Endeavour Silver Corp. (NYSE:EXK) Q1 2024 Earnings Call Transcript

Endeavour Silver Corp. (NYSE:EXK) Q1 2024 Earnings Call Transcript May 9, 2024

Endeavour Silver Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. First Quarter 2024 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please go ahead.

Galina Meleger: Thank you, operator, and good day, everyone. Before we get started, I ask that you view our MD&A for cautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A and financial statements are available on our website at www.edrsilver.com. With us on today’s call is Dan Dickson, Endeavour Silver’s CEO as well as Elizabeth Senez, our Chief Financial Officer; and Don Gray, Endeavour’s COO. Following Dan’s remarks, we will then open up the call for questions. And now over to Dan.

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

This puts us in great shape to achieve 2024’s production guidance between 8.1 million to 8.8 million silver equivalent ounces. The performance of both operating mines Guanacevi and Bolanitos remain steady and for lack of better word script. Gold grades of both operations were slightly ahead of plan, offset by silver grades that were slightly below plan. Silver equivalents are flat and we expect similar grade profile throughout 2024. Moving to our financials, we reported top line revenue of $64 million up 15% year-over-year, due to higher volume sold and their higher realized gold price compared to Q1 2023. Cost of sales totaled $52 million also up 32% from Q1 2023 due to a combination of increased ounces sold, higher direct costs and depreciation.

Direct costs have stabilized and aligned well with our 2024 plan costs. Mine operating earnings totaled $12 million after expiration, G&A and income tax expense reported a net loss of $1.2 million or $0.01 per share. At the site level, Guanacevi delivered mine free cash flow pretax of $6.5 million and Bolanitos contributed $4.5 million. The higher gold price has significantly benefited our Bolanitos operation. The full effect of the 2023 cost escalations and appreciation in the Mexican peso impacted direct operating costs compared to Q1 2023. As a result, our direct operating costs per time were significantly higher compared to last year. However, compared to 2024 budget, our direct operating costs aligned well with budget. To be clear for our listeners, our direct operating costs are defined as mining, processing and indirect costs.

Royalties, special mining duty and purchased ore are included in our direct cost metrics and are all impacted by the higher metal prices. These costs again, including our direct cost per ton have all exceeded budget due to the higher metal prices. These account for roughly $50 per ton on our direct cost per ton. On a net basis, we did benefit from the higher byproduct gold credit, resulting in our cash costs and our all-in sustaining costs reporting below guidance. At March 31, we had cash on hand of $35 million and working capital roughly $56 million. During Q1, we raised gross proceeds of $39 million by our ATM facility. As a reminder, it’s essential to highlight that in adherence to our agreement for drawdown on the senior secured debt, we were committed to self-fund development for up to $150 million before gaining access to the $120 million credit facility.

After quarter ended, we satisfied this condition, which in turn enabled us to draw on the first installment of the $60 million of $120 million committed. In connection with the draw, we also executed the final hedge contract terms to reduce financial risks on the project. First, capitalizing on the strong gold price environment, we executed forward sale contracts for 68,000 ounces of gold at $2,325 per ounce. This represents 55% of the planned gold byproduct production during Terronera’s initial three years of operations. Second, we secured the cost of the pesos by entering forward purchases of $45 million of U.S. equivalent Mexican pesos, which covers the remaining construction period at a fixed rate of 16.56 per U.S. dollar. Overall, we’re pleased with the terms of the debt package as our finance team dedicated significant efforts to secure favorable terms while safeguarding the upside for our shareholders.

We anticipate completing the remaining draw of $60 million in Q3, aligning with the completion of the Terronera build completed in Q4. Let me give you a quick update on construction progress at Terronera. By the end of Q1, we achieved a significant milestone by surpassing the halfway point of construction, achieving 53% completion income seen progress at both the surface construction and underground mine development. As I mentioned earlier, we spent $38 million towards development, bringing our total expenditure to $158 million. Our project commitment now stands at $225 million representing 83% of the $271 million capital budget. With site activities advancing rapidly, we’ve concentrated our effort on structural steel installation, which is 80% complete and major equipment installation for our upper mill platform.

As our quarterly reporting is very comprehensive, I’ll provide a few recent highlights of progress. Over the past year, we’ve emphasized the importance of accelerating mine development rates to four meters per day for critical heading, a goal we are steadily achieving to meet our production timeline. In this quarter alone, we completed over 1,000 meters of underground mine development, bringing our total to over 3,200 meters, keeping us on track for initial ore access in Q2. The majority of construction activities have progressed well at the upper plant site. Currently surface construction stands at 56% complete. On the procurement front, our bulk materials purchasing is on track with the construction schedule, allowing us to install many components upon immediate arrival to site, while making use of the project’s lean footprint.

Our COO has optimized just in time delivery framework which has proven highly effective all while maintaining a steadfast focus on continuous safety measures. Thanks to your growing workforce at the site, which now totals 550 employees and contractors, this quarter saw the achievement of other significant milestones. This includes successful setting of both the SAG and ball mills, placement of the regrind mill and flotation cells and the commencement of installation for the crusher belt conveyors and apron feeders. Additionally, during Q1, we initiated excavation of the TSF embankment key trench in the lower platform area, which are 60% and 45% complete respectively. Concrete work is anticipated to start in Q2 on the lower platform. And lastly, on the community relations side, a new minor trainer program for local community members was established to provide training and employment.

If you’re interested in viewing photos and video footage of the construction during progress, I encourage you to visit our website. You’ll find our currently photo gallery showcasing the latest developments as well as the video filmed in mid-March. Before we move to Q&A, I’d like to highlight that we recognize that our long-term success goes beyond achieving financial metrics. Next week, we will publish our 2023 sustainability report that speaks to our ongoing actions to mine responsibly and help shape a more inclusive sustainable future for our business and our stakeholders. 2023 marked the second year implementing our three-year sustainability strategy and we will be reporting on our progress to date. I would recommend you take time to view our new report after it’s published online.

Additionally, we’re pleased to announce the nomination of a new board member, Angela Johnson, at our 2024 Annual Meeting of Shareholders to be held on May 28. Her technical background and ESG experience is an exceptional fit for our existing board members and helps us achieve succession planning objectives to ensure core board competencies and expertise are in place. That wraps my formal comments for today. Together with the other members of our management team, we would be happy to take questions. Operator, please open the lines.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Lucas Pipes, B. Riley Securities. Please go ahead.

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

Dan Dickson: Yes, Lucas, that’s a good question. We did use a 17:1 ratio in our assumptions and our guidance for 2024 through Q1, we are effectively very close to 17:1. Our expectation is the Mexican peso will have a rate here around 17:1. So from an operating standpoint, we stick with where our guidance is, which is ultimately $14 to $15 cash costs, all in sustaining costs we expect to be 22 to 23. Obviously, in Q1, we’re below that guidance and I think that’s a function of the gold price. If you look at our costs, our direct operating costs per tonne they’re in line with where our plan was. From a construction standpoint, we entered into $45 million worth of FX contracts. So we’ve effectively locked that in at 16.6. So the impact for Terronera going forward would be muted because of that, but of course, like I say, I think the peso is going to it seems to stabilize here at 17:1. I expect that to stay there for the year.

Lucas Pipes: Thank you, Dan. And then, good job at Guanacevi. And you noted that silver grades were slightly below plan and so my question is when you would expect those to be maybe more kind of on plan or above plan and with the plan there, you exceeded the 1200 tonnes per day level and curious if there’s more to do on that? Thank you very much.

Dan Dickson: Yes, from a grade standpoint, we actually exceeded plan this quarter from a gold standpoint and slightly under plan from a silver standpoint on grades at Guanacevi. That’s normal variations in the ore body and we expect to be something similar for the next three quarters as well. So, we’re just over 400 grams of silver and about 1.2 or just under 1.2 grams of gold. I think those are very favorable grades and that’s our expectation for the year. As far as running 1200 tonnes per day through the Guanacevi plant or exceeding our capacity of 1200 tonnes per day, our hope is that will continue. Obviously, we put guidance out with the estimation of 1200 tonnes per day, but we did a lot of work in the plant in 2023 of refurbishing things and obviously we have the ability to push it beyond that 1200 tonnes per day and now it’s all predicated on the mine keeping up to speed.

We don’t want to get too far ahead of ourselves. At the same time, like I said in my comments, Guanacevi has been very steady and the expectation is we’ll easily meet that 1200 tonnes going forward.

Lucas Pipes: Thank you very much. And maybe a quick one, just with the backup of much stronger precious metal prices, what’s your take on M&A in the space either kind of as a buyer yourself or more broadly in the ecosystem? Thank you very much.

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

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

So again for us, I think we want to get through 2024 and look at that landscape and from a broader standpoint, I think people are always going to be inquisitive and we always try to build a bigger, better company.

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

Heiko Ihle: Hey Dan and team, thanks for taking my questions and I assume you can hear me okay?

Dan Dickson: We can hear you well, Heiko.

Heiko Ihle: Thanks, Don. Just looking at the gold with silver ratio during the quarter, obviously, gold production increased quite markedly. In fact, gold was so strong it made quite a measurable impact on cash costs given gold byproduct credits. At this point, we’re halfway through Q2 and gold still at 23.30. Just conceptually, can you provide a bit of guidance if you expect to see this through the remainder of the year and the impact on cash costs and if you anticipate this fully offsetting the impact of the higher Mexican peso?

Dan Dickson: Yes, for the higher Mexican peso is all built into our guidance to start with at 17:1. So of course, if we see the appreciation in the Mexican peso, a higher gold price offsets that. Again, I think the Mexican peso stabilized here. So hopefully it stays where it’s at because it is a significant portion of our costs from a labor standpoint, it’s about 30% of our operating costs, which is obviously tied to the Mexican peso. For gold, like I said in my comments initially, our gold grades were slightly ahead of plan and that’s just normal variations in body. Where I think there is opportunity is Bolanitos. Obviously, Bolanitos has more gold production on a proportional basis compared to Guanacevi and allows us to potentially get into some other areas of Bolanitos that we haven’t been in because of the lower gold price.