Endeavour Silver - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp first quarter 2024 financial results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please go ahead.

Galina Meleger (VP of Investor Relations)

Thank you, operator, and good morning, everyone. Before we get started, I ask that you view our MD&A precautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A and the financial statements are available on our website at www.edrsilver.com. With us on today's call is Dan Dickson, Endeavour Silver's CEO, Libby Senez, our Chief Financial Officer, and Don Gray, our Chief Operating Officer. Following Dan's formal remarks, we will open the call for questions. Now over to Dan.

Dan Dickson (CEO)

Thank you, Galina, and welcome, everyone. In 2024, we've hit the ground running with a solid start. Market sentiment has heated up as gold's reached new all-time highs, and silver is starting to follow. Our cash flow will benefit from these higher prices, and our share prices outperformed our peer set thus far in 2024. From an operating standpoint, our operations are hitting their targets. Moreover, we made remarkable progress in the construction of our next cornerstone mine, Terronera, solidifying a bright future for the company. It's exciting to think that this time next year, Terronera will be contributing production to our profile. Consolidated Q1 silver equivalent production totaled 2.3 million silver equivalent ounces, or 1.5 million ounces of silver and 10,000 ounces of gold. This puts us in great shape to achieve 2024's production guidance between 8.1-8.8 million silver equivalent ounces.

The performance of both operating mines, Guanaceví and Bolañitos, remains steady and, for lack of a better word, note the script. Gold grades at both operations were slightly ahead of plan, offset by silver grades that were slightly below plan. Silver equivalents are flat, and we expect similar grade profile throughout 2024. Moving to our financials, we report a top-line revenue of $64 million, up 15% year-over-year due to higher volume sold and the higher realized gold price compared to Q1 2023. Cost of sales totaled $52 million, also up 32% from Q1 2023 due to a combination of increased ounces sold, higher direct costs, and depreciation. Direct costs have stabilized and aligned well with our 2024 planned costs. Mine operating earnings totaled $12 million. After exploration, G&A and income tax expense reported a net loss of $1.2 million, or $0.01 per share.

At the site level, Guanaceví delivered mine free cash flow pre-tax of $6.5 million, and Bolañitos contributed $4.5 million. The higher gold price has significantly benefited our Bolañitos operation. The full effect of the 2023 cost escalations and appreciation of the Mexican peso impacted direct operating costs compared to Q1 2023. As a result, our direct operating costs per ton were significantly higher compared to last year. However, compared to 2024 budget, our direct operating costs aligned well with budget. To be clear for our listeners, our direct operating costs are defined as mining, processing, and indirect costs. Royalties, special mining duty, and purchase doré are included in our direct cost metrics and are all impacted by the higher metal prices. These costs, again, including our direct cost per ton, have all exceeded budget due to the higher metal prices.

These account for roughly $50 per ton on our direct cost per ton. On a net basis, we did benefit from the higher byproduct gold credit, resulting in our cash costs and our all-in sustaining costs reporting below guidance. At March 31st, we had cash on hand of $35 million and working capital roughly $56 million. During Q1, we raised gross proceeds of $39 million via our ATM facility. As a reminder, it's essential to highlight that in adherence to our agreement for drawdown on the senior secured debt, we were committed to self-fund development for up to $150 million before gaining access to the $120 million credit facility. After quarter ended, we satisfied this condition, which in turn enabled us to draw on the first installment of the $60 million of the $120 million committed.

In connection with the draw, we also executed the final hedge contract terms to reduce financial risks on the project. First, capitalizing on the strong gold price environment, we executed forward sale contracts for 68,000 ounces of gold at $2,325 per ounce. This represents 55% of the planned gold byproduct production during Terronera's initial three years of operations. Second, we secured the cost of the pesos by entering forward purchases of $45 million of U.S. equivalent Mexican pesos, which covers the remaining construction period at a fixed rate of 16.56 per U.S. dollar. Overall, we're pleased with the terms of the debt package as our finance team dedicated significant effort to secure favorable terms while safeguarding the upside for our shareholders. We anticipate completing the remaining draw of $60 million in Q3, aligning with the completion of the Terronera build completed in Q4.

Let me give you a quick update on construction progress at Terronera. By the end of Q1, we achieved a significant milestone by surpassing the halfway point of construction, achieving 53% completion encompassing progress at both the surface construction and underground mine development. As I mentioned earlier, we spent $38 million towards development, bringing our total expenditure to $158 million. Our project commitment now stands at $225 million, representing 83% of the $271 million capital budget. With site activities advancing rapidly, we've concentrated our effort on structural steel installation, which is 80% complete, and major equipment installation for our upper mill platform. As our quarterly reporting is very comprehensive, I'll provide a few recent highlights of progress. Over the past year, we've emphasized the importance of accelerating mine development rates to four meters per day per critical heading, a goal we are steadily achieving to meet our production timeline.

In this quarter alone, we completed over 1,000 meters of underground mine development, bringing our total to over 3,200 meters, keeping us on track for initial ore access in Q2. The majority of construction activities have progressed well at the upper plant site. Currently, surface construction stands at 56% complete. On the procurement front, our bulk materials purchasing is on track with the construction schedule, allowing us to install many components upon immediate arrival to site while making use of the project's lean footprint. Our COO has optimized a just-in-time delivery framework, which has proven highly effective, all while maintaining a steadfast focus on continuous safety measures. Thanks to our growing workforce at the site, which now totals 550 employees and contractors, this quarter saw the achievement of other significant milestones.

This includes successful setting of both the SAG and ball mills, placement of the regrind mill and flotation cells, and the commencement of installation for the crusher belt conveyors and apron feeders. Additionally, during Q1, we initiated excavation of the TSF embankment key trench in the lower platform area, which are 60% and 45% complete, respectively. Concrete work is anticipated to start in Q2 on the lower platform. And lastly, on the community relations side, a new miner training program for local community members was established to provide training and employment. If you're interested in viewing photos and video footage of the construction during progress, I encourage you to visit our website. You'll find our quarterly photo gallery showcasing the latest developments, as well as a video filmed in mid-March.

Before we move to Q&A, I'd like to highlight that we recognize that our long-term success goes beyond achieving financial metrics. Next week, we will publish our 2023 sustainability report. It speaks to our ongoing actions to mine responsibly and help shape a more inclusive, sustainable future for our business and our stakeholders. 2023 marked the second year implementing our three-year sustainability strategy, and we will be reporting on our progress to date. I recommend you take time to view our new report after it's published online. Additionally, we're pleased to announce the nomination of a new board member, Angela Johnson, at our 2024 annual meeting of shareholders that's to be held on May 28th. Her technical background and ESG experience is an exceptional fit for our existing board members and helps us achieve succession planning objectives to ensure core board competencies and expertise are in place.

That wraps my formal comments for today. Together with the other members of our management team, we would be happy to take questions. Operator, please open the lines.

Operator (participant)

We will now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes (Managing Director of Equity Research, Energy, and Natural Resources)

Thank you very much, operator, and good afternoon, everyone. Dan, I wanted to ask a little bit about the exchange rate kind of Latin America and how you would expect that to both impact your kind of operating cost expectations as well as any impact on the capital cost side? Thank you very much.

Dan Dickson (CEO)

Yeah, Lucas, that's a good question. We did use a 17:1 ratio in our assumptions and our guidance for 2024. Through Q1, we were effectively rate close to 17:1. Our expectation is the Mexican peso will hover rate here around 17:1. So from an operating standpoint, we stick with where our guidance is, which is ultimately $14-$15 cash costs. All-in sustaining costs were expected to be $22-$23. Obviously, in Q1, we're below that guidance, and I think that's a function of the gold price. If you look at our direct operating costs per ton, they're in line with where our plan was. From a construction standpoint, we entered into $45 million worth of FX contracts. So we've effectively locked that in at 16.6. So the impact for Terronera going forward would be muted because of that.

Of course, like I say, I think the peso seems to have stabilized here at 17:1. I expect that to stay there for the year.

Lucas Pipes (Managing Director of Equity Research, Energy, and Natural Resources)

Thank you. Thank you, Dan. And Dan, good job at Guanaceví. And you noted that silver grades were slightly below plan. And so my question is when you would expect those to be maybe more kind of on plan or above plan? And with the plan there, you exceeded the 1,200 tons per day level. I'm curious if there's more to do on that. Thank you very much.

Dan Dickson (CEO)

Yeah. From a grade standpoint, we actually exceeded plan this quarter from a gold standpoint and slightly under plan from a silver standpoint on grades at Guanaceví. That's normal variations in the ore body, and we expect to be something similar for the next three quarters as well. So we're just over 400 g of silver and about 1.2 or just under 1.2 g of gold. I think those are very favorable grades, and that's our expectation for the year. As far as running 1,200 tons per day through the Guanaceví plant or exceeding our capacity of 1,200 tons per day, our hope is that will continue. Obviously, we put guidance out with the estimation of 1,200 tons per day, but we did a lot of work in the plant in 2023 of refurbishing things. And obviously, we had the ability to push beyond that 1,200 tons per day.

Now, it's all predicated on the mine keeping up to speed. We don't want to get too far ahead of ourselves. At the same time, like I said in my comments, Guanaceví has been very steady, and the expectation is we'll easily meet that 1,200 tons going forward.

Lucas Pipes (Managing Director of Equity Research, Energy, and Natural Resources)

Thank you very much. Maybe a quick one. Just with the backdrop of much stronger precious metal prices, what's your take on M&A in the space, either kind of as a buyer yourself or more broadly in the ecosystem? Thank you very much.

Dan Dickson (CEO)

Yeah. I mean, from ourselves, our standpoint is we need to execute on Terronera and get Terronera into production. I think at the end of this year, if we can execute on Terronera, get commissioning in Q4 and commercial production for 2025, we're going to see that reflected in our share price. Now, you never say never. There's always opportunities out in the marketplace. From our standpoint, we want to see something that's accretive. But I don't think the full value of Terronera is built into our share price yet. And again, I think that needs to be executed this year for that to be reflected there. And from a broader standpoint, yeah, we're seeing higher prices. Obviously, last year, we saw margins get constrained just because of higher costs. And I think that's percolated its way through the industry. I think cash is important.

Obviously, there hasn't been a lot of capital available in our industry, and there needs to be investment from an exploration standpoint and a development standpoint, which will create more opportunity for prices to increase, especially from a silver standpoint. I can't speak for the entire industry. I know as Endeavour, we want to be here 10 years from now. We continue to look for development projects. We look for exploration projects. But right now, our resources are dedicated towards Terronera, mainly from a cash standpoint and also from a labor standpoint. There's only so much time and energy that we have that we can put into certain projects. We really like our Pitarrilla project that's coming in behind Terronera. Again, for us, I think we want to get through 2024 and look at that landscape.

From a broader standpoint, I think people are always going to be inquisitive, and you always try to build a bigger, better company.

Lucas Pipes (Managing Director of Equity Research, Energy, and Natural Resources)

Dan, I appreciate your thoughts. Keep up the good work. Thank you.

Dan Dickson (CEO)

Thanks, Lucas, and thanks for the questions.

Operator (participant)

The next question comes from Heiko Ihle of H.C. Wainwright. Please go ahead.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst.)

Hey there, Dan and team. Thanks for taking my questions. I assume you can hear me okay?

Dan Dickson (CEO)

We can hear you well, Heiko.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst.)

Thank God. Just glancing at the gold to silver ratio during the quarter, obviously, gold production increased quite markedly. In fact, gold was so strong that it made quite a measurable impact on cash costs given gold byproduct credits. At this point, we're halfway through Q2, and gold's still at $2,330. Just conceptually, can you provide a bit of guidance if you expect to see this through the remainder of the year and the impact on cash costs? And if you anticipate this fully offsetting the impact of the higher Mexican peso?

Dan Dickson (CEO)

Yeah. The higher Mexican peso is all built into our guidance to start with at 17:1. So of course, if we see the appreciation in the Mexican peso, a higher gold price offsets that. Again, I think the Mexican peso stabilized here.

Hopefully, it stays where it's at because it is a significant portion of our costs. From a labor standpoint, it's about 30% of our operating costs, which is obviously tied to the Mexican peso. For gold, like I said in my comments, initially, our gold grades were slightly ahead of plan. That's just normal variations in the body. Where I think there is opportunity is Bolañitos. Obviously, Bolañitos has more gold production on a proportional basis compared to Guanaceví, and it allows us to potentially get into some other areas of Bolañitos that we haven't been in because of the lower gold price. If we have higher gold production, of course, that means a bigger gold credit. I think, Heiko, what we look at as a management team is our direct operating costs per ton.

So the things that we can manage, mining costs, processing costs, and the indirect costs, so all our G&A on site. Our goal is to meet plan on that. And if we end up in a higher gold price environment, of course, that byproduct credit lowers our all-in sustaining costs and our cash costs. But like I say, we try to control what we can control, and that's the inputs that are going into our operating costs.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst.)

Fair enough. And then just a longer-term question. Your direct operating costs in the quarter increased by about 10%. In your release, you said this was based on ongoing ventilation and water management challenges that affect the productivity. Obviously, none of this translates to Terronera at all. And I just looked at some of the pictures you had on your website, and it looks like this thing's really coming together. But then you also state in the release that you're encountering ongoing inflationary pressures and costs that I assume may ultimately be seen at Terronera a bit. I mean, commissioning is at this point Q4 is not that far out. Should the analyst community start thinking a bit of inflationary costs for the site, or should the current numbers that we have stay as a good baseline for where we should be at?

Dan Dickson (CEO)

Yeah. That's a very good question, Heiko. And we haven't provided guidance from an operational standpoint for Terronera since April of 2023 when we announced the construction decision. And at that time, we put out an optimized plan that highlighted an $81 cost per ton. And that cost per ton had come down from the feasibility study of $87-$81 because of the economies of scale going from 1,700-2,000 tons per day. That estimate was done effectively December of 2022, January of 2023. Since the start of 2023 across the industry and specifically in Mexico, you've had the appreciation in the Mexican peso by 15%. You've had inflationary pressures specifically on steel, reagents, power costs, all in Mexico.

So it would be very fair to assume that you've had escalations from an operating standpoint at Terronera going from $81, maybe get into the $95 or $100 range. We haven't gone through and rebuilt those estimates from an operational standpoint. As we go into production, hopefully later this year, like I say, commissioning for Q4, management will update those costs and will provide guidance in the marketplace going into 2025. But again, if you just look at what's happened across the industry, what's happened in Mexico, it's fair to say that those operational costs are higher than what we put out when we initially did that optimized plan.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst.)

Fair enough. Great answer. Great quarter. Obviously, the stock's reacting quite favorably, and I'll get back in queue. Thank you.

Dan Dickson (CEO)

Thanks, Heiko. Thanks for the questions.

Operator (participant)

The next question comes from Craig Hutchison of TD Securities. Please go ahead.

Craig Hutchison (Mining Equity Research Analyst)

Hi, guys. Can you talk about the cadence?

Dan Dickson (CEO)

Hey, Craig.

Craig Hutchison (Mining Equity Research Analyst)

Hey, Dan. Can you guys talk about the cadence of the remaining spend at Terronera? I think you said 53% at the end of March, commissioning maybe 6-9 months away. I would imagine that the spend that you guys reported last time of about 2%-3% a month will accelerate. But if you could just sort of talk to how that spend will accelerate between now and then commissioning.

Dan Dickson (CEO)

Yeah. It's a good question, Craig, in the fact that we are reaching our peak construction within, well, really this month, next month, through August. The key components being the upper platform, as I said, 80% of steel's complete there. So now we're going into piping and electrical. That's been going very well with our contractor. Mine development remains a critical path into production. We are hitting ore in Q2. So this quarter, we expect to start having ore come out of the mine. We have crossed the vein. Everything looks really good from that standpoint. So there's additional spend from a mine development standpoint. And then the key other critical path is our tailings facility. Our tailings facility, we call it the lower platform. That's where our dry stack tailings facility will be, our concentrator will be, and ultimately our LNG plant. Our LNG plant remains delayed.

It's expected to start commencing putting in the concrete this quarter and then obviously vertical construction after that. Our expectation is that LNG plant won't be complete, which is 10% of the production of 100%. That won't be completed until 2025. So we will be on diesel gensets when we go into commissioning in Q4. But ultimately, from the 2%-3%, that's going to pick up significantly. And we're going to get a like I said, I think we said we have $225 million committed. A lot of that's going to be pushed through in this quarter and then early Q3. So lots going on, but we have really no more procurement. It's now just about executing. And as we execute the embankment for the tailings facility, which has been going relatively well, we'll be on track for commissioning in Q4.

Craig Hutchison (Mining Equity Research Analyst)

Okay. Great. And just maybe as a follow-up on that, I understand with the LNG getting commissioned and beginning in 2025, what's the throughput you can run the plant at on diesel alone?

Dan Dickson (CEO)

Yeah. Our diesel gensets will have the same output as our LNG plant, which is just shy of 13 megawatts. So the plan is everything should be up and going on these diesel gensets. What the diesel gensets will do is increase our operating costs compared to the LNG plant.

Craig Hutchison (Mining Equity Research Analyst)

Okay. Great. And then once you guys are sort of reaching commissioning, what's sort of the timeframe to reach commercial production? What type of what is the definition for you guys for commercial production and how long do you guys think it'll take to get there?

Dan Dickson (CEO)

Yeah. I don't have the specific definition. It's a multitude of factors of getting into commercial production or qualifying for commercial production. We initially estimated 3-4 months. I think we think we can do that a lot quicker than 3-4 months. But as we approach and understand where our bottlenecks are and if we can pre-commission some of the upper platform before Q4, that would be ideal. But we'll give guidance to the marketplace as we approach Q4 on that.

Craig Hutchison (Mining Equity Research Analyst)

Okay. Great. Maybe one last question for you. Just on the second drawdown, can you remind me what the milestone is to access that additional money?

Dan Dickson (CEO)

Yep. In that, right now, like I say, in April, we pulled off $60 million. And in that, we had a cash requirement of sitting in an account, which we ultimately call an overrun facility of $24 million. We're required to build that up to $28 million. And then the independent engineers are doing a visit for the lenders late May just to get an update to make sure what's happening in our reports is what's happening on site. And that's one of the terms. And then other bunch of minor terms that need to be executed on going into that.

Craig Hutchison (Mining Equity Research Analyst)

Okay. Great. Thanks, guys.

Dan Dickson (CEO)

Thanks, Craig, for the questions.

Operator (participant)

The next question comes from Robert Carlson of Janney Montgomery Scott. Please go ahead.

Robert Carlson (Financial Advisor)

Great. Congratulations on the quarter and quick progress made so far. But do you guys utilize hedges?

Dan Dickson (CEO)

Yeah, Robert. Well, we entered into a gold hedge, which is a requirement under our lending facility. So we entered into 68,000 ounces of gold that will be delivered through 2025 and 2026, a little bit into 2027. And that was priced out at $2,325 per ounce of gold. Otherwise, we don't hedge silver. One of our mandates is to make sure that for our shareholders who are investing in Endeavour Silver is to provide that upside that we expect to come on a silver price standpoint. From an interquarter standpoint, we'll enter into things very short-term, so under 90 days. But that's just generally trying to take advantage of spikes in the silver price.

Robert Carlson (Financial Advisor)

So with Endeavour coming on board like next year, there's no plans to establish a hedging program for silver?

Dan Dickson (CEO)

No. There is no plan to establish a hedging program for silver. I think what we're seeing right now in the silver market is an environment that's going to be very favorable to silver price. I mean, from an industrial standpoint, we've seen significant demand increase because of solar panels, the electrification of the world, obviously trying to reduce carbon. But the monetary story for silver has been lagging for the last kind of two, three years. And we've seen gold really take off and ultimately make new all-time highs. Silver's still well off its all-time highs of $50. Today, obviously, we're sitting just above $28. And so I think there's a lot of runway there for silver over the next kind of year, couple of years. And we want to leave that upwards movement in silver price for our shareholders.

Robert Carlson (Financial Advisor)

Great. Thank you.

Dan Dickson (CEO)

Thanks, Robert.

Operator (participant)

Once again, if you have a question, please press star and then one. The next question comes from Jake Sekelsky of Alliance Global Partners. Please go ahead.

Jake Sekelsky (Managing Director and Head of Metals and Mining Research)

Hey, Dan and team. Thanks for taking my questions. So just building on that last question a bit and going back to the tailwind from stronger gold byproduct credits this quarter and more so at current levels, I'm wondering if there's a level in gold where you'd look at hedging out some additional gold production outside of the requirements for the Terronera facility?

Dan Dickson (CEO)

Yeah. I mean, that's a fair question. I think there's a lot of runway left in the precious metals space. It's not something that we'd really entertain for this year. Obviously, we want to make sure we protect the downside of the company with having so much investment going into Terronera. But we think the 68,000 ounces of gold that we've already hedged out for when we get into operations for Terronera provides that. For the remaining operation, the Bolañitos and Guanaceví were to reproduce about 30,000-35,000 ounces of gold. I think we're comfortable that gold's on its way upwards. Obviously, there's always downside potential. But we use $1,840 in our guidance forecast and from a cash flow standpoint. And again, maybe we get into Q3 and we sell some gold forward a little bit, but we wouldn't get beyond the 90 days.

Jake Sekelsky (Managing Director and Head of Metals and Mining Research)

Okay. That's fair. And then just on Terronera, can you just touch on the labor outlook there as we head towards commissioning later this year?

Dan Dickson (CEO)

Yeah. I mean, from a labor standpoint, we handle all the mine development internally. So from our mining team, which will transition from development into operations, will be consistent and be fully up on labor from an operational readiness standpoint for the plant. We've already started that process. We've made hires for plant operations. And obviously, from an indirect standpoint, we're relatively staffed up there as well. So there shouldn't be a significant change or a huge hiring process between now and Q4. We have people that we need to add, but we've already been working on operational readiness plans so we can execute well in Q4. Again, from the labor cost standpoint, everything we've done this year from an operational standpoint was done at 17 to 1 peso to U.S. dollar.

When we go into operations for Terronera, that would be a similar FX rate that we would use. For Bolañitos and Guanaceví, 30% of our cost is related to labor, and that's similar for Terronera. Again, when we go back and look at 2022's optimized plan, that would have been done at a 21-to-1 ratio. So now that's at a 17-to-1 ratio. So you'd have higher labor costs from an operational standpoint just because of the FX move. But again, when we go into 2025, we'll provide that additional detail for the market.

Jake Sekelsky (Managing Director and Head of Metals and Mining Research)

Got it. Okay. That's all from me. Thanks again.

Dan Dickson (CEO)

Thanks for the questions, Jake. Much appreciated.

Operator (participant)

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

Dan Dickson (CEO)

Thanks, operator, and thanks to everyone who's tuned in today for our Q1 2024 earnings release. Again, I think we've done an extremely good job of just executing our plan from an operational standpoint. It's our job to execute on Terronera this year. If we can execute on Terronera over the next two quarters, we should be into commissioning for Q4 2024. And it'll be nice to see that production profile come into the Endeavour production profile for 2025. Thanks, everyone, and have a good day.

Operator (participant)

This brings to an end today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.