Endeavour Silver - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp Third Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. 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 and zero. I would now like to turn the conference over to Galina Meleger, Vice President, 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 edrsilver.com. With us on today's call is Dan Dickson, Endeavour Silver's CEO, Christine West, our Chief Financial Officer, and Don Gray, Endeavour's COO. 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. I'd like to begin by saying that we navigated through a difficult third quarter. Not only were we hit with challenging market conditions that caused a sharp decline in the silver miners index by nearly 20%, our cornerstone mine, Guanaceví, had a difficult operating quarter. The impact of lower throughput, significantly lower grades, non-routine expenses related to repairs and maintenance, and an increased operating development resulted in escalated costs on a per unit basis in Q3. Costs were further amplified by macro factors such as the ongoing industry-wide inflation pressures and a strong Mexican peso. While the headline for this quarter is our elevated costs, we've taken corrective measures to get Guanaceví back on track and not have issues affecting productivity persist. Of course, nobody likes to experience a lackluster quarter, but it's an opportunity to learn and improve.

Such was the case for us, as our new VP of Operations has taken steps to sustainably improve Guanaceví's operating performance. I'm pleased to tell you that we're seeing a significant improvement in mine productivity this quarter. Of course, during the past quarter, we continued advancing the Terronera project. Terronera provides a clear path to margin expansion, repositioning the company to attain significant free cash flow once the mine is in production. Let's discuss this year's or this quarter's production in more detail. Consolidated Q3 silver equivalent production was down 14% year-over-year to 1.9 million silver equivalent ounces, bringing us to 6.5 million silver equivalent ounces year to date. While this quarter's results still puts us on track to be within this year's production guidance range, there's little room for setback in Q4. Guanaceví's production shortfall is due to a number of factors.

If you recall, we discussed initiating changes to our mine plan and infrastructure to improve working conditions for our employees by providing better ventilation and improving our water management. To address these conditions, we temporarily changed mine sequencing. This meant mining lower silver and gold grade stopes until we sufficiently addressed the temperatures and the water inflows lower in our mine. Ultimately, these issues could have been better managed to prevent impacts on production. Simultaneously, increased stope development during Q3 to open more stopes further impacted Q3's mine output. Sequencing of stope development will continue to be a focus for Guanaceví to ensure a stable production schedule going forward, near term and long term. While the temporary changes have lasted longer than we anticipated, conditions have improved and mine output has increased.

With the conditions within the mine, management felt it was an appropriate opportunity for an extended plant shutdown to address areas within the plant that required more time than our standard maintenance shutdowns. Considerable maintenance work was performed in all areas of the plant, including crushing, grinding, thickeners, and the filter press to ensure we maintain consistent throughput going forward and alleviate risks that could result in unplanned downtime. With the plant maintenance completing in early October, both the mine and the plant are operating at or above capacity. The combination of these events during the third quarter results in quarterly silver and gold production decreasing by 22% and 13%, respectively. It equates to a production shortfall of nearly 400,000 ounces of silver compared to previous quarters and our annual mine plan. But as I've said, we're back on track with Q4 expected to meet plan.

The performance of our other mine, Bolañitos, remains steady. Increased gold production was offset by lower silver production in Q3. The Bolañitos operation seems to continue a strong effort to meet or beat their targets, including mine and process tons. Our safety programs and results are being outstanding at both operations. Moving to our financials, we reported revenue of $49.5 million, with cost of sales of $46.7 million, for operating earnings of $2.7 million and mine operating cash flow of $10.6 million. After exploration, G&A and other investment expenses, we reported a net loss of $2.3 million or a $0.01 loss per share. This quarter, our cost of sales increased 35% compared to the same period last year.

While there are a number of drivers, including a strengthened Mexican peso, higher labor, power, and consumable costs, and increased royalty costs, a significant part of the Q3 story was low production at Guanaceví, impacting costs on a per unit basis. Guanaceví delivered $6.7 million of operating cash flow. However, after capital and exploration expenditures, Guanaceví reported negative mine free cash flow of $1.3 million. It's been quite some time since Guanaceví has not delivered a positive free cash flow quarter. Year to date, Guanaceví has delivered $12.2 million of mine free cash flow, and Bolañitos remains slightly above breakeven. Regarding operating costs, we've seen pressures on several fronts. Our direct costs per ton were up 23%.

The increase in operating development, paired with higher energy costs, increased labor due to re-shifting the workforce, and increase in costs from accepting more tolled ore, had the largest effect this quarter. While the Mexican peso weakened in the latter part of Q3, it made high, averaging 17 to 1 in the third quarter. The peso has recently reversed course, but it's still 10% above our budgeted assumptions. Again, all these factors translate into higher costs overall. Quarterly cash costs and the all-in sustaining costs are at $1,795 per ounce and $2,964 per ounce, respectively. On a year-to-date basis, we've reported a $13.08 cash cost and $23.41 all-in sustaining costs, which are both above our original guidance provided in January.

Looking to the rest of the year, containing costs will continue to be a focus as we work to improve the efficiencies of our operations. We're closely reviewing our purchasing practices to see where and how we can make improvements. At this time, while we expect cost metrics to improve, additional maintenance work related to the plant shutdown continued for the first week of Q4, and increased operating development is expected to continue into Q4. Additionally, cost pressures related to macro factors will continue. However, management anticipates that Q4 cost metrics will improve as productivity and production are expected to return to historic levels. As at September 30, we had cash on hand of $41 million and working capital of $76 million.

During the quarter, we raised gross proceeds of $23 million through the ATM, and another allotment of $17 million was raised subsequent to quarter end to ensure there is sufficient funding for the development of the Terronera project. On October tenth, we executed the $120 million project financing agreement with Scotiabank and ING Capital to fund the Terronera project. As per requirements under the project loan, the company will primarily self-fund development to cash on hand before drawing down on the facility. As such, the company expects to draw down on these funds in 2024. Based on the project's spend schedule, it's anticipated we'll be fully committed on the project capital costs in the early Q2 2024. Moving to more detailed information on the construction of Terronera.

At the end of Q3, we reached 38% completion, and we expect to be close to crossing the halfway mark by year end. We've spent $95 million to the end of Q3 on direct development. Project commitments total $160 million, which is 69% of the $230 million initial CapEx budget. With the execution of the $120 million senior secured debt facility, we are well positioned to satisfy the financing requirements of the project. During the quarter, we made notable progress in a number of key areas. Not only have we completed construction of our permanent camp and now can fully accommodate our workforce, but we've also made significant progress on construction of our process plant, with surface construction now above 42% complete.

If you're interested in seeing photos of the construction progress, I encourage you to visit our website under the Terronera page. Let me recap some recent developments. Of note, with rainy season upon us, during Q3, construction safety measures were modified. The focus was on visibility and project road maintenance. We are pleased that extensive improvements over the last year helped maintain the site roads, keeping them in good good condition and accessible. As a result, equipment access and material deliveries to the site were unaffected during the rainy season. Additionally, visibility control measures were reinforced. On the recruitment side, the workforce continues to grow, with on-site personnel having increased over 520 employees and contractors. The total engineering progress is nearly complete. Most equipment has now been purchased, and deliveries for all major plant equipment will be completed by year-end.

During Q3, the request for bid proposals for the mill construction contract was nearly complete, which includes structural, steel, mechanical, piping, electrical, and instrumentation. Mine development remains our critical path. Quarter end, over 1,300 meters have been completed, and advance rates are gaining momentum as portal 2 and 4 pass through the fault zone and ground conditions have improved. During the quarter, portal 1 reached its design elevation, allowing for mine development to advance now on four front, portal 1, 2, 4, which is incline and decline directions. Plant site earthworks, concrete work, and rebar installation are underway. Concrete work and rebar installation continuing with SAG and ball mill grinding areas, coarse ore stockpile and flotation areas. Concrete work also began for the primary crusher and excavation work started in the tailings thickener area.

And lastly, on the community side, we continue to focus on supporting the municipality with projects like upgrades to our roads, our local landfill, and communication infrastructure. Looking ahead, our main focuses remain progressing our mine development, advancing concrete work for the mill platform on schedule with electromechanical contractor mobilization early 2024, which marks the next major phase of the construction for Terronera, and starting excavation on the filtration and LNG power plant areas and the TSF. That wraps up my formal comments for today. Myself, Don Gray, and Christine are happy to answer any questions that you may have. Over to you, operator, for Q&A.

Operator (participant)

Thank you. 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. The first question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle (Managing Director of Equity Research)

Hello, everyone. Thanks for taking my questions, and it's nice to see an eight-figure mine operating cash flow before taxes figure, even though this was obviously a challenging quarter. Building on all of that, you had a productive shortfall at Guanaceví due to mine sequence and changes required to focus on improved access and ventilation. Some of the maintenance there was completed in September. It's now November, as per your release. So building on all of that, which, if any, of the effects from the mine sequence and changes should we anticipate to last through the remainder of the year, maybe even into 2024? Phrasing it differently, and I guess more simple, has your expectation for Q4 changed from what it was two months ago, and are there meaningful impacts that we should model out?

Dan Dickson (CEO)

Sorry, Heiko, it's, it's good to hear from you. Just your question got muffled there a little bit at the end. I'm not sure I heard it properly.

Heiko Ihle (Managing Director of Equity Research)

The question ultimately is, building on the changes that we saw at Guanaceví, should we anticipate them to last through the remainder of the year, or are most of the impacts from them gone? And then I phrase it a little differently: Has your expectation for Q4 for the site changed from where it was about two months ago?

Dan Dickson (CEO)

Yeah, and it's a very fair question, and it's nice to hear from you, Heiko. Ultimately, the designs of the changes that we put through is to improve ventilation and improve our water, the management of our water. We're getting more inflow down in the El Cerro concession than necessarily was expected about a year ago. And we're making those changes, and ultimately, our throughputs and our mine output have increased here in Q4. We expect that most of the work that we did in Q2 and Q3 would be lasting. So not only do we expect Q4's production throughput, production output from the mine and ultimately throughput through the plant to meet plan, which is effectively around 1,200 tons today, those changes should help benefit us for 2024 and beyond.

I say some of these things are preventable, and the fact that we could have managed it better last year and made sure that we were advanced on our ventilation program and our water inflow program, it's something we didn't do, and we can do better on. It's just that all this came kind of all at once and ultimately impacted our production here in Q3. With that impact on production in Q3, really showed in our financial results and ultimately our cost metrics at Guanaceví. I wouldn't say it's completely behind us. We're still working on ventilation and water management. We expect that to be done here in Q4. But ultimately our output is up. So with our output up, we'll at least meet our production plan.

Heiko Ihle (Managing Director of Equity Research)

I think, I think that's a very fair answer and, and reassuring as well. Completely different thing. You're, you're hosting a visit to Terronera in two weeks, and we're obviously excited to attend. Construction progress at site is 38% complete as per your release today. Lot to happen at site. Just going through the last release you had on the site, it stated that procurement, as a quote, procurement efforts are on schedule with most long-lead major equipment anticipated to be received by year's end. That was a week and a half ago. What exactly is still missing, and where exactly is it? Is it at customs on a ship? Is it with the suppliers? Anything that's concerning you or maybe should concern us? I assume the answer is no, but just wanted to, to, to make sure.

Dan Dickson (CEO)

No, there's always things that concern us. I mean, the big thing that comes to mind right now is some delays in key houses. Those weren't expected. I wouldn't necessarily call them critical items, but they're important items because every piece of equipment and, and parts matter to get the plant up and going. As I say, all our key components for the mine and key components for the plant were ultimately ordered quite early on, and most of that's being delivered this year. There's smaller equipments now that we're going through. Right now, we're going through ATCs on steel. That's gonna be kind of delivered out to suppliers, and that expectation's gonna come.

Over the next year, until we get into production or start up the plant, there'll be all these little things, and our job is to manage that, and there's always unforeseen items that we have to manage. Right now, it's been fine. There's been nothing critical, but something will come up, and it'll be our job to manage that.

Heiko Ihle (Managing Director of Equity Research)

You've done a successful and good job at that kind of stuff in the past. Here's to our wishes, and thanks for taking the questions.

Dan Dickson (CEO)

Thanks, Heiko, for the questions.

Operator (participant)

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

Lucas Pipes (Managing Director)

Thank you very much, operator. Good afternoon, everyone. My first question is a follow-up on Guanaceví, and as you look out to 2024, what do you think could these measures you've taken mean when it comes to production and [inaudible]. Thank you very much.

Dan Dickson (CEO)

Yeah, for us, for 2024, we'll put out guidance in January, but go on to see, we've been there 18 years. The plant capacity is 1,200 tons per day. I mean, now it's pretty easy to make the assumptions that we'll be able to do 1,200 tons today for 2024. Ultimately, the measures we've taken in Q3, it ensures that we can have a 1,200 ton per day operation. If we can maintain our production profile and, it'll allow us to meet guidance from a cost standpoint, our all-in sustaining cost is expected to be between $19 and $20 this year. It's probably going to be a little bit higher next year because of the inflation factors, but we'll come out with that guidance in January.

Lucas Pipes (Managing Director)

I appreciate those comments. Thank you very much. And then, question on Terronera. In terms of kind of your minimum cash and liquidity targets while you do the development there, anything specific we should keep in mind as we model kind of cash flow over the coming quarters? We would appreciate your perspective. Thanks.

Dan Dickson (CEO)

Yeah, I think it's important that we maintain a certain level of liquidity. Right now, we're sitting on $76 million of working capital, and that's what we look to when we're looking at our liquidity, especially during this development cycle that we're in with Terronera. I think it's important to know that we do have to spend our cash first before we can draw down on our debt facility, and we expect to draw down our cash, not to zero, but to a certain level, probably $20 million-$25 million, before we draw down on that facility. Then once we start drawing down that facility, hopefully our cash builds with performance at Guanaceví and Bolañitos, and we'll see that in 2024.

Lucas Pipes (Managing Director)

Got it. Okay. Well, really appreciate it then. Yeah, thanks again for all the color and best of luck.

Dan Dickson (CEO)

Thanks for the questions, Lucas.

Operator (participant)

The next question comes from Trevor Ward with private investor. Please go ahead.

Trevor Ward (Shareholder)

Yeah, good morning. I'm calling from Hawaii. I'm a relatively new in terms of purchasing common stocks and I bought a substantial, in my opinion anyway, a substantial position in Endeavour. So I'm currently holding 40,000 shares at an average price of $3.10. What I'm curious about is all, all this jargon and the numbers. For me, the bottom line is, in terms of, let's say, over the next year and then looking forward, when do I expect to actually see Endeavour actually turn a profit and show a dividend?

Dan Dickson (CEO)

Well, Trevor, you're lucky that you're sitting in Hawaii right now. It's, we're here in Vancouver. It's a beautiful day, but ultimately cold, so I do wish I was where you were. For Endeavour Silver, where we are right now from a growth profile standpoint, is we're investing in our Terronera project, and Terronera is gonna take us from 9 million ounces of silver equivalent to 16 million ounces of silver equivalent production per year. Having that scale is going to improve our earnings, and we've had positive earnings over the years. This quarter in itself, of course, we lost $0.01. Obviously, we don't want to be in that position. We want to be making money no matter what price of silver is or what price of gold is, and I think Terronera is gonna do that for us.

As far as dividend, because of Terronera, that's gonna be in the future. I wouldn't say in the near future, because we also have the Pitarrilla project coming in behind that. Our goal is to advance Pitarrilla. Pitarrilla would be a significant scale project that we still have a lot of work to do on, but we are feeling confident with it. But again, any capital and cash flow that comes from Terronera, we're probably gonna reinvest in the company. So unfortunately, if you're looking for a dividend from Endeavour Silver, it's probably not gonna come in the near future. But with what can happen in the silver price, and ultimately, if you're investing in Endeavour Silver, you're investing in the price of silver, that could change, and I hope it does.

Like I say, currently, right now, with where we're at with $23 silver, I don't see a dividend in the near future until we've fully invested with and exploit what we have with Pitarrilla, Parral, and our other exploration programs.

Trevor Ward (Shareholder)

All right, so just a couple more quick questions without having to do all the-

Dan Dickson (CEO)

Sure.

Trevor Ward (Shareholder)

A little while ago, I saw, I watched a, an interview, with yourselves, and, your projection and your assumption at that time was that, by the end of 2023, silver would hit $30 an ounce. Just to quickly, what, what brought you to that? And also in terms of a, maybe a quick, brief, explanation of how the, international silver market works. And then, the last question before I say goodbye is, what is your current position, and can you tell me, since you've been in this position, what is your current holding of stock, and when was the last time you bought or sold the, the stock?

Dan Dickson (CEO)

Sure. There's a lot of questions there, the overall market and my personal position. My personal position, I believe I hold about 450,000 shares of Endeavour. My holding price would probably be between $4 and $5, and my carrying price would be. The last time I bought stock would have been last year, about May or March of 2022. But that's probably enough about me. With regards to me saying the silver price would have been $30, I couldn't tell you when, which interview you listen to, but I have said that in the past, and ultimately that would be based on where gold price is. And if you look at the history of gold and silver ratio, the last 35 years has averaged about 35-to-1.

Right now, gold sitting just below 2000, maybe at that time, gold was at 2100. So to get to a ratio right now, I think we're sitting 86-to-1, to get to a ratio similar to what we've seen historically, that would push silver up into the high 20s and ultimately $30. And we hit $29 silver, oh, a couple of years ago now, and we've really come off of that. And I mean, it's been a very uncertain times, and with rising interest rates, silver price has not performed. But funny enough, gold has held on considerably well. I think that's a positive thing for the silver price. I think if gold pushes up through 2000 and 2100, silver always eventually follows.

It's just there's a lag time and a lag period, and sometimes that lag period is six months, sometimes that lag period is one year. So, with me procrastinating or projecting that silver was gonna be $30, I don't think I've never not said that. So I likely get, and it'd be based on where gold price is, and then ultimately how the silver market works in the world, that's a huge question. I mean, it's, it's a large market. There's over 800 million ounces that are produced and sold. It's sold through different exchanges in the United States, China, across everywhere. So I don't think I'll get into that right now, Trevor, but happy to answer those questions through our info line. Give our IR group a call, and, and we'll take you through that another time.

I'll move on to the next question, operator.

Operator (participant)

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

Craig Hutchison (Director and Base Metals Analyst of Equity Research)

Yeah. Hi, guys. I was wondering if you guys can give us an update with respect to Pitarrilla, what some of the milestones are. I know you had some issues around ground control, but any kind of milestones in terms of the exploration work there and potential for an updated PEA?

Dan Dickson (CEO)

Yeah, no, that's a great question, Craig. Thank you. Ultimately, we wished we were drilling at Pitarrilla this quarter. As you touched on, we had some ground issues. The fault that we were getting through, we support it, but ultimately there's continue to be rock falls in the old adit that was there. So we are doing a parallel adit, and we've taken that drill program and ultimately put it into an adit event this year. So we will not be drilling Pitarrilla until January, possibly February of next year. Still allows us to do a PEA or start doing economic studies on Pitarrilla next year.

But we want to make sure we get that adit complete, get the drilling done, on what we think of some feeder zones, and then ultimately, look at this project as potentially the next development project after Terronera. And that would be, like I say, starting to make those economic studies, hopefully midyear to end of next year.

Craig Hutchison (Director and Base Metals Analyst of Equity Research)

Okay. Thanks. And just one other question for me. Just with regards to the debt funding, the stipulation that you'll need a cost overrun funding in the form of cash or letter of credit, up to, I think, $48 million. How should we think about that? Is that a requirement? Would that effectively become like a restricted cash requirement you have to hold for a certain period, or how do we just understand that $48 million requirement?

Dan Dickson (CEO)

Yeah, it, it's a very good question. Fair question. It's actually broken into two tranches. So the first $60 million of $120 million is available to us with cost overrun funding of $24 million. Ultimately, it wouldn't be restricted. However, it's almost treated like restricted cash. And then, of course, when the next $60 million funding comes of the $120 million, another $24 million required there. Now, we'll look at where we are from a project construction standpoint and whether the full $48 million of overfunding is required, and we'll do that with the independent engineers. So we'll come to that sometime, I'd guess, mid-2024. But in your question, is that restricted? Possibly, yes.

Craig Hutchison (Director and Base Metals Analyst of Equity Research)

Okay. And maybe just maybe to follow up, I guess, would it be fair to say you have more to do on the ATM facility this quarter just to kind of get your cash position up ahead of that drawdown?

Dan Dickson (CEO)

Yeah, it's very possible if the market allows it. Obviously, we want us to be in performance as expected, and that impacts our balance sheet. Now, I think our balance sheet's in great shape. We have over $41 million of cash at the end of the quarter and $76 million in working capital. There are some levers on our long term. We have IVA, about $18 million, related to Terronera, that hopefully we can get to current, in relatively short order. So that gives us more funding that's available. Almost $96 million of working capital if we include that IVA. So I think we're in really good shape, but it's something that we have to be mindful of while we're in development and with these markets. So we will be, and I think we're doing a good job managing that.

Craig Hutchison (Director and Base Metals Analyst of Equity Research)

Thanks, guys. Thanks a lot.

Dan Dickson (CEO)

Thanks, Craig. Good questions.

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 thank you everyone who joined our Q3 call. Again, I think it's important to know that management's working to resolve some of these cost issues that we have at Guanaceví. I think that's going to be done through getting our, our output up to where we expect it to be and on plan. So everyone, I look forward to having our, our Q4 call, and financial release for 2023, and talk to everybody again in March of 2024. Thank you.

Operator (participant)

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