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

Welcome to this webinar on Endeavour's Terronera Project and the release today of our final pre-feasibility study. Our cautionary note is a legal disclaimer that I will be making some forward-looking statements so you are duly cautioned. And we have quite an agenda today listed on the right, and I will move quickly through the slides so that we have time for Q&A. As an overview, Terronera represents the potential to become Endeavour's next core asset and our largest and lower-cost mine. The final 2020 pre-feasibility study released today highlights the robust economics of this high-grade vein system. After-tax net present value comes in at USD 137 million, internal rate of return at 30% and payback period of 2.7 years using base case prices of $1,419 gold and $15.97 silver. This will be one of the lowest-cost mines in the entire silver sector with cash costs, net of the gold credit, estimated at 0. In other words, gold pays for the mine and thus the silver is effectively free. And even on a mine site all-in sustaining cost basis, the costs are estimated to be a very low $2.10 per ounce. Initial CapEx will come in around $99 million and sustaining CapEx at $61 million. This will be a 1,600 tonne per day underground ramp access mine, feeding a flotation plant capable of producing high-grade bulk sulfide concentrates. And for the life of the mine, we expect to produce about 3 million ounces of silver and 33,000 ounces a year, just under 6 million ounces of silver equivalents for an initial 10-year mine life. Terronera is located about 50 kilometers northeast of the port city of Puerto Vallarta in Jalisco state, Mexico. It has excellent road access, only a 1.5-hour drive from Puerto Vallarta on Highway 70. And even though it's located in mountainous and forested terrain, it has a temperate climate at elevations of 1,500 to 2,200 meters above sea level. There's ample local infrastructure for the exploration stage and many opportunities to build infrastructure for the production stage. Terronera consists of 24 mineral concessions totaling just over 17,000 hectares. And we've made applications for several new concessions adjoining the existing land package. The history here goes back to the 1500s, specifically 1542. And there was small-scale mining off and on for several centuries, halting during the Mexican Revolution of 1910 to 1912. Basically, nothing happened for 100 years until we optioned the property in 2010. We bought it outright in 2013 for $2.75 million. And since 2010, we've spent about $27.8 million on all exploration, engineering and related costs. That works out, by the way, to a discovery cost between $0.30 and $0.35 per ounce. The geology is classic Sierra Madre Occidental in the volcanic belt that hosts the majority of Mexico's gold and silver deposits. And this is a classic low-sulfidation epithermal vein system. Mineralization is contained in multiple veins, many of which have not even been drilled yet. And we've made 2 bona fide discoveries in 2 veins, the Terronera vein and the La Luz vein, which typically run 1 to 8 meters thick, up to 30 meters in places, and grading anywhere from 100 grams of silver to 1,000 grams, anywhere from 1 gram gold to 10 grams and an average silver equivalent grade of 400 grams silver equivalents in the Terronera vein and over 1,000 grams silver equivalents in the La Luz vein. The ore bodies consist of silver and gold sulfides and sulfosalts associated with quartz-adularia veins filling faults crosscutting the host volcanic rocks. I've touched on the project milestones already, but just to review. We acquired the option on the property in 2010; made the discovery, initial discovery, in 2012; started our economic studies in 2015. And today, we released the final pre-feasibility study on the Terronera Project. Our reserves and resources have grown by leaps and bounds since we started. And you can see on the chart here both the ounces of silver and gold and silver equivalents and the grades in silver equivalents, with a 65% jump in silver equivalent grade since 2011 and a 56% increase in total tonnes in reserves and resources with just over the last 5 years. And again, the discovery cost, $0.32 per ounce of silver equivalent. Our grade and production profile is actually the inverse of the reserve and resource profile. We front-loaded the production and the grades to capture more metal in the early years to speed our payback period and give us faster cash flow. And again, on this chart, you can see the silver and gold production in the silver and gold bars, the silver equivalent grade in the red line. And there's 2 ore bodies here. In longitudinal view, you can see Terronera and La Luz. The reason why the first 4 years of production are higher production and higher grade is primarily due to the early mining of the very high-grade La Luz vein. So again, recapping our base case pre-feasibility highlights. This is a classic ramp access underground mine developing shallow, thick and rich vein ore bodies over a 10-year mine life, generating a net present value of $137 million at an internal rate of return of 30% and a 2.7-year payback period. We generate life of mine cash costs, net of the gold credit, of basically 0. And even on a mine site all-in sustaining cost basis life of mine, we're looking at a very low $2.10 per ounce of silver net of the gold credit. In the base case, we'll generate, on average, 5.9 million ounces of silver in equivalents per year for 10 years. And with significant exploration upside, more than half of the known veins have not yet been drilled. If we turn our attention now to an alternative spot case using metal prices closer to today's prices at $18.49 silver and $1,812 gold. Even though the operating metrics remain the same, you can see the financial metrics jump significantly, with NPV rising to $229 million, IRR to 46%, payback period shrinking to 1.7 years, life of mine cash costs falling to negative $4 per ounce, net of the gold credit. And even mine site all-in sustaining costs falling to negative $2, net of the gold credit. Silver equivalents climb a little bit to 6.2 million ounces per year only because of the higher silver-gold ratio used in the spot case. So since 2015, we've conducted 5 independent technical reports assessing the project as it grew and culminating in today's release of the 2020 final pre-feasibility study, shown in the base case, blue; and in the spot case, yellow. Suffice to say that we've added value to both the NPV and the IRR with each study over the last 5 years. So how do we accomplish yet more improvements in the current pre-feasibility study? The value adds in the 2020 PFS include a review of more than 25 operating parameters and the highlights of which are: increasing the capacity of the plant to 1,600 tonnes per day from 1,500 tonnes per day, resequencing the production profile to front load both the grades and the ounces so that we have an elevated grade and production profile in years 1 through 4. We deferred some mine development from the initial CapEx stage to the sustaining capital stage; and we've adopted about -- a mix of 60% cut and fill, 40% long hole in the mining of the Terronera vein, which was a step forward from the last study. With regard to plant equipment, we were able to incorporate some idled equipment from our now idled El Cubo mine site. And the crushing circuit was simplified. In fact, the whole process flow sheet was simplified to use smaller crushers, smaller tailings thickeners and fewer pumps. We adjusted our power source to be a combination of liquefied natural gas, grid power and a small solar plant to have diversified power sources for the mine, plant and camp. And we also reduced the size of the camp initially during the construction phase, intending to expand it for commercial operations. So initial CapEx comes in at $99 million, of which $44 million is for mine development, preproduction mine development. And the other significant portions of the initial CapEx come in as project indirects, process plant and infrastructure. Some of the savings that we shaved off of CapEx compared to the last studies include deferring some mine development, reducing the equipment and plant footprint, utilizing some of the El Cubo plant equipment, modifying the tailings facility and moving of equipment financing into the sustaining CapEx through leasing. So $99 million of initial CapEx, $61 million of sustaining capital. As I mentioned earlier, this will be one of the lowest-cost silver mines in the entire silver sector. And you can see here the headline mine site all-in sustaining cost comes in at $2.10 per ounce, net of the gold credit. Again, the biggest portion of that is the gold credit, followed by the mining costs. Direct mining costs per tonne come in at $83.82 per tonne, the cash costs, again, 0 and the all-in sustaining costs $2. So how does Terronera stack up in the industry to other operating mines? On a cash cost basis, it's clearly in the lowest 15% of all operating mines in the peer group. But if you look at the mine site all-in sustaining costs, it will be lowest -- clearly, lowest decile in the entire group. And we'll single-handedly reduce our consolidated operating costs significantly when Terronera comes on stream. Those kinds of low costs generate very significant after-tax free cash flow and EBITDA, with base case free cash flow coming in on average about $30 million-plus per year, and in the spot case at more than $40 million per year, for an accumulated free cash flow over the 10-year mine life of $217 million in the base case and $342 million in the spot case. In terms of sensitivity analysis, you can see on the chart left that the project is most sensitive to metal prices. And at the current spot prices, there's a significant jump in NPV and IRR. The project is much less sensitive to both OpEx and CapEx. So the Terronera and La Luz mines will be classic underground ramp access mines. At Terronera, we have 4 separate ramps to develop the ore body, connecting to a main haulage way just over 2 kilometers to the mill and with an average mine output rate of 1,600 tonnes per day. La Luz, which is a tiny little mine but very high grade, is developed by one portal accessing 2 ramps. The mining method will be primarily cut and fill and long hole at Terronera, resuing and long hole at La Luz. And backfill will be a simple blend of waste rock, tailings and cement. Keeping it simple, our process flow sheet is a basic 3-stage crushing, 3-stage grinding, 2-stage flotation and thickening and filtration to produce high-quality bulk sulfide concentrates. We're targeting a crush size of 3/8 of an inch and grind size of 80% minus 70 microns. The plant recoveries are targeting about 85% silver and 82% gold. Surface infrastructure, again, fairly simple. We have some leveling of the plant site to put a plant on a hilltop. And that material will go down to form the toe of the tailings storage facility. So you can see the tailings and plant shown on the graphic here. And the mining fleet is shown right, a basic mix of drills and scoops and trucks, et cetera. And the power plant will be an interesting mix of liquefied natural gas, grid power and a small solar power plant. We wouldn't be where we are today at Terronera if it weren't for the fact that we've been investing in the local communities from day 1. We believe in sustainability is core to our success. And photos left, you can see a recent municipal art contest, a recent recycling campaign for an environment day. And on the charts right, a recent survey of all the local inhabitants shows very, very strong support, very strong social license for mining at Terronera. We continue with programs in education, in employability and private-public partnerships with all levels of government and other institutions. We have most of the permits needed to commence operations today. We will be extending some of those permits due to tight time lines. But other than that, we'll simply be filing for additional permits as needed that flow out of any changes from the feasibility study. Terronera represents significant upside opportunities to extend both mine life or expand the operations. For instance, we've already filed to acquire additional concessions covering mineralized areas trending off of our property. Through simple drilling, we can convert existing inferred resources to probable reserves and test multiple other new veins, such as the footwall veins and the Real Alto veins. The mine and plant have the potential to expand, perhaps even to 2,000 tonnes per day, subject only to expanding the reserves. We will evaluate optimizing the mining methods. With more geotechnical drilling, we should be able to justify more long hole, which has lower unit costs and therefore would reduce even further our operating costs. Or transportation. We're going to actually evaluate a somewhat innovative and fully automated [ commercial ] underground rail haulage system instead of traditional haul trucks to move the ore from the mines to the plant. We're also evaluating the mining equipment and whether or not we can move away from diesel and adopt electric or natural gas equipment. Recoveries, still some opportunities there as we optimize the grind size and the different flotation stages. Tailings transport, we'll look at conveyors or pipelines versus trucking. And again, the power capacity, we think, can be tweaked as we go through final feasibility. Exploration potential. I already mentioned that there's many veins that have yet to be drilled at Terronera. So in the Terronera and La Luz resource envelopes, there's opportunity to move inferred resources to probable reserves with additional infill drilling. Outside of the current resource envelopes, there's a suite of veins in the footwall of Terronera called La Loma-Los Pajaros, and these vein targets range up to 500 meters long by 3 meters thick. We have never even tested these veins. And in the south end of the property, the Real Alto area has a suite of 12 separate veins that have seen very little drilling with very encouraging results, and they're way high in the system. These veins typically have elevational controls on the ore bodies. And in Real Alto, the surface is well above the target bonanza zones. So deeper drilling will be required to test targets ranging from 0.5 kilometers to 1 kilometer long. And on surface, they're 1 or 2 meters thick. But in the bonanza zone, we would expect greater thicknesses. Next steps. Well, we have a pretty full agenda coming up with the launching of a full feasibility study this quarter, taking approximately 9 to 12 months for $1.5 million to $1.8 million. We want to build out our project team; complete the EPC process with contractor bidding and selection; extend various government permits and amend the mine access ramp and construction camp permits; order long-lead items for the plant and mine; evaluate additional upside opportunities such as recommencing our exploration drilling later this year; and ultimately, go to the Board for approval to develop the mine and secure the financing to commence development. So we're going to move now to more of an industry overview. Pure-play silver producers are really hard to find, and Endeavour is actually one of them. Based on last year's production, our revenues were 54% silver, 46% gold and no base metals. Thanks to Terronera and Parral, we expect that silver mix to rise, whereas most of our peers are not only below 50% revenue by -- from silver. Through M&A, that number can only shrink. So we are a pure-play silver producer. In fact, speaking of M&A, there's lots of gold projects out there, approximately 100 have been surveyed at the PFS or feasibility level, but there's real scarcity of advanced silver projects, and Terronera is definitely one of them. Looking at our leverage to the price of silver. Thanks to our silver exposure, Endeavour actually has a sector-leading beta to the silver price of 1.6% over the last 5 years compared to our peer group. And last but not least, when you look at our current price to the net present value of the company, we're trading at not only near-historic lows for the company but near the bottom of the peer group for price/NAV multiples. And we feel, now that the Terronera PFS is out, that can only improve. So that's our webinar today. I'd like to thank you for attending, and I'll turn it over to Galina now for Q&A.

Thank you, Brad. So we'll open up the platform for investor questions. [Operator Instructions] I will read out the question as they come in through my e-mails and management will provide an answer. So the first question that's come in is, is it possible to finance the project by cash flow only without additional financing?

Thanks for the question. That's generally not the route that most companies go. In the silver space, we typically look for a more conventional blend of equity and debt. And that's most likely the path that Endeavour will follow.

The next question comes from Craig at TD. And the question is, could you please provide a sense of how much preproduction capital will be saved by using existing equipment from El Cubo?

Craig, this is Godfrey. The estimate is about $2.5 million to $2.6 million savings by using the Cubo plant equipment.

The next question is from an investor. And it is, what do you see as being the maximum possible lifespan for the mine, in your opinion?

Well, we stated that there's significant exploration upside, and we already have a minimum 10-year mine life. If we wave our arms and get very successful in drilling both the footwall veins and the Real Alto area, plus the new applications that we've made to pick up additional concessions, I can see a significant increase in either the mine life or the output rate. So if we expand reserves 10%, 30%, 50%, there's 2 ways that we can look at converting that into value, extending the mine life by 1, 3, 5 years or expanding the operation by 10%, 30%, 50%. So it's really driven by our ability to discover new reserves, and we're very optimistic that with the large, undrilled vein systems, there's significant upside for that.

All right. The next question is from an investor. And it is, what is the specific idle equipment from El Cubo that we are incorporating?

So we're looking at bringing the primary crusher over from Cubo, also a number of the tanks and pumps, thickeners that we'll be using in Terronera.

The next question comes from an industry peer. And the question is, during the discovery period of 2011 to 2016, on average, how many drill rigs were active in the project? And how big was your exploration team consisting of geologists and geotechnicians?

We varied on our drill rigs from about 1 to 5 rigs at any particular time. And we had about 15 to 20 exploration people on site during the discovery process.