Endeavour Silver - Q4 2022

Transcript

Speaker 0

Welcome to Andeavor Silver Corp. Full Year 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. You may signal an operator by pressing star and 0.

I would now like to turn the conference over to Galina Malager, Vice President of Investor Relations. Please go ahead. Please go ahead.

Speaker 1

Thank you, operator, and good day, everyone. Before we get started, I'd like to briefly review our MD and A for cautionary language regarding forward looking statements and the risk factors pertaining to these statements. Our MD and A and financial statements are available on our website at edisilver.com. With us on today's call is Stan Dixon, Endeavour Silver's CEO Christine West, our Chief Financial Officer and Don Gray, Endeavour's COO. Following Dan's formal remarks, We will open up the call for questions.

And now, over to Dan.

Speaker 2

Thank you, Glenna, and welcome, everyone. I will keep today's call as brief as possible as all the details were published in today's news release. I'll make sure I hit some of the key points for our investors. Andeavor Silver had a solid 2022 in what can be categorized as a challenging cost environment. Our production exceeded guidance, which helped alleviate the upward pressure on costs.

Inflationary pressures across the entire spectrum of inputs We're closed across the entire mining sector, and it is no different for us. We continue to derisk advanced Terronera. Ideally, a financial package would be complete. However, things outside our control has pushed back into this year. I'm confident we will help clarity on this matter in short order.

We continue to be excited about the acquisition of the Vitoria project, Both solidifying our presence in Mexico and furthering our strategy of delivering industry leading growth. On a consolidated basis, we produced 9,000,000 ounces of silver equivalent metal with both silver and gold production exceeding the upper range of guidance By 17% and 4%, respectively, the 2nd consecutive year with significantly exceeded production guidance. Quanta C was a star performer yet again, accounting for over 70% of consolidated production with silver and gold grades well above plan. In fact, Guanacevi had record throughput grades, averaging 512 grams per tonne silver and 1.44 grams per tonne gold, While the plant approached 1300 tonnes per day average throughput in Q4, overall, the mill performed well with recoveries Just under 86% for silver and just below 90% for gold, demonstrating consistency and civility at the slightly higher throughput. The performance of our operating mine, Bolanitos, remains steady.

There was increased silver production offset by lower gold production. We continue to evaluate opportunities to increase mine life at Volcanoes and our cognizant of Volcanoes in the current landscape. The operating team has done a good job meeting their targets. Our strong operating performance enabled robust financial results, Particularly in Q4, as gold and silver prices strengthened, we are able to take advantage of the higher prices by selling most of the silver inventory. As a result, revenue rose by 27%, marking a 10 year best bolstered mostly by volume.

The higher revenue translated into increased cash flow with mine operating earnings of $51,500,000 up 42% from 2021. Operating cash flow before working capital changes of $54,000,000 again up 68% compared to 2021. And specifically at the site level, Guanacevi delivered mine free cash flow before taxes of $30,000,000 and Bolo and Idiot contributed just over $1,000,000 Our earnings for the year were $6,200,000 or $0.03 per share. I'm particularly pleased that we're Able to deliver operating costs on a per ounce basis that are relatively in line with guidance despite the industry wide inflationary pressures. We ended the year with cash costs of $10.65 per ounce, which is about 7% over our guidance An all in sustaining cost of $19.97 per ounce, which is below the lower end guidance of $20 per ounce.

However, industry wide inflation has been and continues to be challenging. Our direct cost per ton were up 16% Compared to the previous year as we saw cost increases in a lot of our key inputs. Fortunately, the increased Guanacevi rates offset the increases in direct costs, The cost control will continue to be a key focus for the company going forward. Our financial performance led to a strong balance sheet at the year end. We had cash on hand of $84,000,000 with no long term debt aside from normal course leases for equipment.

Working capital totaled about $94,000,000 which includes unsold volume held at cost of $6,000,000 but has a market value of 15,000,000 This past year, we were very busy and productive at Terronera, preparing the site for full scale construction. We spent $41,000,000 on initial development using our own existing cash, while we continue to confirm a viable debt package. During the year, the project team delivered several achievements. The full mobile mining fleet is now on-site comprised of 30 units. All the major plants equipment has been pre ordered with the majority of the equipment scheduled to arrive in the first half of twenty twenty three.

Upgrades to the road assets, totaling 7 kilometers, are well advanced. This work will improve slope Stabilization and Drainage as well as enhanced transportation access. We commenced construction of the permanent care. We commenced the back excavation of the plant site and we commenced the 1st portal access. We are optimistic and excited to provide has approved an additional $26,000,000 in development expenditures to Q1 2023, while we continue to advance the project.

At the outset of 2022, we began executing on our 3 year sustainability strategy, which is anchored on 3 pillars: People, Planet and Business. We launched or expanded many initiatives to further invest sustainable practices across our organization and create We took several steps to increase employee development, engagement and inclusion With positive results across the company. In addition, we amplified our community investments in Mexico, aligned with our Priority areas of education and employability. Over the past year, we devoted a significant amount of time and effort These are discussed in our first climate disclosure report that will be published next week, aligning with the TCFD framework. While it's still early days on integrating climate initiatives, we are trying to be thoughtful and diligent in determining the most effective steps for us.

As we deepen our understanding of the impact of climate change initiatives on our company, most importantly, our view of climate change is not Solely fixed on risk, there are also great opportunities in front of us. The world is beginning to realize the importance of metals to support the transition to a low carbon The products we provide today are the very beginning of the supply chain for essentially everything needed and used in modern society. I encourage you to read our climate report when it's published next week. For 2023, our production outlook continues to be strong Another year of robust grades from Guanacevi. We are targeting to produce between 8,600,000 and 9,500,000 ounces of silver equivalent, A midpoint which marks a 4th consecutive year of production growth.

The combination of higher consolidated throughput and produced ounces Allows for a projected unit cost of $10 to $11 per ounce for cash costs and $19 to $20 per ounce for all in sustaining costs, Similar to 2022, I've wanted to be in Volunos. We have plans to invest more than $35,000,000 in sustaining capital to optimize performance And maximize output. Of course, as everyone knows, this company has been built through the drill bit, and we are aiming to invest $10,000,000 into With the largest portion, dollars 3,000,000 being allocated to Pizzeria, while Parell has a $1,500,000 budget. I want to emphasize how excited we are about the notion of unlocking value through exploration and advance both PYTHREA and PYUREL. Both are expected to advance through economic studies early next year.

The scale and impact of PYTHEREA will be very significant for us. In December, we confirmed an indicated resource of nearly 600,000,000 ounces of silver plus material amounts of lead and zinc. This year, we plan to extend the historical ramp to better understand the feeder structures we identified in the deposit. With continued exploration and SNC success, We ultimately hope to identify a business case to model an underground operation at Victoria. In closing, it's going to be another busy year.

I'm very excited about our outlook as we continue to exercise on our growth pipeline, particularly At a time when silver demand is beginning to strengthen. I think that wraps up my formal comments for today. Let's open up the lines for questions. Operator?

Speaker 0

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

Wainwright. Please go ahead.

Speaker 3

Hi, everyone. This is Marcus Giannini calling in for Heiko. Thanks So you talked about Cost control being a key focus for this year and in particular business improvements. Given that we're now in March, Can you provide a bit of color as to where exactly you expect efficiencies and how much of that has already been incorporated year to date? Maybe if you could just touch on any cost improvements you've already seen, that would be great.

Thanks.

Speaker 2

Yes. I mean, it's a difficult question because we saw cost increase across the board last year. I mean, cyanide power costs are significant Contribution steel, I'd want us to be at Bolaniols, it was TCs and RCs power costs. For us, it really comes down to making sure that on a daily basis, a weekly basis and a monthly basis, we're reviewing our cost reports, Reviewing inputs that are going in, particularly at Quanta Citi. We have significant pumping that happens at Quanta Citi that uses And cost effectively a lot of power and money.

We have seen a little bit of a decrease from a kilowatt hour cost At Guanacevi and Bolanitos, when it comes to actual improvements, we think we do a really good job at Bolanitos. It's Guanacevi where we can be better Waste Management, managing our waste, managing the tons, being more efficient on a productivity basis than moving tons. I don't know if we've seen that come through yet here March 1, 2023. It's something that will take time through the year. And there's not big cuts that can be had.

The inputs that we need are the inputs that we need. The inflationary pressures on that Have been there. We have seen that slowdown in Q4 and hopefully that continues through 2023. But it's our job as management

Speaker 3

Okay, awesome. Yes, thanks for the color. Obviously, a lot of moving parts there. And then switching over to Terronera, you're sitting on over $80,000,000 in cash, just under $94,000,000 of working capital. How far down would you be willing to take your balance sheet if it means minimizing capital raise and building out turnover?

Speaker 2

Yes. I mean, I think the key part to that is the fact that we are looking for a debt financing package, and that debt package Would be anywhere between $100,000,000 to $120,000,000 The initial feasibility study for Terronera is $175,000,000 We recognize And when we do have that debt package, we'll likely update the market of where that capital costs are. But to answer your question, ultimately, what we want to see and be I have on hand just for the 2 operating assets somewhere between $34,000,000 is the cushion. I think we can get there I think we get that debt put in place.

Speaker 3

Okay, excellent. Yes, and just one last quick one. Seeing as you incurred $3,000,000 in smelting and refining costs, any thoughts on where you see these costs Trending in 2023, I'm assuming the prices are set in advance in the contract?

Speaker 2

Yes. We renew our concentrate contract Concentrate contracts are offtake agreements on an annualized basis. I think the key component there is a relatively similar, a little bit lower Pervolio, the key component of all that when it comes down to is the energy costs at refineries. And as those kind of oscillate, It does impact us. I think for the year, we have, like I say, it's about similar to a little bit lower at Bolanitos.

Of course, I'd like to introduce a delay bar of the ship.

Speaker 3

Got you. Okay, awesome. Thanks for taking my questions. I'll hop back in queue.

Speaker 2

Thanks, Marcus.

Speaker 0

The next question comes from Jake Petusky from Alliance Global Partners. Please go ahead.

Speaker 4

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

Speaker 2

No problem, Jake. Nice to hear from you.

Speaker 4

You as well. So Dan, you touched on moving Cataria and Parral For the economic study stage, do you guys have any visibility on the timeline there for those?

Speaker 1

Yes, I mean part

Speaker 2

of that visibility also depends on our exploration program. So at Italia, we have a plan to do 5,000 meters and really that Those that drill meters will happen when the ramp extension is complete, which we expect it to be done mid year. So it starts Q3 And then we'll drill. Ultimately, for VITRIA, the studies would happen in 2024, just because of the scale and scope of VITRIA. For Parell, we actually had a plan to put in place to start economic studies in 2022, just but with the acquisition of Parell, that pushed it back a bit.

This year, we're drilling close to 3,000 meters at Perale, and the next drilling is done. Our expectation is we move towards economic studies at Perale. So Start that, those studies at the end of the year, possibly publishing early 2024.

Speaker 4

Okay. That's helpful. And then just on inventory management for this year, I mean, obviously, you guys did a good job of taking advantage of higher silver prices in the Q4 of last year. Silver prices have come down this quarter. You guys expect to take a similar approach just to with inventory management?

Speaker 2

Yes. A similar approach is probably the right way to say it. I think as we get into the build with Terronera, we get less flexibility just depending on where our balance sheet is. We made some sales at the beginning of the year here when we hit into the 24 on silver, but as you'd say, we've come down into the 2020 handle. We'll see how it goes here in March.

Obviously, our balance sheet is in great shape, so we do have that flexibility kind of for the 1st 6 months. And as we move through the year, we'll see how we do it.

Speaker 4

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

Speaker 2

Thanks, Jay. Good questions.

Speaker 0

The next question comes from Craig Hutchinson from TD Cowen. Please go ahead.

Speaker 2

Hi, good morning, guys. Good morning, Greg. Just a question on Terronera. So once the financing package is in Just based on the work you guys have done today and the commitment to spend here in Q1, what's the timing To first production, how long will the construction period take? Yes.

Ultimately, in the feasibility study, the production period Our construction period is a 2 year process. Our goal with being able to advance it is still to be commissioning at the end of 2024. So full year's production effectively in 2025, but hopefully if things go well, knock on wood, we could have 1st pour, obviously, back half of 2024, maybe commercial production at the end of 2024. Okay, great. And if you have any color In terms of the timing of the amended permits and anything happening there?

Yes, our permit team And as a lot of our listeners, investors know, Terronera is fully permanent. And with the feasibility study, we Have the permits to start construction, which obviously we've advanced a lot of the things. There are amended permits For operational flexibility, so we don't particularly need the permits to construct. But over the 12 year mine life, we want various Flexibility, one being a staging area that we want to push out 300 meters. We've submitted a lot of this up.

We actually still have something that we need to submit. We've actually had very good communication with the permitting department, the different authorities. There's a number that we have to go through, Cermina, Kanagua, Inam, Enel have been advancing. And over the last, I'd say, 3 months, we've gotten approval for smaller permits. So all that keeps going, and I'd reiterate that we have all the permits to start construction and ultimately go into operations.

It's just Amending permits for operation flexibility. Are those amended permits, is that a consideration in terms of the due diligence that's being done by Financing Groups? Yes. Yes, they are. Okay.

And just that Wanted to be with respect to the royalties are obviously quite high in Q4. Can we expect kind of similar levels of Dollar amount royalties kind of for the balance of this year, just given you are kind of back into those same areas in Perfianier, Yes. I'll be careful with that a little bit. The Q4 has an elevated royalty just on what we sold in the quarter. So on an absolute basis, we had sold over 1,000,000 ounces of silver, and there's Royalties that would be recognized on sale as per the contract.

So today, where we sit $20 silver between $20 $25 silver, we pay a 13 And that aligning with when it's produced doesn't necessarily line up when it's sold. So Q4 hasn't elevated royalty, but on an annualized basis, we're producing similar amount from that area, which we call El Curso, Which is subject to that sliding scale royalty with Frisco. Okay. And maybe just one last question. With respect to Bolanitos, so how confident are you with respect to kind of reserve Extensions to be able to mine at a similar rate next year, the volume of this.

For 2024? Yes. Just an extensive, how long do you think the reserve life's going to be extended here?

Speaker 3

Yes, we have resources that

Speaker 2

we can convert into reserves. I mean, clearly, right now, it's Volleyatos. It's effectively operating at breakeven, There's a number of reasons to operate and mine at breakeven. Firstly, and obviously, the optionality to both any boats into that production. The second is proportional allocation of our costs.

Thirdly, we have talent there that ultimately, If one day Volunios doesn't operate, we want to make sure we can keep that talent and move them to Terronera that would come in. But We do expect and have confidence that we can extend Volleynose's life. We are getting to the point where we're getting to succession boundaries. So we're not Covering 3 years or 2 years. We're finding 3 months or 6 months at a time.

Our exploration team continues to have Some success. We just got more work to do on that exploration. So level of confidence, I'm confident, I would I'm jumping off the joy, and I'm not depressed. So somewhere in the middle of all that. We've never had more than a 2 year reserve life at Boling Hills for the last 16 years.

And I could say our exploration team has done a very good job there. There's a lot of concessions that surround us that have a lot of opportunities still and we just have to work through that.

Speaker 0

The next question comes from Mark Reichman from NOBLE Capital Markets. Please go ahead.

Speaker 5

Just a couple of questions. You've already laid out your guidance for 2023. And from a production standpoint, it looks relatively flattish compared to 2022. So it seems to me that grade and prices will make the big difference. So when you think about next year in terms of whether it's going to end up lower or higher in 2022, What do you see as kind of the key variables in terms of getting that cost down?

You've already laid out your guidance on the Cash toss and the all in sustaining toss. But if you do this financing package and the interest rates have come up, So you would have the additional interest expense, but what would be the variables that you think that could Drive a better year in 2023.

Speaker 2

Yes. Of course, we put out the range of 8.6% to 9.5%. And I think for us, the ability to exceed that plan or hit the high end of that range Really comes down to our operating team at Guanacevi and ultimately our operating team at Palaniyos for that matter. The El Cursa, the Alondra area of Guanacevi, I don't know if we're going to beat grades like we did in 2022, but I think there's opportunity Stay a little bit above those grades or at those grades. I think we're set up really well.

We did A lot of development in 2022 will give us some efficiencies this year. But at the end of the day, the reason we put out our 2023 guidance is because we expect that's where we're going to be at. I would point to 2021. In 2022, we've revised guidance upwards 2 years in a row, and we actually exceeded those revised upwards guidance, We'll see how this year unfolds.

Speaker 5

Well, I think a lot of people are looking at Terronera. So you talked about production construction decision in the coming months. When you're looking when you're talking about the financing package, What's the biggest hold up there, the biggest hurdle to clear? Is it getting an Acceptable rate? Is it those permitting issues?

What do you think would be the breakthrough in securing that financing package? And how early in the year do you think you would incur more debt?

Speaker 2

Yes. I mean, at the end of the day, it's Project loan financing and the key aspects of the project loan financing is ESG and ultimately getting Commercial banks, so big banks on-site from an ESG standpoint. And what's required for that is an Equator's Principle and ESOP report. That includes over one 100 and change of different specific reports, and we've spent over the last year documenting a lot of that and building processes and So it's not about terms. We know what those terms would be.

It's about time line getting through that due diligence and a project loan financing bank will typically hire an external engineering firm to do that due diligence and write reports and effectively pull apart our feasibility study or our plans. That's all happened and that's been completed. Like I say, I won't get into what happened necessarily this past year at this point, but there's things that were out of our hands. But It's been moving forward. Our team has done actually a really good job on it.

I expect, like I said in my outset, clarity in relatively short order on that.

Speaker 5

Okay. Thank you very much. That's really helpful.

Speaker 2

No. Thanks, Mark. Good to hear from

Speaker 0

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

Speaker 4

Thank you very much, operator. Good morning, Dan. Good morning, everyone. Dan, I also want to follow-up on Terronera. And I believe the 2021 feasibility study pointed to $175,000,000 of CapEx.

Obviously, things unfortunately changed quite a bit from 2021, and I think you mentioned there could be some offsets to inflation, but just order of magnitude, is it 200? The 2 handle, the light ballpark to think about? Or do you think you can keep it below that? Thank you very much for any color.

Speaker 2

Yes. Lucas, I mean, that's a very fair question. The 2 handle quick answers, 2 handle is the right ballpark, but I'll get maybe a little bit more detail into that. Ultimately, we completed that report in March of 2021, and I think it's dated July of 2021, and we published Ultimately filed in September of 2021. I think our engineering team and our development team with our the external engineers did a good job Catherine, some of that inflationary stuff that we started to see in 2021.

But of course, nobody is perfect with that. And I Say that because our mobile fleet is entirely on-site with 30 units. If you compare what we paid Compared to what was in that feasibility study, we're right on point. The 12 key components that we've purchased for the plant are relatively in line to what we saw in our feasibility study. There are changes though and there are things that we haven't locked in.

And ultimately, what we've been looking at over the last year, year and a half as we push through this financing package and advance Terronera It's optimizing from that feasibility study. So going from a 1700 tonne per day to 2,000 tonne per day has been looked at and it's been looked at over time. And that can offset some of the inflationary costs that we've seen, a, coming from a capital standpoint and coming from an operating on a per ton basis standpoint as well. So we have been leaning towards a larger plant and ultimately more output from the mine to offset some of that inflationary cost. When we have a detailed financing package in place, we're going to we will provide the market with where we expect the capital to be, What type of size that Terronera will be?

It's not significantly different. But as you say, Higher throughput will help offset some of the inflationary pressures that we've seen.

Speaker 4

Very helpful, Dan. I appreciate that. And then One of the earlier questions touched on 2024 all in sustaining costs. And I wanted to follow-up on that and maybe be Slightly more pointed. I know it's early, but directionally, should we expect All in sustaining costs to come down in 2024 or is the current level, maybe the best ballpark for the coming years?

Thank you very much.

Speaker 2

Yes. I mean, at the end of the day, Lucas, we put out 'twenty three guidance, we have clarity on that. For 2024 all in sustaining costs, It's highly dependent on where we sit with Terronera. And Quantency and Bologna, they're mature assets. We kind of know where their costs have been.

They were very similar for about 12 years until the last Couple of years, they've really picked up. And like I say, I don't think that's specific to Andeavor Silver. I think that's what we've seen across the whole mining space. I'm trying not to put guidance out for 2024. I would just would say point to cornice seed and bony oats would be similar.

We know what we have. We know where we're at. There are things that go into that on an all in sustaining cost per ounce grade that wanted to be will be important. Of course, our resource grades We're very similar to what we have in reserves, so that might continue. But if Terronera can come online at the end of 2024 and the timing of that comes online in 2024 We'll be highly dependent on our consolidated all in sustaining costs.

I think when we come next year, we would probably give guidance on our existing operations And then guide Terronera separately depending on when we see the end of construction or we expect the end of construction. That's probably the best way I can answer you at this point for next year. Let's see how we perform this year. Hopefully, we can be in line or even beat it. And if we can, that will bode well for 2024.

Speaker 4

That is very helpful and very clear. Dan, I really appreciate the color and to you and the team, best of luck.

Speaker 2

Thanks, Lucas.

Speaker 0

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, and thanks to our investors and listeners today. Again, as I said in my formal comments, I think 2023 is going to be a very busy year For Endeavour, of course, pushing forward at Pretoria and Pharrell is important for our pipeline. But if we can get to a formal construction decision on Terronera in relatively short order, I think that would be the next catalyst Thanks a lot, and have a good day.

Speaker 0

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