SilverCrest Metals Inc. (SIL) Earnings Call Transcript & Summary

Good morning, and welcome to the Coeur Mining announced acquisition of SilverCrest Metals 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.

Thank you, operator. Good morning, everybody. Thanks for joining the call. Joining me this morning is Eric Fier, SilverCrest's Founder, CEO and Director. Before we start, we want to quickly point out our cautionary language regarding forward-looking statements shown on Slide 2 in our slide deck and refer you to our SEC filings on our website. You all saw this morning that we announced the signing of a definitive agreement to acquire SilverCrest Metals to create a leading global silver company. Eric and I both believe this transaction is underpinned by a clear rationale and provides compelling benefits for both sets of shareholders that we look forward to highlighting for you on today's call. If you turn to Slide 4, we believe this combined company creates an unrivaled and unique silver company with over 21 million ounces of expected silver production next year, along with 432,000 ounces of gold, equating to approximately 55 million silver equivalent ounces from a balanced portfolio of 5 North American assets, 3 in the U.S. and 2 in Northern Mexico. The Las Chispas operation adds immediate high-quality, low-cost production and consistent free cash flow to supplement Coeur's Rochester-driven free cash flow inflection point now underway. SilverCrest's robust balance sheet with over $120 million of cash and bullion as of June 30 and growing and with no debt, it's expected to drive a 40% reduction in Coeur's leverage ratio on day 1. In addition, the strong cash flow from Las Chispas will enable us to accelerate our balance sheet-deleveraging initiative in the coming quarters and provide flexibility to reinvest in high-return organic growth opportunities across our portfolio. Combining the significant growth from Rochester with the high-margin, low-cost production from Las Chispas, Coeur provides an exciting and unparalleled re-rating opportunity for shareholders. Before turning the call over to Eric, I just want to congratulate him and the entire SilverCrest team for what they've accomplished over the past several years leading up to this transaction. I'd also like to acknowledge the quality of the team and the strong culture you've created at SilverCrest. It's a real testament to you and your leadership. Eric?

Thanks, Mitch, and good morning, everybody. It's been almost 9 years since the first exploration hole was drilled at Las Chispas, and I'm very proud of how far we've come and what the SilverCrest team has been able to accomplish in such a short period of time. We are extremely excited by the next chapter of growth. In assessing the strategic alternatives available to us, we ultimately concluded the combination with Coeur was the best transaction for the SilverCrest shareholders and for Las Chispas for several reasons. Number one, it provides an immediate premium over our current share price, resulting in an all-time high share -- all-time high price per share. We see tremendous amount of upside at Coeur's assets, particularly at Rochester, which we reviewed in great detail. Given their New York Stock Exchange listing and tremendous trading liquidity, we become part of a unique U.S. platform with a top ESG profile. Being part of a multi-asset company with Coeur's profile results in a diversified and stable platform with the reach and resources to maximize the potential of Las Chispas and benefit shareholders in this robust metal pricing environment. And number four, given these opportunities and the mutually beneficial characteristics that Mitch previously mentioned, we see the potential for a re-rate in Coeur's share price post transaction. I look forward to joining Coeur's Board to support the integration and transition of Las Chispas into Coeur and hope to bring value to Coeur's other assets such as Silvertip, which is a project we find quite interesting. Now I'll pass it back to Mitch.

Thanks, Eric. Turning to Slide 5. I'll quickly cover some transaction details. As disclosed in this morning's release, Coeur will acquire all of the outstanding common shares of SilverCrest via a plan of arrangement. SilverCrest shareholders will receive 1.6022 Coeur shares for each SilverCrest share, implying a total equity value of $1.7 billion based on SilverCrest's common shares outstanding. This represents an 18% premium based on both company's 20-day volume weighted average prices as of yesterday's close and a 22% premium to yesterday's SilverCrest closing share price. Upon completion of the transaction, existing Coeur and SilverCrest shareholders will own approximately 63% and 37% of the pro forma company, respectively. As for shareholder votes, the transaction requires, among other things, a 66 2/3 shareholder approval from SilverCrest and other technical vote requirements detailed in our press release and approval from Coeur's stockholders. Shareholder meetings are expected to be held around year-end, and the transaction is expected to close in the first quarter of 2025. The transaction is subject to customary deal protections as highlighted on Slide 5 as well as to applicable stock exchange and regulatory approvals and the satisfaction of certain other customary closing conditions. I'd like to take a couple of minutes to run through a few Las Chispas highlights and highlight why we see this combination as a real leader in the global silver industry. Starting on Slide 8. Las Chispas is a high-margin, low-cost primary silver underground operation that started up less than 2 years ago. The mine has a stable production profile with annual expected production of approximately 10 million silver equivalent ounces at an all-in sustaining cost margin of about 48%. Slide 9 highlights how Las Chispas compares to other large silver-producing operations. Reserve and resource grades are shown on the top and cost per ounce are shown on the bottom. You can see how Las Chispas stands out in terms of grade on the top slide -- top chart, and the bottom chart highlights the fact that Las Chispas has the lowest per-ounce costs among peers at less than $8 an ounce on a silver equivalent basis. Touching on Slide 10 for a minute. The SilverCrest team has done an incredible job developing and ramping up Las Chispas. Our long history operating the Palmarejo underground silver and gold mine next door in Chihuahua, gives us confidence that we'll uphold SilverCrest's commitment to responsible stewardship of this high-quality operation in Sonora, which remains one of Mexico's largest and most pro mining states. We look forward to the opportunity to further unlock value at Las Chispas by leveraging our experience in maximizing throughput and by bringing a commitment and a track record of extending mine lives through sustained investment in near-mine exploration. These are 2 areas where we see potential to realize the full potential of Las Chispas over time. Slide 11 highlights some of the exploration potential at Las Chispas, where we plan to focus to add to the current mine life over time. The geology at Las Chispas is favorable with an extensive high-grade vein system throughout the property package. Significant opportunity remains to extend known veins and to explore and advance new targets, a process that is currently just getting underway. Our exploration team is excited to take on the new opportunity. Looking at Slide 12 shows how well the 2 companies fit together. Just ticking through a few of these highlights, the pro forma market capitalization is approximately $4.5 billion. Our expected 2025 EBITDA will increase approximately 35% to about $700 million as a result of this transaction. Our expected 2025 free cash flow will increase roughly 33% to approximately $350 million. And on the leverage front, our net debt to 2025 estimated EBITDA ratio is expected to drop from 1.2x on a stand-alone basis to just 0.7x. Note, these forward-looking numbers reflect analyst consensus prices, which are a bit lower than current levels. And just to reinforce the scale point, Slide 13 shows how the combined company will be positioned as a peer leader in terms of silver and silver equivalent production and market capitalization. Similarly, Slide 14 highlights the dominant cash flow profile of the combined company relative to peers, which is underpinned by the combination of the recently expanded Rochester mine and the low-cost profile at Las Chispas. Briefly on Slide 15. We see significant re-rate potential based on how the combined company benchmarks to the Silver peer group on key metrics and how it clearly becomes a leading silver company for investors at a time when the outlook for silver is extremely positive. Quickly on Slides 16 and 17. This leadership position of the combined company extends to our collective approach to ESG where we both prioritize our commitments and responsibilities to the health and safety of our employees, to protecting the environment and to having meaningful partnerships and impacts on the communities where we operate. Just to wrap up on Slide 18. I mentioned at the beginning of the call that we feel this transaction makes tremendous sense and offers compelling benefits for both sets of shareholders. Together, we will accelerate our strategic priorities and key catalysts by offering much greater scale, significant and growing free cash flow, lower costs, diversification across a higher quality portfolio of assets and a much stronger and more flexible balance sheet. In times of rising silver and gold prices, we see this company as the must-own equity to gain that upside exposure. And in times of falling silver and gold prices, we strongly believe the combined company will be much better positioned and much more resilient than it's ever been before. With that, let's go ahead and open it up for questions.

[Operator Instructions] The first question comes from Mike Siperco with RBC Capital Markets.

Mitch, maybe a question for you. Can you maybe talk a bit about what, if any, the implication is of making this move today on how you see the outlook at Rochester coming out of the construction period? Is there a read-through into how you feel that's going and what the outlook is into 2025? And maybe more importantly, how, if at all, this changes your outlook on Silvertip and maybe time lines towards coming to a decision there?

Yes. No, great questions. Thanks, Mike. You were just out there, I think, at Rochester and saw how things are going when we had that analyst trip there a week or 2 ago. Obviously, as a company, we've been heads down focused on delivering on that expansion over the last 3-plus years. If anything, we feel like announcing this transaction reflects our confidence in the Rochester expansion that we've sort of have that behind us now. We've always said that we're not in a position to do anything until we feel like we've got Rochester ramped up and going, which we feel confident that we do. So if anything, what we see is adding Las Chispas on top of what is happening at Rochester is really only accelerating some of these key inflection points that we have out in front of us here in terms of the free cash flow inflection point that's underway here in the second half of the year based on Rochester. The deleveraging, that's only going to happen quicker by adding this world-class operation and creating the kind of leader that we think this will represent. So I don't know if that helps give you a sense of how we're thinking about it. If anything, I think it's a validation that we're -- of our confidence in the progress at Rochester. And as far as Silvertip, it is something that factored into our thinking. We've always said that as we drill and better understand and advance Silvertip, as we consider options down the road, partners or not, is Silvertip something we could potentially do on our own. We've always thought that having a larger platform and some scale would allow us to potentially advance Silvertip on our own most likely. And so with the added cash flow from Las Chispas, we'll be able to continue with that aggressive exploration that needs to happen over the next 2 or 3 years, so that we can hopefully start putting that through the project stage gates of a PEA, PFS and FS. And then when and if we have a project there, we can really approach it from a position of strength based on the combined company that we're creating with this transaction.

[Operator Instructions] The next question comes from Michael Dudas with Vertical Research Partners.

Congratulations. Mitch, the combination in Mexico seems pretty enticing. Maybe it means more scope and opportunities on how powerful with the expectation companies have both shown to drive some significant -- obviously, you touched on exploration, maybe some of the operational or the ability to drive combined value with the knowledge base you guys have developed out there.

Yes, yes. No, thanks for the question, Mike. As you know, and as I think I said, we've been next door there in Chihuahua at Palmarejo, which is also underground epithermal silver and gold deposit. So we've got a lot of experience, a lot of comfort in operating in Mexico. Palmarejo is in a pretty remote part of Chihuahua down in the southwest corner of the state in the Sierra Madre mountains. When you visit Las Chispas, one of the things you'll quickly recognize is just the accessibility and the great infrastructure off of a paved road, 2.5-hour drive out of Hermosillo. So it's a really nice setup there at Las Chispas. But there are 2 great teams at Palmarejo and at Las Chispas, some faces at Las Chispas that I've recognized from having worked with us in the past. And I think those 2 teams can leverage their respective experiences to really enhance each operation, whether it's on the geotechnical side, on the process side, dore sales, refining side, health and safety, those areas come to mind. And so we feel like Sonora is really the most important mining state in Mexico. The local relationships and support and impact that Las Chispas has had there in the local community is really fantastic. There are some great things going on there that I think we could take back to Palmarejo as well. So Northern Mexico is home to these kinds of deposits, and mining is a real critical part of the economy in places like Sonora and Chihuahua. So we feel comfortable having a second operation. The overall revenue of the business will still be majority U.S., but within the overall portfolio, having a bit more Mexico is something that we're comfortable with going forward. Does that help, Mike?

Yes, it does. I appreciate that, Mitch. And then just a follow-up. So with regard to your -- certainly with the cash flow generation, the cash that's coming in and the deleveraging is you're still targeting 1x as kind of a reasonable level because that seems to be accelerated here and that allows you some more optionality as you kind of get through maybe the end of '25 into '26 to think more about Silvertip or some other things?

Yes, exactly. At these prices and with Las Chispas, we'll achieve those goals much faster and get to a point then where we'll be accumulating cash, and that will open up a lot of other opportunities to not only reinvest back into organic growth. But whether it's potential return of capital or as we consider advancing Silvertip, there'll be a lot more options from that larger platform, that stronger cash flow profile and that really strong balance sheet that we'll have very quickly on the back of this transaction.

And we have a follow-up from Mike Siperco with RBC Capital.

Yes. Maybe one follow-up for you, Mitch, and then one for Eric, if I could. Should we be changing our thinking about the approach to Wharf and Kensington pending this deal with maybe more focus on exploration at Silvertip, as you mentioned in Las Chispas as well? Or are you still thinking about those 2 assets as core to the portfolio, sort of steady as she goes?

Yes, I think it's fair to say for the foreseeable future, we'll be focused on integrating Las Chispas and ensuring that we continue to deliver on everything that's happening there. Wharf is a really evolving story, not only is that a consistent cash flow generator, but we're pretty excited about the exploration potential there. I think we've talked about that on the last couple of quarterly calls. It doesn't require a lot of investment, a lot of capital there, but I think it could have -- a little bit of exploration could go a long way there in further extending Wharf's mine life and that great strong consistent cash flow from there. And as you know, Mike, at Kensington, we've been busy investing there to extend that mine life and get Kensington set up to have its own kind of mini free cash flow inflection point next year in 2025 in the second half of the year to get back to generating some good strong cash flow. And so in the near term, we're going to focus at Kensington on really delivering the results of that multiyear investment in underground development and exploration, have a longer mine life, start generating the free cash flow there that we've been working hard to unlock and then we can kind of reassess at that point.

Okay. Great. That makes sense. And then, Eric, switching to Las Chispas, if I could, and the exploration outlook there. I mean, obviously, this is a nice premium, and the share price has done very well over the last year or so on higher prices. Can you talk a bit about how you saw this timing and what the outlook is for exploration at Las Chispas? Is this -- I gather you're saying this is a good return or a prepayment on the potential. But I suppose it is notable that you haven't really gotten to the meat of the exploration of the district and the remaining veins yet. So could you talk a little bit about how you see that outlook at the project?

Yes. Thanks, Mike. You got to look at Las Chispas' series of epithermal veins, there's over 100 of those or over 20 kilometers of either untested or under-tested veins to chase. So that gives you a great platform to work on those veins. And this does the same, the combination of these 2 companies is going to further that. As you know, we had success in the construction of Las Chispas. Part of that success was the exploration team working with the operations. So we basically pulled those guys over into operations, a lot of work on ore control, geotech and the exploration team is still assisting operations as we move forward. We just got a break about 6 months ago from that focus, and we're back to exploration at Las Chispas. And that includes expansion, looking at expanding current veins along strike and to depth, looking for what I would call high grade. This is a very prolific district that we're in. Grades are -- still in the core that we're drilling as of today are multi-kilo, okay? So expect some news out on those types of opportunities that still exist. We're going a bit further afield. We're starting around infrastructure and moving out from there. So as you do that, you've got to look at grade and thickness and how much is it going to cost to develop over to a new vein. So we've really trained our team to -- exploration team to recognize economic and potential economic value in those veins. So yes, there's a lot of headroom here to grow at Las Chispas. We're just coming back into that program right now. So it makes sense as far as moving forward on this transaction to even further accelerate that. So I hope that covered it.

Yes. That makes sense. Exactly that. I gather the idea is that the combination accelerates the planned exploration at Las Chispas and maybe bring some of that forward. So that makes sense. Congratulations on the announcement.

The next question comes from Mike Parkin with National Bank.

Just kind of a follow-up on that last question. Looking at the Coeur slide deck on Slide 8, just shows like the history of the Las Chispas reserves, resources. And when you look at like over that 2-year period, total resources are down about 4.6%. Mind you, is that kind of like transition to production, switching back to the drill bit, it seems. Can you just give us a sense of what your budget is this year for exploration? If you have a historical kind of per ounce, whether is that per silver equivalent ounce, per silver ounce discovery cost? Just so we have a sense of where your budget is this year relative to where that budget has been in that ramp-up period of '21, '22, '23 just so we have a better sense of kind of like how are you going about putting money back to work through the drill bit?

Eric, do you want to...

Yes, I'll take that, Mitch. Yes, I'll take that. So budget for exploration at Las Chispas and you got to remember that we got a regional program also going on. So that's $12 million to $14 million this year. I think we're currently sitting around $10 million spent to date. So we got until the end of the year some more money to be spent, looking to create more value. So it's really around -- as I said, we're restarting our program. We've taken and moved a lot of our measured and indicated resources into reserves. And some of the inferred got drilled out and that got moved into indicated also in the reserve. So we're emptying our buckets of inferred and we got to get back to expansion, looking at new veins in order to increase the inferred. And as you do that, you're going to hit, you're going to miss, you're going to get targeted and you're going to be spending money next year on infill drilling of the inferred that we've created this year. We have yet to put out any information on how that program is going from a resource and reserve standpoint. We hope to do that coming into the end of the year, and you'll see those -- plan to see those numbers. If you're familiar with the pyramid for exploration, you've got to -- we're at the bottom or the foot of the pyramid bringing new veins in, looking for inferred resources to go to indicated and measured and be considered for economic parameters to get into the reserve. So we look for inferred resources to increase this year as we're refilling that bucket.

The next question comes from Dalton Baretto with Canaccord.

Congratulations on this deal. I think it's a great one for you guys. And I apologize if this has been asked already, I got kicked off the call for a bit there. But can you maybe speak to any potential synergies between Las Chispas and Palmarejo, either operating or on a tax basis, anything like that?

Yes, sure. Thanks, Dalton. We touched on that a little bit, but I can just give some quick -- give you the cliff notes version of what I said earlier. Between the 2 teams there at Palmarejo and Las Chispas, obviously, Sonora and Chihuahua next door to each other, very different access and infrastructure with Palmarejo being fairly remote and Las Chispas being in close proximity to excellent infrastructure and easy to get to. I think the 2 teams can leverage each other areas of expertise, whether it's on the geotech side, on the process side. I think I mentioned in my comments about throughput. For example, the Palmarejo folks have done an excellent job of ratcheting up their daily tonnages and we see that as a potential lever to pull there at Las Chispas over time. Maybe on the dore sales on the back end, there are some opportunities there, certainly sharing best practices in areas like health and safety. But we're approaching this as sort of a plug Las Chispas in as is and continue to emphasize the consistency and focus on everything that they've been doing so well and continue with that. And then over time, hopefully, the 2 teams can identify some real tangible synergies, savings and opportunities like that. So that's sort of how we're thinking about that.

This concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Krebs for any closing remarks.

Okay. Well, hey, we appreciate everybody's time so quickly here this morning. And we look forward to keeping you up to date as we move this transaction forward. Hopefully, you can tell we're all super excited about what this does for both companies and what this creates, and we look forward to delivering on those benefits from this exciting combination. So thanks again, and have a great day.

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