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

Good morning, and welcome to the Coeur Mining Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mitchell Krebs, President and CEO. Please go ahead.

Good morning, and thanks for joining our third quarter Earnings Call. With me today in Chicago are Mick Routledge, Tom Whelan, Aoife McGrath and several other members of our team. Before I begin, please note our cautionary language on forward-looking statements in our slide deck and refer to our SEC filings, which are available on our website. Starting off on Slide 3. Third quarter production results were in line, driven by quarter-over-quarter production growth at Rochester, Kensington and Wharf, while cash flow in the quarter was negatively impacted by lower prices, higher consumable costs and lower grades at Palmarejo along with a $21 million noncash inventory adjustment of Oyster. We're set up for a strong fourth quarter to finish the year within our full year production and cost guidance ranges and look forward to delivering strong production and cash flow growth on the back of the Rochester expansion that is expected to be completed mid next year, followed by commissioning and ramp-up in the second half. Turning to a few third quarter highlights. Rochester achieved an important milestone with the successful installation of prescreens into the existing ex-pit crusher circuit. Since it was commissioned, the team has seen meaningful improvements in crush size and has been able to better manage the level of fines, which bodes well for the expansion as we transition from the existing operation to the newly expanded operation next year. The expansion is advancing on schedule with overall completion now at 61%. We've updated the total capital estimate to incorporate the cost of adding prescreens into the new crusher to factor in potential price and quantity risk related to steel, cement and labor needed to complete the project and add contingency to cover remaining potential project risks. The updated range represents an increase of about 9% to 12% from the prior estimate. The photographs on Slide 10, 11 and 12 show the impressive progress we're making in Rochester. Our team has done a tremendous job of overcoming a pandemic disruptions from the breakdown of the global supply chain, an incredibly tight labor market and the highest inflation in 40 years to get this project to where it is today, all while maintaining 0 lost time accidents after totaling over 1.2 million hours on the project. We remain focused on delivering what we believe will be a world-class long-life operation and one of the largest primary silver mines at a time when global cylinder demand is beginning to strengthen. Towards the end of the quarter, we sharpened the focus on our core assets, agreeing to the strategic sale of the Crown and Sterling exploration properties in Southern Nevada. The transaction closed on November 4 and further streamlines our portfolio while crystallizing significant value for core in the form of $150 million in upfront cash. Before I hand the call over to Mick for a review of our operations, I want to briefly turn your attention to Slide 24, which highlights the importance of gold and silver in everyday life. The world is beginning to realize the importance of metals and the need for responsible mining, the products we provide say at the very beginning of the supply chain for essentially everything we need and use. Virtually every global trend today, be it decarbonization, breakthroughs in technology that improve lives and public health or the growing importance of sovereign natural resources in an increasingly fractious world supports a strong long-term fundamental outlook for our industry. With that, I'll turn it over to Mick.

Thanks, Mitch. It's great to witness the growing recognition of mining to the 21st century economy and to everyday line. I know that the people at our sites take that very seriously and come to work every day with commitment and purpose. Backhoe work and dedication are apparent in our operating results to date. In 3 quarters of 2022, our main continue to demonstrate growing consistency and stability. Looking forward, we have a tremendous opportunity to further entrench best practices and business improvement in our operating culture to sustain and grow our performance. We have the right assets and the right people in place to accomplish this. Turning to our third quarter production sum on Slide 6 and beginning with Palmarito. Production was affected by lower grades, which were partially offset by higher recoveries due to fueltation plant improvements. Costs for most consumables remain elevated but are beginning to trend in the right direction with recent decreases in diesel and cement costs, reflective of cost control efforts and ongoing efficiency improvements. Lower labor costs in the quarter were due to the tailing of contract apparent. Year-to-year networks production continues to exceed forecast, and we are mainin good position to achieve production and cost savings. Moving to Rochester. Following a significantly improved second quarter gold and silver production increased again, driven by strong oil placing rates in the prior period. Gold Entone produced increased 5% quarter-over-quarter, while sobrainie produced increased 8%. [indiscernible] the third quarter were impacted by the installation of the prescreen pilot system, which was completed on July 22. Third quarter adjusted costs for gold and silver on a core product basis were impacted by continued increased fleet maintenance and consumable costs. As Mitch mentioned, one of the prescreen payment system continues to progress well with encouraging preliminary results shown on Slide 9 for product size distribution improvements and sales management. Our focus today has been on testing the limits of the system and on dialing in our operating indels. We are now transitioning to locking in operating discipline and establishing consistency with repeatable results. Contests are underway to give early indications of recoveries with initial results expected in the first quarter of 2023. As mentioned last quarter, we anticipate a period of elevated costs throughout Rochester's transition period as the integration and testing of the prescreen system takes place and construction activities accelerate. Despite expectations for a strong finish, but just a slow start to the year is expected to result in gold and silver production tracking to the lower end of the 2022 guidance. As before notes in our presentation clearly illustrate, the pace construction of Rochester has picked up significantly with approximately 450 contractors now working on site. This now concrete work is now complete with the exception of the primary crusher pocket and the prescreens, which are now underway. The Mero Pro plant is taking shape. Slide 10 in the presentation shows the October 19 placement of the DAA tower. Construction of the marrow Pro plant is on track for completion by the end of the first half of 2022 when in line with the P85 project schedule. With engineering with the prespeds assembly now complete, we have allied all work streams on the crushing circuit and construction continues on schedule. I'm also pleased to report that construction project has now passed 2 years as of August first without the lost sale incident. Moving to Kensington. Production increased quarter-over-quarter with great contributions from Dalaman Cambian. The focus of fourth quarter production is on Cambian, Unica and Juan, and we began to see production from our mayors. With strong contributions from Zone 3, we've been Cambian on track to achieve the lower end of the 2022 production gains. Locking up with Wharf, a 6% production increase quarter-over-quarter was driven primarily by recovery timing of higher grade ore placed in the previous period. Wharf remains on track to finish the year around the top of its 2022 production guidance range. With that, I'll pass the call over to Tom.

Thanks, Mick. Turning to Slide 4, I'll quickly run through our consolidated financial results. Before spending some time to review the key initiatives we have taken to bolster our balance sheet over the remaining duration of the Rochester expansion during these uncertain economic and geopolitical times. Our third quarter financial results were impacted by significantly weaker spot rolled and silver prices and continued cost inflation. Revenues decreased by $21 million quarter-over-quarter, driven primarily by 24% lower silver sales. This decrease was due to a 16% decrease in average realized silver price and an 8% decrease in silver ounces sold. Gold revenues decreased by 5% quarter-over-quarter due to a 4% decrease in gold ounces sold. During the quarter with the spot gold price decreased by 8%, it is important to note our average realized gold price only decreased by 1% due to the positive impact from the downside protection we have in place via our gold hedging program. We realized an $11 million gain on our gold hedges for the quarter, which equated to a $133 per ounce boost to our average realized gold price this quarter. The estimated market value of the hedge book was approximately $47 million at September 30. Operating costs were in line with expectations for the quarter, but remained elevated due to ongoing inflationary pressures on diesel, other consumables and labor. We are seeing pockets of cost moderation throughout the portfolio and our breadth of cost management and business improvement initiatives contributed to a lower increase in 3Q compared to the prior quarter. As we all see in our daily lives, fuel prices remained frustratingly high. Core consumes between 16 million to 18 million gallons of diesel per year. Our average realized diesel price for the quarter was $4.33 per gallon, which was a modest 5% decrease from Q2 2022. However, this price still represents a 45% increase since Q2 2021 as outlined on Slide 5. The A couple of additional items to note in the third quarter. Operating cash flow long to negative $19 million driven by the aforementioned 24% decrease in silver revenues and the semiannual interest payment on our senior notes. Capital expenditures for the quarter were $97 million, reflecting the planned POA 11 expenditures. Notably, approximately $575 million of the estimated POA 11 capital has now been committed and $443 million has been incurred towards the expansion. The fourth quarter of 2022 and the first quarter of 2023 are the peaks of our capital expenditures on the project as we drive towards achieving our P85 schedule as Mick outlined. Against the backdrop of geopolitical and global macroeconomic uncertainty, we remain concerned about commodity prices and continued cost inflation over the short term. Slide 13 highlights the proactive initiatives that we have completed during 2022 to position the company to fund the remainder of the revised POA 11 expansion and to continue our exciting high-return exploration plans against this uncertain backdrop. I wanted to highlight a couple of key items that give us confidence that the balance sheet will be able to provide the required flexibility. We received inflows of $150 million of cash from the strategic sale of Crown Sterling last week. We worked with our banks to complete an amendment to our revolving credit facility to provide additional balance sheet flexibility through to the end of 2023. We would like to thank all of our syndicate banks for their continued support and confidence as we round the final turn on the POA 11 expansion. We continue to hold approximately $46 million of equity investments, and we have established a new ATM for gross potential proceeds of up to $50 million. We have this all up, and we have approximately $492 million of total potential liquidity. These key initiatives taking to enhance our total potential liquidity leave us feel uncomfortable that the balance sheet will provide the required flexibility to deliver the industry-leading high-return growth that will transform our company. I'll now pass the call back to Mitch.

Thanks, Tom. Before moving to the Q&A, I want to quickly highlight Slide 14 that summarizes our top priorities for the remainder of the year. On December 15th, Coeur will hold at Virtual Investor Day, during which we will provide in-depth updates on our progress against these goals as well as provide a 3-year outlook for the company and a more detailed review of our exciting exploration efforts taking place at Kensington and Silvertip. We continue to believe that the execution of this strategy is the right road map for adding significant long-term value for stockholders and positions Coeur as a truly differentiated opportunity for investors seeking industry-leading organic growth. With that, let's go ahead and open it up for questions.

[Operator Instructions] There appear to be no questions at this time. I would like to turn the conference back over to Mitchell Krebs for any closing remarks.

Okay. Hey, we appreciate everybody's time this morning, and we hope you'll join us on our Investor Day on December 15. Otherwise, we look forward to speaking with you all again in early 2023. And if you have any follow-up questions from today, please don't hesitate to reach out. Have a healthy and safe holiday season, everyone. Thanks.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.