Coeur Mining - Q3 2023

Transcript

Operator (participant)

Welcome to the Coeur Mining third quarter 2023 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mitch Krebs, President and CEO. Please go ahead.

Mitch Krebs (President and CEO)

Good day, everyone, and thanks for joining our third quarter 2023 earnings call. Before getting underway, please note our cautionary language on forward-looking statements in today's slide deck and refer to our SEC filings on our website. I'll kick off with a quick overview on Slide 3 before turning the call over to Mick, Aoife, and Tom. While silver is set to take a larger role with the Rochester expansion project now behind us, it was the gold side of the business that drove stronger third quarter results. Gold production increased 15% and costs per gold ounce declined 13%, which drove a material increase in our Adjusted EBITDA. These results were primarily due to a bounce back quarter at Kensington, as well as a strong gold quarter at Palmarejo.

In total, quarterly revenue increased 10% to $195 million on total production of approximately 78,000 ounces of gold and 2.3 million ounces of silver. Obviously, the key headline is the completion of the expansion at Rochester. The first ounces were produced from the new leach pad and process plant during the quarter, and the focus is now on handing off the new three-stage crushing circuit to the operating team to ramp it up as safely and quickly as possible, which Mick will talk more about in a couple of minutes. In the meantime, Rochester is delivering a significant step up in production levels. They recovered over 500,000 ounces of silver and 8,000 ounces of gold in October alone, roughly 2-3 times higher than in prior months so far this year.

Some of you were able to witness firsthand the size and scale of this operation in September, but some recent photos starting on Slide 10 of today's presentation also do a good job of showing the newly expanded infrastructure. With crusher commissioning now underway, work has already started to remove the legacy crusher, which allows us to access higher grade ore located beneath it that we plan to mine beginning early next year. Once at the 32 million ton per year processing rate, Rochester is expected to be North America's largest open pit heap leach operation. Here in the U.S., it's expected to become the country's largest source of domestically produced and refined silver at a time when silver demand for electronic applications and renewable power sources is rapidly climbing.

Finally, and most importantly, it is poised to be a truly transformational operation for Coeur, with lower cost silver and gold ounces at 2.5 times higher production levels, with several near mine opportunities to expand and enhance the life of mine through exploration, which Aoife will touch on shortly. With Rochester's free cash flow as a key driver, a top priority in 2024 will be to start reducing our leverage levels now that the recent period of elevated investment is starting to fall away. Tom will provide a balance sheet update in a few minutes. One other comment on exploration. Drilling at Kensington accelerated during the quarter, with the latest results continuing to demonstrate the near mine potential to add to its mine life. Aoife will provide some additional details shortly. With that, I'll turn the call over to Mick.

Mick Routledge (SVP and COO)

Thanks, and good day, everyone. As Mitch mentioned, the team delivered solid quarterly results, capped off by improvements at Kensington and the good news regarding the end of construction at the Rochester expansion project. Beginning with Rochester, the third quarter was characterized by the full-scale effort to integrate the newly expanded infrastructure into our Nevada operation, located in what is widely recognized as the world's number one mining jurisdiction. Our progress on those fronts has been truly impressive, with first production from the new leach pad and process plant taking place in September. The great October silver and gold results that Mitch mentioned earlier position us for a very strong fourth quarter, and we remain on track to achieve 2023 production gains. Commissioning of the new crusher is underway, with full ramp-up set to take place during the first half of 2024.

Looking at Slide 9, the majority of the extensive systems testing has now been completed, which is verifying that mining capacity can support the planned ramp-up to the full 155,000 tons per day needed by the end of 2024. Rochester's strong reputation in Northern Nevada is helping to ensure that we have the best possible workforce in place to deliver on our goals. The expansion to increase throughput 2.5 times required a modest 20% increase in headcount, which highlights the economies of scale we expect to enjoy going forward. We are fully staffed and trained for the job ahead. Aside from the inherent positive attributes of Rochester, the true differentiator for Coeur is the expansion offers us all the growth benefits of a large new mine but with a degree of familiarity and extensive learnings gained that cannot be matched from the standalone new mine.

Our people, our facilities, and infrastructure, and the deep well of technical expertise that we are drawing from, is a key competitive advantage. Looking back at the build, Coeur's culture of safety and accountability served as a rock-solid foundation for a truly excellent safety result at this construction project, over 2.5 million hours, with just a single lost time incident. Turning to Slide 4 and looking at Palmarejo. Tons milled increased with a strong contribution from Guadalupe, leading to higher recoveries, especially on the gold side, where production increased by 16% to nearly 27,000 ounces. Palmarejo also took a big step forward in the quarter through the completion of the high compression tailings and open pit backfill project, on budget and ahead of schedule.

Its completion secures tailings and waste rock storage capacity for the remainder of Palmarejo's mine life. More importantly, we estimate that it will reduce overall water utilization needed for the tailings process by 16%, while backfilling the legacy open pit there and providing a head start on our future reclamation efforts. Moving on to Kensington, which delivered a significantly improved quarter as excess water flows have abated and paste placement continues to exceed targets. The fourth quarter is expected to be similarly improved, but the paste issues from earlier this year have impacted full year results, leading us to refine Kensington's production guidance to between 81,000 and 85,000 ounces. Finishing up with Wharf, third quarter production was as expected, and the operation is well positioned for a good finish to the year.

As a result, the low end of Wharf's gold production guidance has been revised upwards by 3,000 ounces to 88,000 ounces, with the high end remaining at 95,000 ounces. With that, I'll pass the call over to Aoife for a review of exploration.

Aoife McGrath (SVP of Exploration)

Thanks, Mick, and hello, everyone. As Mitch mentioned, we made some great progress in exploration during the quarter. On September twelfth, we released a press release that indicated the ongoing success of exploration programs at Kensington. Drilling in 2023 has demonstrated the continuation of all key mineralized structures to the south and down dip. At Lower Kensington, we intersected some of the best grade thicknesses ever encountered. The strike length has been increased by 760 ft, and we have intersected sub-parallel structures and linking structures with the potential to host some higher-grade shoots. Drilling in Upper Kensington has discovered a new zone, Zone 30B, that has already been defined over 950-ft strike length and 850 ft down dip.

These most recent positive developments from Kensington's multi-year exploration program followed the successful addition of 1.5 years of mine life, net of depletion, at year-end 2022, the first such mine life addition at Kensington since 2018. Over at Rochester, and referring to Slides 11 and 12, ongoing geology modeling work there is continuing to enhance our understanding of the controls to mineralization at this deposit.

A set of high-angle structures have been outlined that seem to control higher gold grades. These structures form part of a 4-mi long and up to 2-mi wide corridor that extends from north of the Rochester pit, south to and including Nevada Packard pit. The opportunity for higher grades on these structures will be tested in more detail in 2024 and beyond. I'll now turn the call over to Tom.

Tom Whelan (SVP and CFO)

Thanks, Aoife. I will begin with a brief review of our third quarter financial results before providing a balance sheet update. Turning to the financial highlights on Slide 15, third quarter revenue and Adjusted EBITDA saw healthy increases compared to the prior quarter, driven primarily by increased gold sales at Palmarejo and Kensington, which also led to lower consolidated cash per ounce. Operating cash flow swung to a -$2 million as we continued to build up significant inventory on the new leach pad at Rochester, as well as the timing of the semiannual interest payment on our 5.125% senior notes. As noted by Mitch and emphasized by Mick, we are expecting strong fourth quarter production, which we expect to drive a significant increase in operating cash flow across all sites.

Turning to costs on Slide 16, we continue to experience inflationary pressures, but we are aggressively managing costs and implementing business improvement initiatives to mitigate this key risk. Despite the continued inflationary pressures, increased throughput at Palmarejo and Kensington helped drive down consolidated gold CAS by almost $200 per ounce, quarter-over-quarter. Turning to the balance sheet, we ended the quarter with total liquidity of $280 million, comprised primarily of cash and cash equivalents of $53 million, and total available borrowing capacity under the revolving credit facility of $220 million. We finished the quarter with a slightly lower net debt to EBITDA ratio versus the end of the second quarter.

It is important to note that we expect higher quarter-over-quarter EBITDA on the back of strong Q4 production across all sites, including a monster fourth quarter at Rochester. The expected flush of ounces at Rochester that we've been discussing on previous conference calls, and consistent with our annual guidance, is taking place during this quarter as we ramp up the Merrill-Crowe flip flow rates and monetize many of the ounces placed throughout 2023 on the new leach pad. To give context to Rochester's Q4 production, we recovered 537,000 ounces of silver and over 8,000 ounces of gold during the month of October, which is more combined metal than we produced during the entire third quarter. The company's hedging program remains a key price risk mitigation tool during this period of capital intensity and ramp up at Rochester.

We have almost 70% of our hedgeable fourth quarter gold production locked in at $1,977 per ounce, and nearly 50% of our fourth quarter silver production hedged at $25.47 per ounce. As of September 30th, the hedge book sits with an unrealized gain of approximately $12 million on the remaining 2023 hedges. Combined with the realized gains year-to-date, we expect just under $20 million of total gains from our 2023 hedging activities. I wanted to highlight two final key data points related to the Rochester expansion. We have incurred $704 million and have paid $648 million of the POA 11 capital costs as of September 30th, 2023, leaving approximately $60-$80 million to be paid during the final quarter of the year. Importantly, we remain within the guided capital cost range of between $710 million and $730 million. I'll now pass the call back to Mitch.

Mitch Krebs (President and CEO)

Thanks, Tom. Slide 18 summarizes our top priorities for the remainder of the year. Safely and efficiently ramping up Rochester during the fourth quarter remains job one. With another stronger quarter at Kensington and consistent performance from Palmarejo and Wharf, we are well positioned to deliver a strong fourth quarter and achieve our full year guidance. Over the past three to five years, we have been deliberately reinvesting in the business for the long term. As we now begin to deliver the benefits from this more than $1 billion of investments in exploration and expansions, we look forward to seeing our investors benefit from our sector-leading growth, especially on the silver side, longer mine lives, declining costs, transition to positive free cash flow, and a more conservative balance sheet. With that, let's go ahead and open it up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mike Parkin with National Bank. Please go ahead.

Mike Parkin (Head of Mining Research)

Hi, guys. Thanks for taking my questions. Nice to see Rochester banging out some pretty good numbers there in October.

Mitch Krebs (President and CEO)

Yeah. Hey, thanks, Mike.

Mike Parkin (Head of Mining Research)

Just a couple of accounting questions. So the CapEx that you report on your cash flow statement, is that reconciling more with what's incurred or paid on Rochester?

Tom Whelan (SVP and CFO)

Mike, it's, yeah, definitely incurred. So that'll be incurred, and then the cash out the door is cash out the door, and the rest sits in payables. So that's why you see that elevated accounts payable number.

Mike Parkin (Head of Mining Research)

Right. Okay. So the accounts payable will be what's coming down in the fourth quarter.

Tom Whelan (SVP and CFO)

You got it.

Mike Parkin (Head of Mining Research)

Perfect. Okay, and then just in terms of leach kinetics, I know it's kind of early days to speak to it, but do you have any concern with, you know, the thermal load on the pad being sufficient for the winter months? Or, like, should we expect a little bit of a slowdown in recoveries, maybe in Q1, and then a pickup as the pad warms up in the second quarter at Rochester?

Tom Whelan (SVP and CFO)

Mick, you want to take that?

Mick Routledge (SVP and COO)

Hey, Mike. Yes, so, of course, there's some weather and winter dynamics there, but in reality, what we're seeing right now is the recoveries from all of the material that we crushed in the existing X-Pit. So we haven't yet ramped up the new Limerick crusher, which is expected to deliver a different size fraction for us and actually improve the recovery. So for now, we should experience the similar recoveries that we've been getting over this last year for this material that we got on Pad 4 here on Pad 6. As we flush out that inventory that we've been placing over the last year, and then we start ramping up the crusher, we'll see that change a little bit.

The current recoveries, though, are landing right on the curve based on the testing that we did. All that learning from the last two years was really valuable, and we've been calibrating that recovery curve in preparation for this new crusher getting ramped up in the first half of 2024.

Mike Parkin (Head of Mining Research)

Sure. And I guess as you're ramping up tons stacked, even if there's a bit of a slowing in winter months recovery, you're still putting way more ounces on month after month, so production is still probably going to rise month after month.

Mick Routledge (SVP and COO)

So we, yeah, we'll see the flush from the inventory from earlier in the year, of course. And so that is likely to dip just a little bit initially, and then you'll see that general ramp up as we get the crusher online. We've already got about 9.3 million tons placed on Pad 6, and so we'll be getting the ounces from that while we get that crusher ramped up and start again placing new material on there at the back end of this year.

Mike Parkin (Head of Mining Research)

Okay. Is that 90.3 million tons, is that as of end of October?

Mick Routledge (SVP and COO)

9.3. Yeah.

Mike Parkin (Head of Mining Research)

Yeah.

Mick Routledge (SVP and COO)

Yeah, that's 9.3 to date. Yeah.

Mike Parkin (Head of Mining Research)

Okay. Okay. Thank you very much, guys. That's it for me.

Mitch Krebs (President and CEO)

Thanks, Mike.

Operator (participant)

As a reminder, if you have a question, please press star and one to be joined into the question queue. That's star then one to ask a question. The next question comes from Tom Luther with ACL Company. Please go ahead.

Tom Luther (Analyst)

When do you see your stock going up? Thank you.

Mitch Krebs (President and CEO)

Yeah, good morning. Yeah, I'll, I'll take that. You know, like I, I said in my comments and, and, and in the, the release, you know, we look forward here to seeing a few, a few catalysts converge here as we go into 2024 with the transition into positive Free Cash Flow, reducing the leverage levels on the balance sheet, seeing some pretty significant growth on the silver side of the business from a U.S., operation. So we'll see more silver contribution in our revenue and more U.S. contribution to our revenue, which combined with, lower debt and, transition to Free Cash Flow, we think that those are the catalysts that, that should, benefit, our investors in terms of the share price.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Mitch Krebs, President and CEO, for any closing remarks.

Mitch Krebs (President and CEO)

Okay. Well, thanks, everybody, for taking the time to talk with us today. Hard to believe, but, to be saying this, but we wish everybody a safe and healthy holiday season, and we look forward to speaking again in early 2024, following the release of our fourth quarter and year-end results. Have a good day.

Operator (participant)

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