Endeavour Silver - Q3 2022

Transcript

Speaker 0

Welcome

Speaker 1

to the Endeavour Silver Corp. Third Quarter 2022 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. I would now like to turn the conference over to Galina Melliher, Vice President of Investor Relations.

Please go ahead.

Speaker 0

Good morning, everyone, and welcome to today's conference call. Before we get started, I would ask that you view our MD and A Cautionary language regarding forward looking statements and risk factors pertaining to these statements. Our MD and A and financial statements are available on our website under the disclosure portal. With us on the call today is Dan Dickson, Endeavour's Chief Executive Officer John Gray, our Chief Operating Officer and Christine Rust, our Chief Financial Officer. On behalf of Endeavour Silver, I would like to thank you again for joining our call.

And I'll now turn it over to Dan for his formal remarks.

Speaker 2

Thanks, Glyn, and good morning, everyone. Before getting to the quarterly results, I want to take this opportunity to reflect on the sudden passing of our Chairman and Founder of Bradford Cook this past August. All of us at Endeavour were soft and very saddened when we learned of this tragic news. We've been deeply touched by the outpouring of love and support by the global business community and the many thoughtful messages of condolences. Brad co founded Endeavour Silver in 2003, and he was the driving force behind its many successes, creating strong foundations that underpin the company to this day.

It was instrumental in building Endeavour from the ground up into a mid tier silver producer with an industry leading growth profile. Well, vibrant personality, insight and sense of humor will be deeply missed. We are inspired by its pursuit of creating shareholder value. Collectively, we are now we now carry a greater sense of duty to deliver on our objectives and carry forward Brad's legacy. When we had our earnings call 3 months ago, I spoke about the economic backdrop and market turbulence.

Certainly, as an industry, we are facing significant external challenges. Many of the same risks and trends continued to impact equity valuations for miners in Q3, Including cost inflation, rising interest rates and lower prices. Both silver and gold reached 2 year lows in September. Margins are being squeezed on both sides. While we remain proactive in managing this environment, I remain optimistic about our future.

Our safe production performance, the strength of our balance sheet and our management team allows us. We remain bullish in our long term view given the demand fundamentals of silver. While short term new mints in price must be considered and managed, our overall strategic focus remains the same, which means advancing our exceptional growth projects. This quarter, we generated revenue of $40,000,000 which was impacted by withholding metal sales and lower realized silver prices. Earnings declined by 67% to a loss of $1,500,000 or a loss of $0.01 per share.

Operating cash flow before working capital changes fell by 4% to $7,300,000 $0.04 per share. We've continued to carry metal and finished goods inventory with a market value of $35,000,000 at quarter end. Given that almost one quarter's worth of metal remains in finished goods, our financial metrics remain muted. Our cash balance decreased from $103,000,000 at the end of Q2 to just under $70,000,000 at the end of Q3. This drop is largely due to the $35,000,000 cash Payment for the Pateria acquisition.

While mine operating cash flow continues to be invested to prepare the Terronera project for construction, If we were to realize the sale of our carrier inventory, value at over $35,000,000 our cash balance would approach $100,000,000 Q3 was a quarter with several significant developments and decisions. First off, We had a 10% upwards revision to our consolidated production guidance, guiding 7,600,000 to 8,000,000 silver equivalent ounces produced in 2022, which On the exploration front, we released very positive drill results at Guanacevi, Including encouraging results extending the pulmonary dosed area. We also released positive drill results at Parral, Where we see potential for resource expansion to depth and a long strike on the Beta Colorado structure. Drilling will lead to meaningful resource growth, and we look forward to publishing a resource update early next year. We divested ElkCompass, where we ceased operation in August 2021 for $5,000,000 And as previously noted, we completed the acquisition of the Pizzeria project from SSR Mining for $70,000,000 in cash to insurance.

This is a big milestone and a noteworthy addition to our growth pipeline as it's considered one of the world's largest undeveloped silver deposits. And lastly, following Brad's passing, Rex MacFennan was appointed our Chairman. I look forward to working closely with Rex to ensure Endeavour continues to create long term value for all stakeholders, including our shareholders, employees and communities. Operationally, I want to recognize the team at Guanacevi for Continue to lead the way in safe production performance. This September, Guanacevi reached over 2,500,000 Hours of work without a single lost time injury.

We are proud to celebrate this milestone with all our team members. Consolidated silver for the quarter was about 1,500,000 ounces, which is a 12% year on year increase and a 7% higher quarter over quarter. The growth in silver production is primarily driven by the higher grades in the Alcoa orebon A-1s feet as production targets were reached despite lower planned ton throughput. Consolidated gold production decreased by 17%, primarily due to the closure of the Elk Compass operation last August. This quarter, we increased 2,200,000 silver equivalent ounces totaling 6,300,000 silver equivalent ounces for the 9 months ended September 30, 2020 22.

We are well positioned to meet or exceed the high end range of our improved production guidance. If we can exceed guidance, it will be the 2nd consecutive year. For the quarter, our cost per ounce metrics have been tracking relatively in line with guidance and the first half of twenty twenty two, with cash cost averaging a little over $10 per ounce and all in sustaining cost averaging a little over $20 per ounce Net of the gold credits. The additional production from the exceptional grades have allowed us to maintain our cost guidance on a per ounce metric, But industry wide inflation continues to be highly relevant. Our direct operating cost per ton has increased 12% year over year Due to the inflationary pressures across a number of inputs, we're aggressively pursuing cost management initiatives to mitigate inflationary pressures where possible, We're working to ensure that our higher costs do not remain a permanent feature of the business going forward.

Guanacevi delivered yet again another stellar quarter. As compared to Q3 2021, silver production was up 13% with silver grade being 21% higher. This more than offset the 7% decrease in tonnes during the quarter. Similarly, higher gold grades were offset by the lower throughput delivering Flat Fuel Production. Improved grades in the Alcoa area, which is subject to a royalty that is based on silver prices And contributes about 2 thirds of our mine output is primary factor.

Great from Alkerson was slightly exceeded model estimates to date. At Bolanitos, production results are largely in line with expectations, and we are on track to meet our annual target of 2,400,000 ounce silver equivalent. While gold grades were below target, silver grades were up 36% year over year. Mine development continued to be important for Valneos, Which pushed our all in sustaining cost of $48 per ounce in Q3. I would stress that our operating cost was $6.73 per ounce.

And while all in sustaining cost is an important metric management, we understand the long term value of mine development and ultimately expect to recover this investment over a period Time not in a singular quarter. In Q3, Boeing's free cash flow was negative $1,900,000 And that includes the capital and exploration expenditures, which totaled $3,700,000 for the quarter. Annually, Bolanosis generated $1,600,000 of free cash flow and annual operating cash flow of $11,400,000 year to date. Clearly, improving cash flow and volumes will continue to be an area of focus as we move into 2023. Moving to our growth pipeline.

Terronera remains a top priority. It's a transformative asset that will make Endeavour the Fastest brand silver miner with close to 100 percent production growth in 2 years. It is strategic for the company for many reasons. One, It is a mine with reserves that supports over 10 years of operations. And 2, it's a low cost mine that will drive significant profitability.

As many of you know on this call, we've been working diligently with project lenders to complete the financing package ahead of a formal construction decision and receipt of amended permits. As part of this, we've completed ESG requirements as laid out by the Equator Principles with 3rd party verification. In the meantime, the Board has approved and elected to derisk various aspects of the project In a disciplined manner to minimize risk towards the construction decision. We currently have approved a $41,000,000 budget, Of which 29 has been spent to date. As we commenced with the procurement of many long lead items, we were fortunate to have secured a number of key contracts Before the spike in costs and supply chain issues accelerated, the vast majority of the mobile mining fleet has now been delivered to site.

To date, we received 30 Sandvik and Getman units, including jumbos, bolters, scoops, dump trucks, cranes and other support equipment. Major mill equipment has been ordered. We expect delivery of the SAG mill primary crusher and pebble crushers in the first half of next year. And the team has kicked off Erfworks with client area and started preparations on Portal Number 2 and started to prepare the area for a permanent camp facility that will accommodate 550 personnel. As you can hear, we're working on multiple fronts to advance Tim and Aaron And it's seen good momentum with predevelopment activities.

In the coming months, we look forward to providing an update on the financing. While Terronera is our nearest source of growth, we are completed we also completed the acquisition of the Pateria project in Q3, one of the largest undeveloped silver assets in the world. Victoria has the potential to be a large scale cornerstone asset. We are nearly complete verifying this historic resource and believe it will add over 500,000,000 ounces of silver to our consolidated mineral resource inventory, Effectively tripling our total precious metals resource estimate. Next year, we will turn our attention to extending the underground ramp In developing cross cuts for underground drill pads to drill vertical feeder structures.

Fully understanding these structures will be crucial

Speaker 1

Thank you. We will now begin the question and answer session. We will pause for a moment as caller is join the queue. The first question is from Heiko Ihle with H. C.

Wainwright. Please go ahead.

Speaker 3

Valentin, can you hear me okay?

Speaker 2

I can hear you well, Heiko.

Speaker 3

Very good. You mentioned ongoing inflation in your release, not a big secret there obviously, but more important than the inflation almost. Are there any parts and availability bottlenecks that you're encountering already? And building off of that last Question, are we pre buying any components because you anticipate shortages or you feel like delivery timelines are getting worse? And if so, what are they?

Speaker 2

Yes, it's a very good question. I think we've been insulated from that a little bit because of all the equipment that we've been buying from Sandvik since 2019. We replenished our mobile fleets at both Bolanos and Guanacevi over the last 3 years. And a lot of the parts that we're getting from Sandvik As critical parts from a mobile fleet standpoint, we haven't had any issue with and ultimately no disruptions. From a plant A lot of our critical spares sit on-site, the ones that we've identified.

And I mean, I'm sure there's Since time to time that we need to get various parts, but I've not heard of any issues that we've had lately with that. So for us, it hasn't been much of an issue, maybe because we've been situated. But I have heard that across the industry a little bit from other groups. It's just, Like I said, it hasn't really impacted us to this date, and we think we're in really good shape going forward.

Speaker 3

Very good. Thank you. And I apologize for bringing up inflation again. Just a quick clarification there, you're spending 41,000,000 This year, any idea on what you think you'll need to decide in calendar 'twenty three? I mean, is there any big ticket or long lead time items That aren't there or like in a certain part of the supply chain.

And would you

Speaker 2

be willing to guesstimate maybe the development expenses

Speaker 3

Just general expense

Speaker 2

to the site for next year. Yes. I can't give overly clarity on that until we actually have formal construction decision. I mean, ultimately, right now, build costs for the feasibility study is $175,000,000 and Of course, we've seen inflation since that $175,000,000 And as I alluded to, kind of in my preamble is ultimately that we've lost in a lot of our costs The mobile fleet already being there and a lot of 12 critical parts for our mill being already ordered. And I think you did a good job of that this year to kind of get ahead And locking those prices in, we will see cost creep from that $175,000,000 and it's all sitting down.

We've been trying to optimize that project this year as we work Through kind of the amendment permit since we're trying to get this debt package in place. Ultimately, when we come out with that, we'll probably, At that point, we'll discuss more in detail the total cost to build Terronera, which will be slightly higher than expected, Significantly higher, but slightly higher. And then give that time line. The time line to build is still about 2 years. Hopefully, we can beat that a little bit.

And I would suggest that the $175,000,000 plus inflation is pretty homogeneous over that 2 year period. So until we come out with budgets, This will be January of 2023. I'd probably leave it at that, Heiko.

Speaker 3

Fair answer. I appreciate it. I'll get back in queue. And God bless, Brad.

Speaker 2

Yes. Thanks, Heiko. Thanks for the questions.

Speaker 1

The next question is from Jasper Ridge with Valpo. Please go ahead.

Speaker 2

Thank you. Hello, can you hear me? The silver and gold Grades have been elevated at Granacevi over the entire year due to high grade ore from the Percelor Body. Do you expect similar grades moving into 2023? Or do you expect them to fall to come down a little bit?

Yes, it's a very good question, Jasper. Thank you. We have seen elevated drill grades from the Alperso orebody. And if you follow this year's Show results from Guanacevi. We've actually put out some really nice results from a width standpoint and from a grade standpoint.

Ultimately, we might see that grade come down a little bit, but I think it will be higher than where our reserves sit at this point going into 2023. Thank you. A follow-up question. As of now, we have roughly 2 thirds lower coming from Del Corso. Moving into next year, how much do you think that will decrease or roughly remain the same in percentage?

We expect it to stay relatively same for next year as well. Okay. And the overall trend, if you look 3 years from now, will it become more dominant? Or do you think it will kind of stay the same? The expectation will be the same.

So with the contract that we have with Ocampo, which is a frisco company, We're required to produce about 600 tonnes per day. We've been doing a bit better than that, 650 tonnes per day for Mel Curso. Based on the reserves and resources and kind of the allocation or the split between our reserves at Santa Cruz Sur or Milache, The expectation kind of over the next 2 to 3 years would be that, that Alcoso production remains about 6 50 tonnes per day. Okay, okay. Thank you.

That was everything for me. Thank you. I'll ask for the questions.

Speaker 1

The next question is from Craig Hutchison with TD Securities. Please go ahead.

Speaker 2

Hi, guys. I was going to

Speaker 3

ask a similar question with regards to Quanta City and the grades, but I think you kind of answered that. But just Maybe for Q4 specifically, you guys are trending above guidance. Is there anything to believe that it wouldn't be very similar to Q3 and Q4.

Speaker 2

Yes. The only change between Q4 and Q3 will come down to December. And Obviously, around Christmas period of time, things do slow down a little bit. Sometimes we see throughput decrease a bit. But I would agree with your observation that if we have a similar quarter in Q4 as we did in Q3, we'll be able to exceed guidance.

We always try to be a little bit conservative and cautious here. And like I said, there's things in December that Impact kind of a slowdown a little bit around operations. So but if everything goes well, we could exceed guidance 2 years in a row.

Speaker 3

Okay, great. And then just at the financing for Terronera, I know you mentioned it's still a couple of months out, but any kind of updates on that? Okay. What are the final due diligence procedures here? And then maybe a similar question with the amended permits timing around that?

Speaker 2

Yes. From a debt standpoint, I mean, we've gone through a lot of work with regards to ESG and documentation, obviously, the feasibility study. And we've done work around optimizing that feasibility study as well. So getting kind of advisors to the banks, updated Kind of narratives and support for any optimizations that we're doing. Ultimately, we see projects that's relatively the same, like the inflation Increase on capital hopefully can be offset potentially by increases in throughput Or slight little changes into the operations that will offset a little bit of those inflationary costs that we've seen.

Hopefully, we can get through some of this So by the end of this year, probably into next year a little bit. Things take a little bit of time and I understand that, but We want to push and get moving on that. As far as the amended permits go, same thing. We've actually submitted a lot of our amended A little bit of work to be done to recharacterize some things that we've got to do internally. The normal core stuff that we expect to get, it's just sometimes things slow down and the government is out of our hands and out of our control.

And We're doing our best to be able to push that and make it as easy as possible on the government. We have been getting permits on various projects with Guanacevi or Volneos or various Movements in permits at Taranera. So it's nothing installed. It's just, I'd say, the slowness of the government. And Hopefully, we can get that done, some of it by the end of this year, some of it will go into next year.

But I would state from a permit standpoint, we have all the permits to start construction. The amended permits will give us flexibility for operations. Some will need because of time line, Do you need some renewals? Because renewals are kind of normal course items as well.

Speaker 3

In terms of the premise for, I guess, Production operation, is it around tailings? Maybe this facility is required.

Speaker 2

Yes. So we're amending permits around 1 of the portals for higher staging area. We're amending permits to get bigger waste dump areas. Amina, which is the archaeological They're clearing the tailings facility, but that's already been cleared by ConAgua and Surmanate. So like I say, It's generally normal course stuff.

Speaker 3

Okay. Thanks guys.

Speaker 2

Thanks, Greg. Thanks for those questions.

Speaker 1

The next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 3

Yes. Thank you so much, operator. This is Nick Giles calling in on behalf of Lucas. I think most of my questions have been answered so far, but Maybe just one quick one. When you look a little further down the pipeline, which exploration assets could be next?

What

Speaker 2

Yes. Thanks, Nick. I think that's a very good question. One project we haven't really touched on much, we did put out good results this year, the Parral project, Which is in Chihuahua. We've been working on Corral now.

We acquired in 2016, put out a resource By the end of 2019, which defined about 43,000,000 ounces of silver. Unfortunately, with COVID, we didn't start drilling there again till mid 2021. And since then, we've actually put out really good results with better risk and better grades than we've seen. We're targeting a certain resource number, which is about 60,000,000 to 65,000,000 ounces of Silver and then we're going to put an economic study on it. I think with the acquisition of Victoria and having Parral, we've got a nice Growth pipeline behind Carronera and ultimately, they're totally different scale projects.

Petrea is obviously one of the world's largest undeveloped Silver Projects. And we're going to look at that kind of with an open mind, but with the idea that perhaps that will be an underground operation as well. And Corral is It's smaller than what Pizzeria would be. It's an old historical district. There's old historical workings there.

So we actually Development already down to where we're drilling from an exploration standpoint. And with the success that we have with Corel From a drilling standpoint, if we can continue to have that success, we will put an economic study on for Alan. That could be option B Victory, it takes longer if we need different economics there. So between Terronera, Peral and Victory, I think we have one of the best growth profiles in the space.

Speaker 3

Great. Great. Well, that's really great to hear. Maybe if I'm not mistaken, just with the proximity of Purell to Guanacevi, do you see any operational synergies there? Or do you see those as kind of 2 stand alone projects?

Speaker 2

There'd be 2 stand alone projects. I mean, Ultimately, there still needs to be a plant that for and there are clients in that district privately run some old government plants. But Just the way that those operations are, I think they're still 3.5, 4 hours apart. There wouldn't be all that much. I mean, of course, spreading across our centralized systems, which Our regional work, our technical advisors, our accounting groups, our legal groups, you get synergies that way, but they would be standalone operations when it's all said and done.

Speaker 3

Got it. Got it. Thanks for the detail and continued best of luck.

Speaker 2

Thank you. Thanks for the questions,

Speaker 1

The next question is from Joseph Reagor with Roth Capital Partners. Please go ahead.

Speaker 4

Hey, Dan and team. Thanks for taking the questions.

Speaker 2

Hey, Joe. Happy to hear from you.

Speaker 4

Yes. So on Caroneira, theoretically sometime early next year, you guys make a I know you can't officially say that, but theoretically, let's assume you did. What would be the expected Time line to production from a construction decision, given you guys have done some work already, like I'm assuming it's Changed a little bit for maybe the PFS?

Speaker 2

Yes. Ultimately, the feasibility study has a 2 year time line to build Because of what we've been doing and all the early works that we've been doing, hopefully, from when we announced construction decisions, It would be shorter than that 2 years, but I'm not willing to kind of put it out there until we actually have that construction decision that time up.

Speaker 4

Okay. And could you quantify like how much time you've taken off so far? Or is that Yes, something you'd rather wait on.

Speaker 2

That's a roundabout way to ask the same questions. But ultimately, I think we could be under the 2 years.

Speaker 4

Okay. Fair enough. And then Bolanitos, kind of looking at what the resource was at the beginning of the year, what your How many tons you've taken out of it this year? It would unless you've added significant amount, which I guess we'll find out in the year end resource update. But would you expect this That mine to start winding down towards the end of next year or the year after?

And then when it does wind down, Would the expectation be to do something similar to sell it off like you did El Cubo? Or would you repurpose some of the equipment From there to one of your other projects.

Speaker 2

Yes. I mean, I'll be able to answer that in the way that At Boling Hills, we do have, like you say, 2 kind of years of reserves based off the reserves and resources last year. And we've been drilling there this year, and we've been adding some resources, and we'll get that out Let me put out new reserves and resources. It will actually be in January as it goes to the end of this year. And following those, we've been there for 15 years, we've never had more than 2 to 3 years of reserves.

There are times, especially where we're seeing today, where prices are and Maybe yesterday would be a better example. It makes it look like volume is probably coming closer to the end. But with Take into account the resources as well, so our indicated resources and our inferred resources. I'm hoping we can get past 2024 and into 2025. And we still have a lot of exploration potential there, areas that we can go drill.

It's not necessarily we'll find big large structures that gives us 10 years. But if we can keep on incrementally adding another year or 2 years, we can keep pushing forward. So the idea hopefully is that we're going to End up being a volume of kind of 3, 4, 5 more years. And at the end of that life, when it does happen, We'll look at all alternatives, whether that's selling the asset or dismantling and moving parts of it that We consider what we have else to move, but I'm not giving up on bolting those yet. I think there's also ability to Acquire concessions in that area as well, that will help extend my night.

So there's lots of time and lots of optionality to select the Polynesos.

Speaker 4

Great to hear. All right, I'll turn it over. Thanks, Dan.

Speaker 2

Thanks, Joseph. Good questions.

Speaker 1

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

Speaker 2

Thanks, operator. Again, I'd like to thank our operating team at Guanacevi with a Successful safe production quarter again reaching 2,500,000 ounces of man hours without LTI, and I think that's a very important thing. And Ultimately, we're in an interesting period. We'll see where silver and gold prices go. And I think it's important To note that our management's job is to manage through these periods, but the long term outlook with the 3 at Parral and Terronera, I think we have the company set up to do very well over Thanks, handful of years.

Thank you, everyone.

Speaker 1

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