The next question comes from Leon Esterhuizen of CIBC. Please go ahead.

[Leon Esterhuizen:]

Hi, guys. I Brad. Just a quick one since I am one of the culprits not taking account of your inventory. I see the inventory - the inventory build wasn't that significant on the dollar value, so $24 million in the previous quarter to $27 million this quarter. I was just wondering is that an inventory drill down that is partly to sort of aimed at the reducing the cost in Q4. Is that part of the deal to get the cost down? I am a little bit concerned with the inventory, because I didn't picked up on the previous question where you said you held back some metal trying to make more. Of course the silver prices are low enough, so.

[Dan Dickson:]

Leon, it is Dan here. I could probably provide clarity on that. The 27 million versus $24 million, you are referring to our full inventory, so that is our warehouse inventory which is our supply that feed the mine. Our stockpile inventories, we have stockpile at one Guanacevi and Bolanitos. I think at Guanacevi, is about 35,000 tonnes and Bolanitos, we hold 60,000 tonnes. Then also, work in process and finished goods, if you look at that detail which is in note six of the financial statements, finished goods inventory from year end went from $1 million carrying to $8 million carrying cost. The fair market value of that that $1 million of finished goods let's say it was about $1.5. The fair market value of the finished goods at the end of Q3 was about $11 million, so that is the big change that Brad is talking about and that is where essentially we sold that inventory. We would have $11 million more of cash flow and cash in the bank, so we are not overly concerned with our cash going from $44 million to $29 million, because we know that have $11 million, we could put out into the market and turn it into cash immediately and that is what he was referring to.

[Leon Esterhuizen:]

Okay. Well, thanks. Just again to the original question. That comes into the equation in quarter four I am assuming. Again, what is the reason for both?

[Dan Dickson:]

Yes. You are right $11 million, if we felt here in Q4 which is quite likely, we need cash flow Brad said that we are business that is trying to make money and we need that cash flows, no different at these prices. That will come in Q4 likely. The reason for the build is just going up in the quarter end and had some and we always have some. It is a question always in the last week, last two weeks of the quarter. To unload our inventory, as Brad said, dated back to 2009 sometimes we choose to sometimes we choose not to. I think at the end of this quarter, we saw precipitous drop in the last week and we just did not want to run into that market. That hindsight yes, $17.50, $18, we are - great prices concerning today we are seeing at 15.60, but that is the nature of the beast.

[Leon Esterhuizen:]

Okay. Thanks, guys.

[Operator:]

The next question is a follow-up question from Doug Miller, Private Investor. Please go ahead.

[Doug Miller:]

Yes. Thank you. To the gentleman who recently phoned and had commented that his questions have been answered, but he added that it must not be a fun time to be running a silver company, to that I would like to add that it is not been a fun time to be an investor in a silver company. My comment is around dividends. You mentioned it on my first question. Is there a dollar price of silver a target that would be required for Endeavour to pay its dividend, is there a certain price will be required for that to become a reality? Follow-up to that is, if a dividend was paid has there been any thought about paying dividend in physical versus [feared] Thank you?

[Brad Cooke:]

Thanks for your question, Doug. We did actually go to the board with the discussions about dividends in 2011. We elected not to go with the dividend policy that year, primarily because we felt there was significantly more gains we had through employing the company's cash for growth and we would not look to a particular price of silver in the future to determine whether or not we are issuing a dividend. I think it will be very much as long as we are growing fast as a company, then we think that is a better use of shareholders' cash. When we see long-term growth slowdown precipitously, then the other way to return profits to shareholders is the dividend. Then we will certainly consider that when our growth looks like it's slowing down.

[Doug Miller:]

Physical versus feared if you were to have a dividend, has there been any talk on that?

[Brad Cooke:]

Yes. While those decisions have been made, we have no problem with the physical versus fear.

[Dan Dickson:]

Doug, this is Dan. We looked at the mechanisms of being able to do physical silver distributions as opposed to dividend. It is something that's doable. Obviously there are some of the investing community would prefer and some for the physical, but until we get kind of closer to that timeline or dividends come back into play for the company, it's just something that we probably won't look at again to look.

[Doug Miller:]

Thank you very much. Appreciate it.

[Operator:]

(Operator Instructions) The next question is a follow-up question from Benjamin Asuncion of Haywood Securities. Please go ahead.

[Benjamin Asuncion:]

Hey, guys. My last question here I promise. Just looking forward in terms of capital and kind of a view point on all-in costs for next year, on within Bolanitos and Guanacevi, are we looking at relatively similar levels to what we saw this year. Then sort of on that, are we looking at Cubo trending towards those two operations from a capital point of view?

[Brad Cooke:]

Yes. Capital at Guanacevi has declined and peaked a couple or three years ago and it has been declining since. That is typical of a mature mine where less investment has to be made in infrastructure to mine the tonnes, so we would expect that trend to continue or at the very least stay even. Bolanitos, I think, now we are seeing the mine mature. I think the same comment can be said, that there is other than La Luz tunnel that we initiated in October. We don't have any big development plans at Bolanitos, so it will be reasonable to assume that will either flat line or come down. At El Cubo, we are certainly targeting - let's see a couple of years ago, we figured we were running about 10 million to 12 million in the year in mine development capital per mine and that I think a reasonable target for El Cubo.

[Benjamin Asuncion:]

Okay. Perfect. That is it for me. Thanks guys.

[Brad Cooke:]

Thanks, Ben.

[Operator:]

There are no further questions at this time. I will now hand the call back over to Brad Cooke for closing comments.

[Brad Cooke:]

Well, thank you, operator. Thanks, everybody, for attending this Q3 conference call for Endeavour Silver. We are working on behalf of our shareholders to deliver a strong Q4 here and show that we have a bona fide business at these prices. Stay tuned and we have got a lots of news coming early through the year end, but into next year. Thanks.

[Operator:]

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