Endeavour Silver Corp. (EDR) Earnings Call Transcript & Summary

I would like to welcome you all to this Q1 2020 corporate update and video webcast by Endeavour Silver Corp. We don't normally go live on our quarterly production updates. But given the current global situation, we thought this would be a wonderful way to reconnect with our shareholders and give you a good update of the progress of the company. As always, I will be making some forward-looking statements today. So you are duly cautioned. And I'd like to start by just touching on how we can create value for shareholders this year. Really, our value catalysts are fourfold. Firstly, and by far, the most important, returning our 3 operating mines to profitability through completing the operational turnarounds that we launched last year, through the development of new high-grade ore bodies at Guanaceví and Bolañitos. And ultimately, the goal is to turn each of these mines from losing money last year to generating free cash flow this year. Secondly, we have one of the best organic growth profiles in the silver mining sector. And advancing our Terronera Project, which is potentially our next core asset and has the upside to become both our largest and lowest-cost mine, this is, I think, of paramount importance to our shareholders. Thirdly, we see continued opportunities to expand our land positions in each of the historic mining districts in Mexico to not only extend the mine lives of our 3 operating mines, but hopefully find more high-grade to improve the operating performance of those mines. And last but not least, the main reason we're in Chile, we have a portfolio of world-class prospects in Chile, is to make a world-class discovery. So let's move on to our first quarter operational update which we announced last week. On a consolidated basis, our production was in line with guidance before we had to suspend the mining operations in Mexico due to the government decree. Our production was well ahead of plan at Guanaceví, but behind plan at Bolañitos. And it was a lower production quarter-on-quarter compared to Q1 last year, primarily due to the suspension of our fourth mine, the El Cubo mine, on November 30. We did withdraw our guidance this year in the last week as a result of the government-mandated suspension of mining operations. And if the suspensions do extend beyond April 30, we actually see opportunities to reduce our carrying costs going forward. Going to the individual mines, Guanaceví significantly outperformed plan in Q1. And it was the biggest money loser in the group last year. So our turnaround has had a tremendous impact on the performance of Guanaceví. Our throughput, ore grades and gold recoveries were all higher than Q1 last year, and they're all well above our plan for this year. So the operational turnaround is nearing completion, and our expanded new mine production allowed us to actually close the old mines in January at Guanaceví. Our newest discovery at El Curso continues to grow. And the only downside on El Curso is that we do pay a very significant royalty on that property, so the costs aren't as low as we'd like. But nonetheless, El Curso has been one of the keys to the turnaround at Guanaceví. Looking forward to the rest of the year, our goal very simply is to deliver free cash flow by completing the operational turnaround, completing the development of new high-grade mines and ramping up other ore bodies to fill that plant to capacity. At Bolañitos, we underperformed plan in the first quarter. And our comparison to Q1 last year is also negative compared to throughput, silver grades and gold recoveries. We did resolve the arsenic issue at Bolañitos by changing the flotation circuit. And so as a result, gold recoveries are improving. We view our operational turnaround, which was launched in Q3 last year, so it's following Guanaceví by 1 to 2 quarters, we view it as being about half done. And after we resume operations after the suspension is lifted, we will need another quarter to see Bolañitos reach its planned output for the year in terms of monthly throughputs, monthly grades and recoveries. The new equipment we bought and the new supervisors we hired last year are having a positive impact. And if you look at the chart right, both gold and silver grades are finally starting to climb in March compared to February. So the turnaround is getting traction, and we do expect Bolañitos to break into the black later this year. El Compas, our production was close to plan, throughputs actually, and we're well in excess of plan, but the grades were short of plan. There's no comparable quarter from last year because we only reached commercial production at the end of March in 2019. And we see operational improvements continuing, primarily on the grade and recovery side through the balance of this year. We did launch in March, a transition from contract mining -- high-cost contract mining to lower-cost employee mining. And the goal of that was simply to reduce dilution and reduce costs. And we have been processing lower-grade stockpiles during this transition period, hence, the lower grades in Q1. Our goals for the year, very simply reopen some of the high-grade areas of the El Compas mine, complete the transition from contract miners to employee miners, complete the transition in some areas from cut-and-fill mining to long-hole mining to reduce costs again, restart the exploration at our Calicanto property, where Capstone, our neighbor at Calicanto has extended their Mala Noche Footwall vein onto our ground through an agreement with us. They have a wonderful copper discovery at depth on Calicanto. So those are the 3 operating mines. Let's touch now on our development projects, primarily Terronera. We made good progress on Terronera in the first quarter, appointing Ernesto Lima as our new Director of Project Development to oversee the development of Terronera as our next core asset. We did receive in the last month or so a summary of the updated economics from a new engineering group on our pre-feasibility study published last year. However, the updated economic summary, although positive, was less robust than last year's study, primarily because the new engineering group used different assumptions to that of the engineers last year. Ernesto did try to get the 2 engineers to reach an agreement on assumptions, but ultimately recommended that we take this final optimization phase of the pre-feasibility study in-house, make use of his expertise and the expertise of our development group to develop the project that we want. And once that final optimization work is done, we will then consider the possibility of a full feasibility study to do a final derisking of the project and expand our alternatives for project financing. So lots going on at Terronera this year. We have a number of areas that Ernesto is currently looking at to add value to the new economics of the pre-feasibility study. Primarily, there was a difference in how the 2 engineering groups estimated reserves. So we're reconciling that. There's a difference in capital costs, and we're reconciling that. And there's a number of other opportunities that Ernesto is currently pursuing to generate the best possible project over the next month or 2. I'll come back to that during the Q&A. And last but not least, in terms of things that we, management, can do to create shareholder value this year. I put in a slide on M&A opportunities because the transaction we did at Guanaceví last year was so accretive. Picking up a piece of property adjacent to 2 high-grade historic mines at Guanaceví literally gave us access, instant access to new high-grade ore. And it helped to speed the transition at Guanaceví from closing old mines and opening new mines and to speed the turnaround of that operation. So we see similar opportunities at Bolañitos with historic high-grade ore bodies stopping at property boundaries, and we've recognized opportunities to make brownfields acquisitions at Bolañitos. At Terronera, we've been using this time to significantly expand our land position. And we hope to announce in the coming quarters not only the additional lands, but initial exploration on those lands. And last but not least, we are always looking for opportunities to grow our business in an accretive way, either on the asset level or the corporate level. And the table on the right is simply a list, a shopping list, if you will, of our parameters for qualified acquisitions. The next phase of this review is really to consider our risk assessment and value opportunities. As I said at the beginning of this webcast, the COVID-19 pandemic has cast a real risk over mining operations worldwide. And most of them are self-apparent: the health risk, the economic risk and the need for fiscal stimulus to reboot economies after we're through this period. But there's also a liquidity risk in Mexico. Because of the government-mandated suspension of mines, we and every other miner in Mexico are looking at a period, hopefully, only 1 month of no revenues, but significant carrying costs. There is an industry-wide impact as a result of this current health crisis as well. Clearly, the demand for silver and silver products will be sharply lower for a short period because the global economies are effectively shut down. But interestingly enough, there's also a sharp decline in supply. RBC recently published this chart on the right with the silver miners shown in the gray bars, and they estimate that on an annualized basis, there's currently 115 million ounces of silver on the sidelines. That's primarily from primary silver producers like Endeavour. And if we were to consider that silver is mainly produced by by-product, copper, lead, zinc miners, if we were to include the sidelined silver production from by-product producers, let's assume maybe 25% of those producers are currently down, that would put a full 30% of global supply annualized on the sidelines at this time. So a pretty significant decline in supply as well. My response to this pandemic was, I think, well prepared. We started working in early March. We implemented our plans in mid-March. We actually had some trial runs in late March with some false alarms. And what have we done for our employees? Well, we immediately formed an executive team in Vancouver. We formed an executive team in Mexico. We were meeting initially daily to consider all the ramifications of not only prevention, but response in case any positive cases arrived at our sites. Our doctors have been, for many weeks now, checking symptoms for every person coming on to or leaving each of our sites and many other responses to keep our people safe. In terms of keeping our business safe, we initially cut costs. We temporarily suspended nonessential travel, nonessential exploration, nonessential hiring. And we've kept only essential personnel at each of the sites to maintain safety, environmental, security and equipment maintenance. In the communities, we've been helping out with education on all the measures that local citizens need to take to keep themselves safe. We've been providing supplies and masks, cleaners and disinfectants and, in the case of vulnerable households, special kits. The national response to the COVID-19 crisis, unfortunately, was not so fast. And we only saw government take action in the last week of March. So it's really a good news/bad news thing. Mexico went straight to closing nonessential businesses and sending people home, and that's the current status today. As a result, we hope that they will be quickly rounding off the COVID-19 curve in Mexico. The government declared a national health emergency on March 31, and we shut down our mines as did everybody else on April 1. So we do think that the economy could be significantly impacted, but one benefit is that Mexico hedges its oil every January. So their oil is hedged at $47, a nice benefit for the country. The health care system is -- was not prepared for this pandemic, but it is actually a good well-functioning system. And so it does appear they can handle this crisis. There was basically no fiscal stimulus package announced yet by the President of Mexico. And small businesses, in particular, I think, are going to be hurt by this. Let's move on now to the last part of this webinar, which is really on the precious metals. Silver price risk and opportunity. Gold and silver are supposed to be hedges against monetary debasement, monetary distress. And yet gold and silver got sold off in March, just like every other market. Well, that's typical of a market panic. When people rush to cash, everything is for sale. But as we know from history, gold and silver are almost always the first sector to bounce back, and that's true again this year. So the market panic of March has led to a gold and silver run in April. Because our production this year is approximately balanced 50% gold, 50% silver, and gold is now at its all-time high for the year, above $1,700, silver has regained over half of what it lost in March at $15.50, I think it's fair to say that gold more than makes up for any shortfalls that we suffer from our silver production and the low silver prices. So what is the opportunity in gold? If you look at the chart left, this is a historic view of fiat currencies and their purchasing power versus gold. Clearly, over time, every government in recent history has allowed their currencies to depreciate relative to gold. And if you look at the chart right, you can see the S&P peak and then the correction. But look at the Fed balance sheet, my goodness. And this isn't all of it. This is just at the end of March. We're seeing a massive increase in Fed debt in the U.S. and worldwide. And of course, what does this mean? That fiat currencies will be worth less and less as we go forward. As J.P. Morgan said, "Gold and silver are money, everything else is credit." So will history repeat itself? My bet is yes. I think we have 2008, 2009 to guide us. Chart right, you can see the sell-off in the S&P, followed by the rebound in 2009, '10 and sell-off in gold, but look at the rebound, best-performing sector for 2 years post-2008 crash. Can we expect the same again this year? We're already seeing it with gold north of $1,700 as I speak. There are very similar macro drivers between today and 2008, and that's the reason why, as panic selling subsides, precious metals and their equities typically outperform the broad market over the following year or 2. Silver is not just a monetary metal. More and more in recent decades, it's emerged as an industrial metal. And so there's a different thesis for owning silver in the portfolio. Silver is produced primarily as a by-product of base metal mines. Base metal mines are currently trapped in a multi-year bear market. So there's dwindling supply and 3 consecutive years of falling supply. But silver is also an emerging green metal. You can't have solar power or electric vehicles without silver. And so that's created a supply-demand crunch. With -- by placing upward pressure on the demand for silver, I think we are clearly seeing the new start of a silver-gold cycle for very different reasons than the monetary reasons. The gold/silver ratio is primarily useful to tell you where you are in the gold-silver cycle, where you are in the financial cycle. In the chart left, this is a historic look back on the ratio. And you can see, for instance, the spike to 85 in the '08 crisis, the quick decline in the silver/gold ratio to 31% in the 2011, '12 peak. And now we've seen a massive spike in the ratio up to 125 in March, already declined to 110. When do you want to own gold -- silver, sorry, relative to gold? After each ratio peak. And we've just come off a peak. I think it's fair to say that silver should significantly outperform gold over the next year or 2. It does lie gold, but then it outperforms. And on the lower chart, you can see that Endeavour's beta or leverage to the price of silver is best in the sector. So to wrap up, our long-term plan, how do we future-proof our business, I'd just like to return to our value catalysts. By turning around our existing mines from losing money to making money, we become a healthy company once again. By developing our organic growth pipeline of projects, Terronera and Parral, we can once again become not only a growing silver producer, but with sector-low costs. We're clearly moving into a new cycle of rising precious metal prices. And by adopting new technologies in our new mines and maintaining a clean balance sheet, we think that we can outperform. Last but not least, Chile represents an opportunity to make a world-class discovery and breaks the mold of small, high-grade underground vein miner. But we will not neglect opportunities to expand our operations in Mexico, extend their mine lives and improve their performance. So with that, I think let's turn to questions and answers. Thank you.

So that concludes the formal part of our presentation. And now we will be taking questions from the webcast, the Submit a Question form. We already have some questions, so I will start reading those out. [Operator Instructions] So now we'll just take a minute to sort through the questions. The first question comes from [ Richard Campbell ], and the question is, what would the ideal price of silver be to send Terronera into a build-out phase?

Well, if we look at the pre-feasibility study last year, the CapEx was up in the $130 million range, and the OpEx was, on a cash basis, down in the very low $1 to $2 range. And I think the all-in costs were less than $5. So it does imply that a very low price of silver is still a goal for Terronera. However, there are obviously other factors. And so I think the safest answer is that the current prices are just fine.

The next question comes from Chris at PI Financial. And it's a couple of questions, but I'll just read them all out. So are you still on track for 1,250 tonne per day at Bolañitos and 1,200 tonnes per day at Guanaceví? And what steady-state grade are you anticipating at El Compas? Please comment on the effects of lower energy costs, lower peso versus U.S. dollar and talks with Mexican authorities regarding deeming mining in Mexico an essential service.

Okay. Thanks, Chris, for your questions. I think Galina is going to have to remind me of some of those. But yes, we're on track for Guanaceví at 1,200 tonnes per day. We actually do have the cone crushers in place now. We're just doing a little bit more maintenance during this downtime. But when we start up again, we should be at 1,200. On Bolañitos, we are definitely aiming for the 1,250 tonnes a day. There's a little bit more development that we need to do, which we'll do as we start up the mines again. And then we will -- we'll be on track for 1,200 in the second half. What was the next question?

Steady-state grade at El Compas.

Steady-state grade. We are aiming to be about 4.2, 4.3 silver equivalent -- sorry, gold equivalent grade for El Compas.

And lower energy costs and depreciation of the peso.

Lower energy costs. Yes...

Yes. Chris, thanks for the questions. The lower peso has a direct impact on our labor costs. And in a normal world, when we're running our mines, it's about 30% to 35% of our costs comes in the form of labor with underground veins. The peso has depreciated just north of 25%, gone from 19 to 25. I think it's hovering just below MXN 24 right now, MXN 24 to USD 1. So ultimately, the impact on our cash costs is about 8% on our direct cash costs. And then ultimately, there is some impact in our capital. A lot of our capital programs are priced in U.S. dollars. So not as much there. And from a power standpoint, we haven't seen a big decrease in CFE rates yet. I'm sure those will be coming. But CFE is basically our third largest cost behind labor, but ultimately, only about 7% of our total costs. So we're not going to have a huge savings to us. Obviously, with underground vehicles in our mobile fleet, we have some diesel savings. But again, that's a small cost in the whole relative things. As far as the discussions with regards to essential services, there are discussions happening from the industry side at the federal level. We haven't heard an update whether mines will be able to get open. I know yesterday, there's some conflicting reports from the health minister saying that he was looking at a May 30 start-up and then AMLO came out and said May 10 for a start-up. I think that's just indicative of what we've seen out of Mexico. They've got a little bit of a slow response to it all, but we're optimistic that as the miners, we can get going a little bit earlier, but who knows.

And Chris, this is Brad. With regard to deeming mining a nonessential industry, there are actually 2 Mexican miners still operating, Peñoles and Fresnillo. And they argued, so far successfully, that they provide essential services. For instance, the smelter in Torreón. You can't shut a smelter down in a day, and you certainly can't start it up in a week. And I think that's why they continue to operate. So good news, bad news. I think they're taking a significant health risk, but obviously, I don't know the extent of their health precautions. The upside is that if Fresnillo and Peñoles can come through this month of April without any significant health incidents, they actually become an example for how an industry can manage the health crisis, and that might actually bode well for deeming mining essential to come back on in May.

The next question is from [ Henry ]. And the question is, please address Endeavour's liquidity based on Mexico reopening sometime soon, perhaps whether that be summer or fall, and the potential for new capital if needed.

Thanks, [ Henry ]. Dan, CFO. Obviously, liquidity is a concern across the industry. At the end of the quarter, we have an estimated $6 million (sic) [ $16 million ] of cash, estimated $30 million to $35 million of working capital. And then ultimately, we think we can get through April for sure. We know we've gone to suspension, and we're going to be paying base salaries to our site staff and salaries to our administrative staff through the month of April, which takes us through the presidential decree of April 30. But it -- when it extends on, if it extends on, we'll have to go back with our unions and start discussing whether we can reduce that base salary to something lower, if possible. So we believe we can get through Q2 here. It's just a question of how long will the shutdown happen for, which ultimately will depend on the Mexican government.

Do you want to do a little correction there with the 16?

Yes. I think you mentioned $6 million cash.

$16 million. Sorry.

Yes.

Yes. Okay.

So at this point, I have no further questions, but I will take about a minute to see if anybody else wants to use the form. Okay. I did get another question from [ Richard. ] And the question is, is it possible that the U.S. and other countries could move from the petrol dollar to a gold/silver-backed treasury note? If this happens, it will spike gold and silver, hypothetical. But would that change plans for Endeavour in a more aggressive approach?

Well, this is Brad. Thanks for your question, [ Richard ], but that is highly speculative, obviously, and a very big picture. Suffice to say that world experts such as Ray Dalio at Bridgewater, are calling this the end of the financial world as we know it. In other words, his "cash is trash" motto really means that the depreciation of fiat currencies has entered into a new phase of -- an accelerated phase of depreciation. And out of this phase, whether it's a year or more, I don't know, but surely, central bankers will need to find something to hang their hats on because the U.S. dollar will not rule the seas as it has.

I have no further questions at this time. So I will just flip it over to Brad for our closing remarks.

Great. Thank you very much, Galina, and thanks all for listening. We don't actually normally do live webcasts on our quarterly production updates. But again, given the global situation, we thought this was a wonderful time and method to reconnect with our shareholders. So thanks again. And we'll be doing our usual conference call after the May 12 financial release. So thanks, and stay safe.