Coeur Mining, Inc. (CDE) Earnings Call Transcript & Summary

Welcome, everyone. I'm Karl Blunden. I run the credit research here at Goldman for the metals and mining space. Delighted to have with us today Tom Whelan, who's the Chief Financial Officer of Coeur Mining. Tom, thanks very much for joining us.

Pleasure.

A lot to discuss here in the next 25 minutes or so. We'll touch on the outlook for precious metals, look at your ongoing growth projects, Rochester in particular, and then also talk about some recent activity in the bond market and what you -- what your ambitions are with the balance sheet going forward. It's all going to be a virtual fireside chat format, but we'll take audience questions throughout. So whenever the audience is ready to ask, just put your questions on the webcast, and we'll get to those as we hit those topics. Yes, Tom, just to level set as we -- before we dive into specifics, I thought I'll turn the floor to you for a couple of minutes just for a quick intro of Coeur's footprint, how that's evolved, your strategy going forward, and then just a couple of thoughts on the balance sheet to anchor us.

Terrific. And thanks again for the invitation. Great to speak with all of you virtually. I know many of you participated in our recent refinancing and look forward to telling you -- giving you a short-term update. But for those who may not be as familiar with the Coeur story, I mean it has been an evolution since Mitch Krebs, our CEO took over, whether you look at it from a geography going from kind of -- not necessarily all over the place, but now to a very strict North American footprint, moving from primarily silver to now primarily gold, best-in-class governance. And we're pretty proud of the efforts we made on the balance sheet to get that -- our debt levels back to what we think are much more comfortable. And so when you look ahead and you look at the growth that we've got, it's a pretty unique story. We've got a significant expansion at Rochester, and we'll go into that in a little bit more details, but the headlines are we've been operating in Northern Nevada for many years, decades actually. And with Rochester, there's going to be a nearly $400 million expansion, which is just going to be an absolute game changer for us. Rochester ends up being on the back of that expansion in '23. The first 10 years out, 80,000 ounces of gold and 8 million ounces of silver and free cash flow of greater than $100 million using long-term analyst consensus pricing and a couple of other elements of growth, but that's the big one. And one of the things that we committed to during that growth was to maintain a net debt-to-EBITDA ratio of less than 2x and over $100 million of liquidity. And we came out of Q1 just below net debt-to-EBITDA of 0.9x and nearly $420 million of liquidity. So we're feeling really comfortable. We've got a great plan to fund that growth through existing cash on hand, the operating cash flow from our existing assets, and we've got a $300 million revolver credit facility that's there, kind of underpinned with some hedging and ATM. So maybe I'll pause there and catch my breath and hopefully, that sort of sets the context of where Coeur's been, where we're heading and what the future looks like.

Yes. That's helpful. I mean, I think the -- it's a little simpler in some ways. Usually when we're up here with mining companies, we're talking about a range of jurisdictions and geopolitical risks, but you've simplified that story, areas that are more stable and more predictable. I guess, maybe something to start us off with on the commodities themselves. Throughout today, we've heard from Goldman, some outside speakers as well. There's a pretty good outlook on demand for industrial commodities. Copper, for example, is one that folks seems to be bullish on. When investors are looking at the commodities to have in their portfolio, and there looks to be pretty good visibility into industrial demand going up, where does gold and silver sit in that? And what's the case for including that in the portfolio today?

Yes. Well, look, first and foremost, speculating on gold and silver prices is always pretty challenging. So what we really try and do at Coeur is focus on controlling costs and doing our best to capture that additional margin. And again, I think we've been doing a great job of that as part of the evolution of the company. Look, with the unprecedented levels of global fiscal stimulus and monetary stimulus, one has to think that, that is overall good for the price of gold. And then when you look specifically at silver, when you think of the growing and diverse demand drivers for silver, solar, 5G, electronic vehicles, silver is becoming a little bit more interesting. And we have a lot of our equity holders who are very bullish on silver, and are very pleased that we currently have not hedged anything from a silver perspective. But gold is a much bigger market. Silver is actually a pretty teeny market, relatively speaking. And when you think of that, that just goes back to our overall strategy to move back towards more gold focus. We were comfortable with that level of silver exposure at just under 30%. And it will be growing on the back of the Rochester expansion. So there's a few thoughts for you. But just so everyone is aware, I mean, our strategy when it comes to forecasting prices is we typically, over the long-term, use long-term analyst consensus prices, sort of take a little bit of a haircut on that, and that's what we look at. And we talk about once a quarter with our Board what our thoughts are around liquidity with the obvious scenario plannings, downside and upside and manage the business accordingly.

So one thing that's a little nonstandard, I would say, is that you are hedging gold at this point in time, right? Equity investors will frequently say, we want exposure to the commodity. But could you run us through that and the connection there with some of the growth initiatives that you have?

Yes. We made the decision to hedge some of our gold in connection with this period of capital intensity at Rochester. And Karl, it's been actually pretty well received certainly on the credit side, as you might suspect, but it's been actually really well received on the equity side. People understand. They get it. It's important to maintain a strong balance sheet. And so the -- what we've used, we started in 2019 and continued the activity in 2020 is we've hedged roughly 50% of our gold production in 2021 using a 0 cost collar. So we have a ceiling of $1,600 and -- sorry, a floor of $1,600 and a ceiling of closer to $1,921 for about 50% of our production and then a ceiling of $1,626 in '22 with a floor just over $2,000 and sort of paused the program at this stage because our scenario planning would suggest, again, sort of keeping in mind that net debt-to-EBITDA ratio of less than 2x that we felt pretty comfortable around it. So again, it's all about periods -- hedging in terms of periods of capital intensity, and we think it's a prudent thing to do, and it has been pretty well received.

One more thing on recent developments. I wanted to touch on before I dig into some of the operations and the strategy more specifically. So you announced an acquisition of a stake in Victoria Gold for about $117 million. Interested in the rationale there. You also decided to finance it with equity. Can you kind of talk us through the strategic considerations there and also the balance sheet?

Sure. Look, Victoria is an asset that is right on strategy. We've been obviously watching it. I think it's been quite a success in terms of ramping up their operations, and we had found a compelling opportunity to acquire a sizable interest, again, all balanced and based on our capital allocation framework. So looking for a return. But we thought it was -- it would be an operation that would complement our existing portfolio of precious metal assets in high-quality jurisdictions, right? And so that was the basis of the investment, and we think it's a good investment for our shareholders.

I had a follow-up from the audience here. Could you talk about any restrictions agreed to on shares, on Coeur shares as part of that transaction?

Yes. Look, the entire agreement with Orion is listed in the -- it's been filed on SEDAR. There's a limitation on how much they can trade. And again, just as you would expect us to do to put in the right protection so that there wouldn't be a significant amount of pressure on our share price. So we agreed -- we came up with a commercial agreement to limit the number of shares that can be traded. And sorry, just I wanted to hit on the other part of the question that you'd asked about why we used equity. And again, it's just back to the existing expansion at Rochester. We wanted to maintain the ratios as expected. It made sense to use equity. And I think whenever Mitch has been asked about M&A or I've been asked, we've definitely been highlighting that we've got plenty of growth strategy. We've talked about Rochester. I haven't talked about some of the other growth opportunities in the portfolio. And so we're kind of chock-a-block internally with growth opportunities. And so if we were going to be opportunistic in M&A, we would be looking for an operating asset. So that's just sort of the bookend to the story there.

I guess maybe then let's stick with M&A just for a second since you mentioned it and then also organic growth because you've got the Silvertip options, right? I think you need to still -- you're still evaluating that and what that could mean. But when you thought about Rochester, now you'll think about Silvertip at some point in time. What is it that you're prioritizing? Is it near-term cash flow, IRR, control for the risk of the investment? You have a pretty disciplined capital allocation framework that you've sketched up. But applying it just to those 2 examples, Rochester, which you're engaging in and then Silvertip, which you may, I'd be interested to hear your thoughts there.

Look, great questions. Again, and I'm pleased that you say you like our capital allocation framework. That's a slide that you'll see in any investor presentation or quarterly presentation. It's truly how we make decisions. And again, I think both Rochester and Silvertip are great examples of how we're following that. Again, we see -- we call it our pot of gold that we're driving towards in 2023. We exited -- when we did the bond refinancing, it was our net -- our EBITDA was roughly $270 million. And we see ourselves on a path to significant growth on that on the back of Rochester. And Silvertip could just be an additional enhancement to that, but it must go through that capital allocation framework. And there's kind of 3 things that need to happen for Silvertip to be a success. Number one is when we put it on care and maintenance, the #1 thing -- one of the key issues we wanted to make sure was that if we were to come out of care and maintenance that if we're ever back in the lowest -- or the worst price environment for lead and zinc, worst treatment charge environment that the operation would at least wash its space and then at base at sort of more reasonable long-term prices, it would generate a nice solid return. And at today's prices, it would be printing money for sure. But secondly, we needed to make sure that sufficient front-end loading on the engineering had been done properly. And so we've completed a prefeasibility study and the rest of this year is going through and completing full feasibility study on the key elements of any restart. And then the third thing is if we're going to increase the throughput, we need to make sure that the orebody is there. And that's probably the area, Karl, that we have the most confidence in. We released some pretty interesting exploration results. We'll do a -- we're spending almost $70 million on exploration -- or budgeted in '21, and Silvertip is getting a big allocation of that. And so we'll be out before the end of the second quarter with the Silvertip update on exploration. So hopefully, that paints the picture of how we think about it. But certainly, we want to get to that pot of gold free cash flow in the near future.

That's fantastic. I think one other question that I receive pretty frequently in the credit market is, how should I think about the mine life of these companies, right? Mine life just seems to extend all the time, you keep on finding new reserves. But you look at Kensington, it's at 3 years now. Wharf is at 6 years. As investors sketch out the cash flows from these projects and the potential for those to extend, what's the strategy there? What's the optimal mine life, if you will? Because you don't want to spend too much cash now building out the lives, but you want people, I guess, to be comfortable that you have a runway.

Really good question, again, just comes right back down to our capital allocation framework. So I've been with the company since January 2019, and one of the first meetings we had with rating agencies was around we really like the evolution that the company has gone through, but some of those mine lives have been a bit short. And we recognize that and have -- unlike many of our peers, who either haven't allocated as much capital to exploration or perhaps don't have the opportunities to allocate that capital to their existing operations, we have. And last year was our largest exploration budget in a long time. This is -- this year is going to be even bigger, and it's all about mine life extension. And I think we kind of ticked the box nicely last year at Palmarejo and Rochester, both have 8. Palmarejo is up to an 8-year proven and probable mine life. Rochester is 16 years, and we increased our reserves by 22% in gold and 44% in silver. And Kensington and Wharf are -- we should start to see some extension there. The story Mitch loves to tell you -- Mitch tells the story much better than I ever do. But Wharf, when we acquired it back from Goldcorp in 2015 had a 6-year mine life. And here it is, here we are in 2021 with yet another 6-year mine life. Interestingly, we probably allocated -- we have allocated the largest amount of exploration budget to Wharf. So again, stay tuned for our year-end P&P update there. And then Kensington at 3 years has always been our shortest life. Probably in the capital allocation framework was the last to be allocated exploration funds. But certainly, we're shown with the Kensington Main along with these super high-grade Jualin deposits that Kensington is a significant moneymaker at $1,500, $1,600 and certainly at today's prices. And so -- and then the other nuance that I would just mention at Kensington was in 2020, most of our infill drilling, which is what you need to convert to reserves, happened in the latter part of 2020, so we cut off our infill drills for June -- at June 30 for year-end proven and probable reserve calculation. So again, stay tuned there. But again, we think all of the allocations that we've made are quite prudent, and we think will lead to great returns.

I want to flip to the other side of the capital allocation in a few minutes where we'll talk about when you start generating excess cash as you -- as Rochester comes to completion, and I'd like to talk about where that capital would go. But just for now, when you're looking at all of these projects, you mentioned acquiring Wharf from Goldcorp, and you've operated it slightly differently. But how are you operating from an ESG standpoint? I get a lot of these questions about the majors seem to be putting a lot of money into ESG. Well, at least they talk about it a lot, right? You can see that in the mentions on earnings calls, for example, and they've got a team. But how is it different at a company the size of Coeur? And what do you offer in terms of leadership for ESG?

Yes. Thanks for that question. I really would have found a way to bring it up otherwise. I mean we're pretty proud of what we do. We think we punch well above our weight when it comes to ESG. Mitch has had this and our Board have had this part -- as an element of the strategy. I mean, we've been operating in many of the -- many of our mines have been around a long time. And without that proper community support and environmental leadership, you're not going to be in business long. But again, we've really tackled the G piece and we put ourselves up against not just any mining company, but any New York Stock Exchange listed company around our governance. And so whether it be the #1 score from ISS on governance, we just had our AGM results. Say-on-pay was 95% positive vote, our Board diversity. We came out with our GHG emissions, again, not promising net 0 by 2050, but I think a prudent approach to set a short-term target in 2025 to have a 25% reduction in net intensity. So I mean we are thinking about all these things not just because it's the sexy trendy thing to do, but because it's the right thing to do. We think we punch well above our weight. So -- but thanks for asking about that.

Coming to the balance sheet now. Take on a little bit of extra debt as you -- to shore up liquidity as you go after the Rochester expansion. When you think about the liquidity profile that you have today, how comfortable are you with that? At what point in time do you start allocating capital a little bit more aggressively to other growth projects, potentially shareholders, all those considerations?

Yes. So our stated goal, as I mentioned, is net debt-to-EBITDA of 2x during the Rochester expansion. Long term, we'd like to get to a total leverage ratio of 1x and a net leverage ratio of 0. So again, when we're thinking about the size of the bond offering, in addition to some of the feedback that we've received that our bonds weren't -- at only $230 million outstanding, perhaps not as liquid, that was a consideration. But when you think of that total leverage target that I mentioned, that was also a piece of the consideration as we sort of set that long term. And look, maybe some of the folks on the call won't be happy to hear this, particularly from a credit side, but both Mitch and I are committed to getting towards to declaring that first dividend. I mean we're not going to declare it until we know it's sustainable, and it makes sense. But that is, again, forms part of our capital allocation framework and ultimately would be something that we would like to decide. And again, that feedback that we get about importance of actually generating free cash flow is important, and that is definitely a long-term goal for us.

As you think about the dividend, maybe we're jumping ahead a little bit too far here, but I think the appropriate model for dividends is a flexible dividend that's tied to commodity prices or tied to your free cash flow in some way. Or is it giving more visibility to shareholders at the base level that then you can adjust over time?

We're in the midst of developing our strategy around that. We're getting lots of feedback from others. We're doing some homework along that, and I think it would be prudent for us to make sure that we're aligned internally and then talk to our Board about it before I share too much. But we're in the deliberation phase around that, but obviously, it's something that we are thinking about in the long term.

Let me shift to a couple of questions that have just come in from the audience here. One of the questions focuses on your operations essentially. You had pretty stable operations. Guidance was reconfirmed. Within guidance, there could be levels that are changing, right? Cost, for example. Can you talk about your management of cost inflation across the footprint?

Yes. Look, no doubt, we're starting to see a little bit of cost inflation. Probably the question we get more is on the Rochester expansion and how are you getting worried that there might be some cost inflation. The good news there is it's just under $400 million capital spend, and we've already committed $300 million. And so we've actually done -- we've actually derisked that pretty significantly as well as we have some -- of course, a contingency. We've had to eat into that a little bit here as we got the last few contracts that have come in. We only have just a handful left to go. So stay tuned there. But I think for the most part, we've gotten ahead of that. And then when you look to our operations, we actually again had some excellent results through the first quarter, did a great job on cost control. Starting to see a little bit of pressure, diesel prices, of course. But as we've disclosed previously, diesel only represents between 6% to 8% of our costs. So that's likely not going to drive the needle. And one of the other big cost driver, of course, is people. And for the most part, where we operate, the great relationships that we have with our teams, we haven't seen that pressure. And again, a lot of our operations, it's not necessarily the only game in town, but it's one of the main games in town. So we haven't seen a lot of inflationary pressure yet. And I think this sort of speaks to the benefit of our footprint and where we operate.

I want to squeeze one more in from the audience here. Maybe it's not a quick one. On Silvertip, when you think about -- not there yet, but when you think about building that out, how would you look at your different financing options?

Good question. Again, one of the key elements -- again, for those who aren't familiar, Silvertip is -- well, nearly 1/3 of the revenue will come from silver, maybe even higher at these prices. But -- it's a -- we sell a zinc concentrate and a lead concentrate. And one of the keys to this restart will be what concentrate qualities that we produce. And we're -- again, we've got some key metallurgical testing that's underway. I don't want to get out ahead of that. But we're feeling pretty confident that things are shaping up that these will be 2 highly attractive concentrates. And accordingly, on the back of that, we're -- we think we can fund the majority of any additional capital expenditure tied to an offtake financing. And so we've already started to be -- we've begun those conversations. And again, stay tuned for more as we continue to progress Silvertip here throughout the rest of 2021.

Fantastic. We're just about at time here, wide-ranging conversation. But is there anything that you'd like to touch on that we haven't gotten to yet?

No. Look, again, what -- we just again appreciate the opportunity to meet with you and the rest of our existing bondholders and hopefully, potential future bondholders. We've told you exactly what we plan to do with that capital, and we plan to give -- communicate regularly with everyone on how things are going. And whether it be at conferences or if you ever want to have a one-on-one with us, please don't hesitate. We're more than happy to spend some time with key stakeholders like all of you to give you an update. So thanks again, Karl, for the opportunity.

Fantastic. Thanks very much, Tom. Appreciate it.