Coeur Mining, Inc. (NYSE:CDE) Q4 2023 Earnings Call Transcript

Coeur Mining, Inc. (NYSE:CDE) Q4 2023 Earnings Call Transcript February 22, 2024

Coeur Mining, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the Coeur Mining Fourth Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the floor over to Mitchell Krebs, President and CEO. Sir, please go ahead.

Mitchell Krebs: Hi, everyone. Thank you for joining our call. Before we begin, please note our cautionary language on forward-looking statements in today’s slide deck and refer to our SEC filings on our website. I’ll kick off with a quick overview on Slide 3 before turning the call over to some of the team who are here with me. By nearly every metric, Coeur’s fourth quarter represented our strongest quarter of 2023. In fact, it was our strongest quarter in over three years. Revenues jumped 35% based on 29% higher gold production and 34% higher silver production. This led to a more than doubling of adjusted EBITDA and fourth quarter operating cash flow, which reached its highest level since late 2020. These results were driven largely by the stepped-up production levels at the expanded Rochester operation and by a strong finish to the year at Wharf.

Kensington and Palmarejo also delivered consistent results to end the year, which enabled the company to achieve its full year production guidance. Rochester’s fourth quarter provided a glimpse of what the expanded mine is capable of delivering once operating at full strength. Based on expected throughput rates of over 32 million tonnes per year, Rochester will be one of the world’s largest operations of its kind and will be the largest source of American produced and refined silver. Mick will provide an update on Rochester in a few minutes. A year ago, I spoke on this call about our expectations for a strong bounce back year at Wharf in 2023, and I’m happy to say that’s exactly what the team delivered. Free cash flow reached $27 million in the fourth quarter and $82 million for the year from 94,000 ounces of gold production.

As you can see on Slide 12, cumulative free cash flow since we purchased Wharf nine years ago has now topped the $400 million mark, which is over four times our acquisition price. When we acquired Wharf, it had an estimated remaining mine life of about five years and today, after over 800,000 ounces of production, Wharf’s reserves stand at over 760,000 ounces of gold with further exploration upside. I also want to offer a few quick comments on our year end reserve and resource update we provided earlier this week, which is summarized on Slide 10. Our roughly $245 million investment in exploration over the past five years continues to deliver tremendous results. It remains a key differentiator for Coeur at a time when many companies in the sector have underinvested in this critical component of the business.

Over the past five years, we’ve produced roughly 1.7 million ounces of gold and also managed to add 400,000 ounces to our reserves, which now stand at over 3 million ounces of gold. For silver, we’ve added 73 million ounces of reserves in addition to producing over 51 million ounces over the past five years, with our current silver reserves now approaching nearly 250 million ounces. In addition to reserve growth, our gold and silver M&I resources have increased by approximately 45% and 59% respectively over the past five years. Aoife will provide additional color in a few minutes, including providing some highlights on our 2024 exploration priorities. Before turning the call over to Mick, I want to thank our entire team for their commitment and dedication last year, which has led the company to be very well positioned not only for this year, but well into the future.

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Q&A Session

Mick, over to you.

Mick Routledge: Thanks, Mitch and good day to everyone. The foundation of Coeur’s success lies with our people and I also extend my gratitude and appreciation to every employee and contractor that contributed to a great finish for the year. I want to take a moment to stress the importance of keeping our people safe. Coeur has made strides over the last few years in driving down injury frequency rates, overall severity and lost time injury rates, to take our place as a clear safety leader within the sector. While I applaud those results, we must also recognize that redoubling our efforts is absolutely essential to sustaining and improving that track record. We must do more and we will do more to safeguard the well-being of everyone on our sites.

There is no higher priority for me and for this company. Turning to a brief recap of our fourth quarter production and cost summary on Slide 4 and beginning with Palmarejo. Higher gold grades due to a greater contribution from Guadalupe in a concerted effort from the team led to a nice finish to the year. Full year gold and silver production trended towards the lower end of the guidance range and CAS for gold and silver met guidance despite a continued strong peso and ongoing inflationary pressures that have been slower to moderate compared to our U.S. operations. Despite these challenges, the team at Palmarejo delivered over $15 million of free cash flow in the fourth quarter, its highest mark of the year. Looking ahead, guidance for 2024 anticipates gold and silver production to be consistent with 2023.

Moving to Rochester. The team finished the year off strong, producing 1.3 million ounces of silver and 20,000 ounces of gold in the fourth quarter, representing quarter-over-quarter increases of 120% and 345%, respectively, a sign of greater things to come with the new pad six and upscaled new Merrill-Crowe facility. This new kit made all the difference in helping Rochester meet gold production guidance for the year. Silver production fell just below the low end of the guidance range due to a temporary inventory backlog at the new Merrill-Crowe plant right at the year end. Fourth quarter adjusted CAS for silver and gold fell dramatically compared to the previous quarter due to higher silver and gold sales, which is also a sign of greater things to come as we see the benefits of higher throughput on our unit costs going forward.

The ramp up of the three stage crushing circuit is proceeding with ore feed now passing through the primary and secondary crushing stages and out to the new leach pad. Commissioning work is now focused on the pre-screens and tertiary crushers with expected completion during the current quarter. As a result of lower placement rates, while we completed crusher commissioning, we expect significantly lower gold and silver production levels in the first quarter. We remain on track to reach commercial throughput levels by the end of the second quarter. Dismantling of the legacy crusher is progressing with mining activities in the area now on their way. As we look at the second half of the year post ramp-up, we expect Rochester’s unit costs to markedly decline to within a range of $14 to $16 per ounce of silver and $1,200 to $1,400 per ounce of gold, nearly 50% lower than recent levels.

Looking at it another way, we anticipate around $2 per ton of mining costs, $3 per ton processing costs and $1 per ton in G&A costs during second half of 2024, where we settle the operation into a rhythm and optimize for both cost and performance. Turning to Kensington. We continue to regain footing with a good fourth quarter following an equally strong third quarter. You’ll recall Kensington had a difficult first half beset by dewatering and paste backfill challenges. But after establishing good controls for both of these issues, we finished at the high end of the previously revised gold production guidance. 2024 guidance reflects higher expected gold production, setting the stage for a bounce-back year characterized by greater mine flexibility and continued development aimed at positioning the operation for a strong future.

2024 is expected to be the last full year for elevated levels of development and drilling as we look to meaningfully extend Kensington’s mine life. Finishing briefly with Wharf, as Mitch highlighted, the team in South Dakota delivered again in 2023, achieving the previously upwardly revised guidance. 2024 should be another typical [indiscernible] with similar production and cost guidance anticipated. With that, I’ll pass the call over to Aoife.

Aoife McGrath: Thanks, Mick, and good morning, everyone. 2023 marked another successful year for exploration with the main priorities being replacement of depletion at Kensington, building the resource pipeline at other sites, and enhancing our ore body knowledge. The teams were enormously successful at this. Measured and indicated resources climbed by double digits at Palmarejo, Rochester and Wharf, while inferred resources climbed by double digits at Rochester, Kensington Wharf and Silvertip. We plan to continue with more of this expansion focus in 2024. And in addition, we expect meaningful growth in reserves at Kensington. For the second year running, we replaced depletion and recorded growth in reserves at Kensington. Reserve grades also increased 5% driven mainly by excellent results from Lower Kensington.

This is the first time we’ve ever achieved back-to-back reserve growth, a clear indication that the multiyear drilling and development program is achieving its objectives. In a year of limited exploration expenditures at Rochester, we still banked growth across all classes, achieving a 7% increase in reserves, a 16% increase in measured and indicated, and a 77% increase in inferred, all on a gold equivalent basis. This was achieved mainly through pit redesigns, which increased the mine life to 16 years. Another standout for the year was strong inferred resource growth at Silvertip with silver lead and zinc increasing 12%, 20% and 27%, respectively. Our recent press release shows the opportunity for extremely high grades in the deposit. And this along with our continually growing understanding of the system, makes us very confident of rapidly increasing the resource base over the next few years.

Across the company, exploration investment for 2024 is expected to include $40 million to $50 million on scout and expansion drilling and $7 million to $13 million on infill drilling. This excludes $15 million to $20 million of underground mine development and exploration support costs at Silvertip. The key priorities for the year are a continuation of life of mine additions at Kensington and Wharf testing higher grade structures at Rochester, further building the inferred pipeline at Palmarejo to enable rapid reserve conversion over the coming years, and continuing to grow resources at Silvertip. With that, I’ll pass the call over to Tom.

Tom Whelan: Thanks, Aoife. I will begin with a brief review of our fourth quarter financial results before touching on an important update regarding the balance sheet. Turning to the financial summary on Slide 13. The fourth quarter of 2023 gave us all a sneak peek at what the company can look like once the Rochester ramp-up is complete with quarterly sales of approximately 100,000 ounces of gold and 3 million ounces of silver. This level of production and sales led to quarterly revenues of $262 million and adjusted EBITDA of $64 million, which were 35% and 110% higher compared to the third quarter. On an annualized basis, this type of run rate would lead to annual revenues and EBITDA exceeding $1 billion and $250 million [ph] respectively.

With our expansion capital behind us, we look forward to the arrival of strong free cash flow generation in the second half of the year, which will be allocated to pay down debt. Lower metal sales are anticipated in the first quarter, consistent with the Rochester ramp-up and Wharf’s seasonally driven slower first quarter. In addition, our first quarter operating cash flow is impacted annually by three key items, Mexican EBITDA tax payments, annual incentive payouts and the semiannual interest payments on our 5.125% notes. Turning to costs on Slide 15, there is good news at our U.S. operations where we are seeing inflationary pressures moderating. However, as Mick mentioned at Palmarejo, continuing inflationary pressure coupled with a strong Mexican peso are likely to present headwinds in the months ahead.

Our unit costs for 2024 at Palmarejo have been guided to $1075 to $1250 per ounce of gold, which will likely lead to lower free cash flow in 2024 at Palmarejo, especially on the approximately 30,000 ounces to 40,000 ounces of gold where we only paid $800 an ounce due to the onerous Franco-Nevada gold stream. Fourth quarter capital expenditures declined by 17% compared to the previous quarter due primarily to timing of final contractor payments at POA 11. As is often typical with the completion of a major project, we are in the midst of some negotiations with a couple of our key contractors on the quantum of their final bills. At the end of 2023, we have paid approximately $700 million of the expansion capital at POA 11, leaving approximately $20 million to $30 million to be paid in 2024.

Turning to the balance sheet. We were very pleased to announce yesterday that we have completed an extension of our revolving credit facility through February 2027, which is a strong external sign of confidence from our lenders in our future. We would like to thank all of our long-standing syndicate banks, BAML, RBC, BMO, ING and Goldman Sachs for their continued support and confidence. We are happy to announce the addition of National Bank and Desjardins to the syndicate of now seven banks. We ended the quarter with total liquidity of nearly $250 million. In light of the strong fourth quarter, our net debt to adjusted EBITDA ratio dropped to 3.4 times versus 4 times at the end of the third quarter. While we do expect drawing our revolver during the first half of the year, we plan to begin reducing debt during the second half of the year as the company begins to generate meaningful free cash flow driven by the successful ramp-up at Rochester.

Further enhancing our financial position, we have extended our hedging program to provide price certainty during the commissioning and ramp-up of Rochester in the first half of 2024 with nearly 95,000 ounces of gold hedged at an average forward price of $2,076 per ounce and roughly 3.1 million ounces of silver hedged at an average forward price of $25.16 per ounce. I’ll now pass the call back to Mitch.

Mitchell Krebs: Thanks, Tom. As we look to our key deliverables for 2024 on Slide 17, we see several major catalysts converging this year. Significant U.S.-based production growth, particularly silver production, and a transition to positive free cash flow followed by a period of sustained debt reduction. While these near-term catalysts play out, we’ll remain focused on further improving our industry-leading safety performance, delivering consistent results from all of our operations and investing in high-return, high-impact exploration. Combined, these drivers offer a highly differentiated value proposition that features production and cash flow growth from a stable platform of four North American operations, growing silver exposure, a declining cost profile, a strengthening balance sheet and significant exploration upside.

The last three years have represented a period of heavy investment by the company, and we’ve repeatedly talked about a coming inflection point. That point has now arrived, and we look forward to delivering the expected results and payoff from these investments and from the incredibly hard work by the team. With that, let’s go ahead and open it up for questions.

Operator: [Operator Instructions]

Operator: Ladies and gentlemen, at this time, showing no questions, I would like to turn the floor back over to Mitchell Krebs for any closing remarks.

Mitchell Krebs: Okay. Well, I know it’s a busy reporting day. I appreciate you all taking the time to join our call. We look forward to speaking again with everyone in early May, when we release our first quarter results. Until then, have a good day and best of luck. Bye.

Operator: Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.