Coeur d’Alene Mines Corporation (CDE) Q1 2013 Earnings Call May 9, 2013 1:00 PM ET

Operator

Good afternoon. My name is Sandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to your host, Ms. Wendy Yang, Vice President of Investor Relations. Ma’am you begin.

Thank you, Sandra. Welcome to our first quarter conference call. I’m Wendy Yang, Vice President of Investor Relations.

This call is being webcast on our website at www.coeur.com. Where we have posted slides to you accompany our remarks. Telephonic replay of the call will be available on our website through May 23rd.

We will be discussing some forward-looking information today and we caution our audience that such statements involve risks and uncertainties that could cause actual results to differ materially from projections.

Please review our cautionary statement shown on slide two and review the risk factors, including some that are specific to our industry described in our latest annual and quarterly financial reports filed with the U.S. SEC and Canadian regulators.

On the call today we have Mitch Krebs President and CEO; Frank Hanagarne; Senior Vice President, Chief Operating Officer and Chief Financial Officer; Don Birak, Senior Vice President of Exploration; and Joe Philip, our Senior Vice President and Chief Development Officer.

We will get started. Mitch, please go ahead.

Thanks, Wendy. Good morning everyone, good afternoon to those on the east coast. During the first four months of the year, we have continued to pursue several key strategic objectives that are shown on slide four. None of these objectives will be achieved overnight but we are making steady progress and none of these objectives will be achieved without the right people and the right level of technical expertise in place.

We are committed to succeed in this new world of capital discipline, execution, cost reduction, returns and better management of the risk inherent in our industry. Success requires building a team of technical and financial talent that can become a true competitive advantage for our company and that’s exactly what we have been doing and I am really excited about the people that have recently joined Coeur.

We have added a new season Chief Financial Officer in Peter Mitchell who will help us maintain a flexible balance sheet, mitigate risks and appropriately deploy free cash flow to achieve optimal returns and lead our efforts to better managed cost and information. We have also added a new Chief Development Officer in Joel Philips to lead the company’s capital project initiatives. Joe and his group are keenly focused on the importance of delivering projects on time and on budget whether there are projects in support of existing operations or more significant projects such as La Preciosa or Rochester’s expansion.

In order to better identify and manage risks, we have hired a new head of health and safety in Bill Holder who is providing leadership, support and the tools necessary to achieve our goal of making sure everyone goes home safely to their family every night.

In addition we have added a stable of very talented, technical, financial, IT and operations professionals who are driving the company forward in ways that will lead to more consistency, better planning and better decision making. What we have undertaken here is essentially a complete overhaul of this company. We are serious about making Coeur a true leader in the precious metals industry. Being a leader doesn’t necessarily mean the biggest. That’s the lesson this industry has learned the hard way over the past decade. We are striving to become the example of how a mining company should run and demonstrate a willingness to embrace new ideas and approaches in an effort to make our shareholders money. This will all be accomplished over time with a new name and a new headquarters location which we believe sets the tone for the kind of change we are talking about.

Despite recent volatility in silver and gold prices we have been aggressively pursuing cost reduction and efficiency gains that our operations since late last year, and we are beginning to see results. We have begun a top to bottom review of all ongoing and planned capital expenditures to ensure we are deploying capital in the project that are either necessary for the long terms sustainability of the operation or that will generate an appropriate return on that capital.

It is important that we stress test all projects and operations per prices to determine the optimal path forward without being too reactionary to the volatility in silver and gold prices, we experienced during April. We need to maintain our focus on long term prices given we are making decisions that are over five to twenty year time period.

Although we are primarily focused on our existing operations we will continue to be opportunistic towards external growth. We currently see a lot of dislocation in the market, especially within the late stage exploration company sector, that we will selectively pursue. WE remain committed to repurchasing our shares which we believe represent tremendous value at current levels. So far we have completed $32.5 million of the $100 million program our board authorized in June of last year.

Turning to slide 5. Couple of weeks ago, I was in New York for the release of the 2013 World Silver Survey. Although industrial demand declined last year, investment demand remain strong and is expected to continue to be the key to sustained silver prices. Other key highlights from the silver survey are summarized on slide 5.

And just a quick comment on gold which makes up 47% of our sales, I haven’t seen the sentiment for gold this negative in a long time. Yet, here we are at $1470 an ounce, after touching $1380 an ounce just three weeks ago. We think the long term case for gold remains intact and we like our metals mix of silver and gold.

Turning to slide 6. I would say we had a mixed first quarter that ended much stronger than it started. As we announced in our April 15^th news release, first quarter production was steady and we expected to accelerate this flat compared to the fourth quarter gold production was down slightly compared to the fourth quarter but up 30% compared to the year ago first quarter. D’Alene gold mine in Mexico rebounded compared to the prior quarter in terms of higher production levels and significantly lower costs. Having said that Palmarejo started slowly in January and February but had a strong March which resulted in a decent quarter. We expect to see more months like we experienced in March and April and what we are seeing so far in May and fewer like January and February throughout the rest of the year and we are confident in our full year guidance at Palmarejo.

Overall costs were down in particular Palmarejo’s cost per ounce dropped from $7.55 per ounce in the fourth quarter to $2.20 per ounce in the first quarter. San Bartolomé’s cost per ounce also declined by 5% versus the prior quarter.

We recently closed the Orko Silver acquisition which adds the world class La Preciosa silver project in Mexico to our list of life of long life assets and Joe will have more to say about La Preciosa in a few minutes. We were opportunistic in the capital markets during the first quarter which has resulted in a very flexible balance sheet. Our strategic objectives for 2013 remain clear and unchanged and are shown on slide seven.

Turning now to the financial update, slide nine highlights our first quarter financial results. We produced 3.8 million ounces of silver and almost 57,000 ounces of gold in the quarter but only sold 3.1 million ounces of silver and 52,000 ounces of gold due to timing which gave rise to a $39 million lag in metal sales that I mentioned earlier. We generated about $59 million in operating cash flow from about $172 million in metal sales. Production cost at our mines are on plan and we are now seeing some reductions versus budget thanks to a lot of hard work. Consolidated production cost were about $89 million in the first quarter which was 4% lower than last year’s first quarter and 17% lower than the fourth quarter of last year. On a per ton mill basis production cost were 16% lower compared with the first quarter of 2012.

Capital expenditures were about $13 million in the first quarter, which was a 59% decrease from the first quarter of 2012. And cash, cash equivalents and short term investments ended the quarter at about 333 million. We use 99 million of this balance to fund the cash portion of the Orko Silver acquisition last month and the company’s $100 million revolving credit facility remains undrawn.

The table on slide 10 shows average realized prices, ounces produced and sold and cash operating costs on a per ounce basis. Now I’ll turn the call over to Frank who will take us through first quarter operational performance.

Thanks Mitch. We will turn to slide 12; this slide lists the first quarter 2013 operational highlights and priorities for all of our four operating mines. First quarter of 2013 production at our Kensington gold mine in Alaska was down 12% in fourth quarter 2012, all cost remained constant. Kensington contributed 20% of our operating cash flow. We expect production for this mine to increase and cash operating cost to decline in the second half of the year, as we expected ore grades.

Our Rochester silver gold mine in Nevada had a good quarter, the silver and gold production up 47% and 65% respectively for the first quarter of last year. Rochester started the year slowly due to processing challenges from severe winter weather in January and February. The mine contributed 23% of total operating cash flow for the quarter. The capital expansion underway at Rochester increased 2013 production, 35% to 50% year-over-year.

Underground and open pit mining rates at our Palmarejo mine in Mexico improved and stabilized in the first quarter, compared with the last few months of 2012. Palmarejo contributed 37% of Coeur’s total operating cash flow. Development of Guadalupe continues and we’re optimizing the mine plan to incorporate a new open pit production plan to augment underground production.

San Bartolomé demonstrated strong mill throughput and silver recovery rates, contributing 18% of Coeur’s consolidated operating cash flow for the quarter. The planned mill expansion at San Bartolomé is expected to drive annual production levels up over 6 million ounces of silver in 2014 and for the next several years.

Looking at Coeur’s metal production by mine, Palmarejo continues to contribute the majority of silver and gold production. But the increased production at Rochester and Kensington has been notable. Our longest lived operation, Rochester is placed to be our second largest cash flow contributor in 2013 and could become the company’s largest cash flow contributor in five years.

Turning now to the operating performance details of each of our mines, slide 14 shows the first quarter 2013 highlights of Palmarejo; although production levels of Palmarejo started off slowly this year as a result of mining lower than plant or grades. March and April were strong months and we remain confident in our 2013 guidance for this important asset.

Palmarejo generated metal sales of 57 million from 1.1 million ounces of silver and 14,500 ounces of gold in the first quarter. As mentioned earlier, we produced more ounces and we sold due to quarter end time; Palmarejo produced 1.65 million ounces of silver and 22,965 ounces of gold at cash operating cost of $2.20 per silver ounce.

Operating cash flow was 31.5 million. Capital expenditures were 5 million for the quarter. Palmarejo’s underground and open pit mining rates improved and stabilize during the first quarter compared to the last four months of 2012. Silver or gold or grades from both the open pit and underground operations are generally expected to improve through the rest of the year as they did in March and April.

Progress at Guadalupe is accelerating through improved development results and we anticipate intercepting the authorized in the second quarter. We are proud to report that Palmarejo’s mine rescue team are in first place and first aid response team are in second place in the respective competitions that the northern Mexico mine rescue and first aid competition held in mid-March 2013.

In addition, for the fifth consecutive year, Ghana was recognized by the Mexican center for Philanthropy with solely responsible business distinction award for demonstrated leadership, excellence in corporate social responsibility, environmental stewardship and sustainability of Mexico. We are very, very proud of our Palmarejo team for these achievements.

Turning to slide 15, San Bartolomé generated 33 million in sales in the first quarter from 1.1 million ounces of silver sold. This was less than metal production of 1.4 million ounces of silver, cash operating costs per silver ounce for $13.27 in the first quarter 2013 compared to $13.97 in the fourth quarter 2012.

Operating cash flow totaled 12 million; the 17-20 million mill expansion project underway at San Bartolomé is expected to increase processing capacity at the mine by approximately 10-15% in 2013. We expect the expansion to generate a less than two year pay back and to increase the mine’s annual production to over 6 million ounces of silver for the next several years; a reduced cash operating cost per ounce. This expansion project is on schedule and expected to be completed late this year.

Capital expenditures in San Bartolomé were 500,000. In celebration of the City of (inaudible) San Bartolomé donated silver bars which were made into commemorative medallions. Great for the possible relationships we have in Bolivia and welcome the opportunity to give back to the community where we operate.

Turning to slide 16, first quarter production at Rochester was 648,000 ounces of silver and 8742 ounces of gold, a cash operating cost of $13.54 per silver ounce, lower than the first quarter of 2012 but higher than the first quarter of 2012. Metal sales totaled $39.5 million and operating cash flow was $17 million.

In addition to expanding the mine heap leach capacity to approximately 67 million tons than an estimated capital cost of about 15 million, this plan expansion will accommodate sustain higher production rates driven by mining or contained in historic stock files. These stock files were created during the mine 26 years’ operating history and gold and silver prices were significantly lower than the current market.

Capital expenditures of Rochester were $3 million in the first quarter. Rochester is located in Nevada the silver state. This month for donated 1000 ounce silver bar to Nevada Governor Brian Sandoval to produce commemorative coins marking the State’s 150th anniversary, (inaudible) part of the community and the state both (inaudible) history.

Moving to slide 17, Kensington produced 25,206 ounces of gold in the first quarter a cash offering cost of $1055 per annum which is much improved over the first quarter of 2012. Costs were higher at that time due to a temporary production scale back to complete several critical underground and surface infrastructure projects.

Now, the sales totaled 39 million and offering cash flow was 15 million first quarter of 2013. Mechanical availability of generators during the first quarter reduced underground backfilling which impacted overall mining efficiency and cost at Kensington. Bill throughput was 129,057 tons consistent with the fourth quarter of 2012.

Gold grade is expected to gradually increase during the remaining quarters of 2013 as scheduled (inaudible) in process; capital expenditures at Kensington were $3 million. As we mentioned, Joe Phillips recently joined our team as Chief Development Officer and brings with him international mining development experience including the successful construction of two mines in Mexico. Joe will lead our development efforts at La Preciosa and other capital projects.

I will now turn the call over to him.

Thank you, Frank. I would like start by saying its pleasure to be part of Coeur’s team and to work on developing exciting projects like La Preciosa. I would like to start with slide 19. On April 16th Coeur acquired Orko Silver. The key asset of this acquisition is the La Preciosa project in Mexico with 32,400 hectare of contiguous mining plants almost three times the size of the Palmarejo district.

This acquisition provides four key benefits to our shareholders. First is diversified Coeur’s portfolio across the larger platform of assets. Second, it reduces our overall political risk profile. Third, it provides accretive significant growth in production and cash flow over a long mine life. Finally, it’s expected to generate rate of return in excess of our cost and capital.

La Preciosa is one of the largest undeveloped silver deposits in the world with the potential to grow even larger through further drilling. The silver resource estimate is 99 million ounces of indicated and 140 million ounces of inferred. The property is well located with significant infrastructure in place including highway access to the property and close proximity to power and railroad lines.

Our efforts at La Preciosa is focused on three principle areas. First is to complete a preliminary economic assessment which will provide a scoping level at the mine plants and projects economics M3 engineers will prepare the PEA by the end of the second quarter of 2013. Following completion of the assessment, we expect to start basic engineering and full feasibility work in the second half of 2013 along with exploration in filed and development drilling.

As mentioned in previous announcements, our studies indicate that a large surface mine will provide the most robust project at current metal prices. And we’ll enable the recovery of a larger percentage of the resource.

Our second effort is to build the team which will take La Preciosa forward to feasibility, construction and operation. We’ve hired Bruce Kennedy as the General Manager of the project. Bruce most recently led the turnaround of large Pirquitas Silver mine in Northern Argentina and has successfully managed projects in Latin America including Goldcorp’s large Peñasquito Mine in Mexico where he was the operations manager.

On slide 20 you’ll see an aerial photo of the property looking south at the mine site plant and tailing locations. The La Preciosa property is a favorable location to build the mine.

Slide 21 breaks down the expected timeline for advancing La Preciosa. As mentioned, the PEA completed in second quarter of 2013 and we will continue developing our exploration and development teams. Our third quarter the technical report for the PEA will be filed and we expect the commence exploration drilling. 2014 will be dedicated to the feasibility study. 2015 to 2016 will be mine construction and we expect initial production in the second half of 2016.

Continuing on the slide 22, I’d like to talk a bit about our capital expenditures for 2013. As Mitch mentioned we’re currently reviewing all of our capital projects inline of recent changes in metal prices. To ensure the expected returns meet our investment hurdle rates. We expect this process to result in a reduction of our capital spending in the second half of the year. Our capital projects for 2013 are focused on increasing production capacity, reducing cost and improving efficiency.

The projections on slide 22 do not yet include CapEx estimates for the La Preciosa for the reminder of the year. And with that I’ll turn the call over to Don to take us through the first quarter 2013 exploration highlights.

Thanks, Joe. Good morning everyone. At the peak of the quarter, we had 10 drills and crews working continuing at the pace we have set in 2012. Majority of our investment remains focused on our large operating and advanced stage properties with Palmarejo leading the way. You will see some favorable results the 108, Las Animas and Tucson‐Chapotillo zones at Palmarejo and from Rochester Kensington and San Bartolomé.

I will describe some of these in more detail next. Four core drills rags given the Palmarejo district, two underground and two on surface. Two underground drills are working at the 108 and 76 zones. On surface we drilled at Tucson‐Chapotillo and Las Animas. Favorable results were obtained from all of these areas but particularly from 108 and Las Animas. As the compilations are included in the appendix section of this presentation for your reference.

Our objective in 108 is to upgrade and expand mineral resources which will lead to new reserves. 526 shows a section BO108 working northeast and a three dimensional view in the upper left corner for prospective. We are pleased with the results we received thus far and a new phase of drilling is being planned.

Shifting to Guadalupe, surface drilling there in the first quarter was devoted to the Las Animas Zone. In 2012, we reexamined the zone and saw good potential for it to be mined with surface method. As a result, first quarter drilling and surface trenching were used to define and upgrade new mineral resources up dip and on straight.

We are now making plans for follow up drilling all of which we expect to increase the size of Las Animas this year. We have recently acquired La Curra, a property which adjoins Las Animas on the southeast. The addition of this property to our portfolio will benefit both surface mine planning and follow up drilling.

Shifting now to United States, slide 28 identifies stockpiles build up at our Rochester mine since we began operating there over 25 years ago. Last year we commenced drilling on the west stockpile to define mineral resources compliant with current standards. Successful in that initial work demonstrate the viability of stockpiles as a new stores of these for the company’s heap leach moderating facilities. This material now accounts for over 42% of our reserve tonnes and about 40% of the contained silver ounces all within just one of the stockpiles.

Much of our work in the Rochester in the first quarter was devoted to further infill drilling of the west and an initial drilling on the south stockpile.

Finally, our first quarter program at Kensington Alaska continues to focus largely on definition drilling and outlying new mineral resources. One of the targets we’re drilling in this year is Kensington south. (Inaudible) gold-bearing quartz sulphide vein situated about 1,000 feet south of the Kensington mine. Late 2000 drill results received this quarter are shown on slide 30.

To improve further drilling access, this year we commenced driving a new 750 foot long hanging wall drift, new drift is on schedule and upon completion expected to improve definition of this exciting new target. With that I will turn it to over to Mitch.

Thanks Don. Before I close, I want to take a minute to recognize three Coeur directors who will not stand for re-election at this year’s shareholder meeting. My thanks go to Jim Curran, Jim Winter and Michael Bogert for their significant contributions and service over the years. I am grateful to each of them for their dedication and support. Joining the Coeur board in 2013, our Linda Adamany, and pending their election of the annual meeting on May 14, Kevin Crutchfield and Randy Gress, each have distinguished backgrounds and bring significant expertise to the company’s board. I would also like to thank our Chairman Rob Miller and all remaining directors for their continued advice, guidance as we worked towards the common goal of building a great company.

On slide 32, as I have said before, our team is driven by the strategic priorities shown on this slide which are straight forward and achievable and provide the foundation for every decision we make. By accomplishing these objectives we are confident, we will create value over the long term for our shareholders.

This is a great time to be a cash flow generating precious metals Company with no external capital needs. There are many opportunities right now and we feel the landscape will only become more attractive. I have never seen anything like it in my seventeen years in the business. Many companies’ evaluations, ones with quality assets, just don’t make a lot of sense at current levels.

Although we will be opportunistic and disciplined as we look at ways to create value, we’re first and foremost focused on achieving operational consistency and efficiency. We appreciate the fact that it’s the free cash flow from our existing mines that makes everything else possible and makes this unique within our challenged industry.