Q2 2019 Earnings Call
Thank you and good morning, welcome to core mining second quarter earnings Conference call. Our results were a waste after yesterday's market close and a copy of the press release and slides for today's call are available on our website.
I would like to remind everyone that our press release slides and some of our comments today include forward looking statements from which actual results may differ.
Please review the cautionary statements included in our press release and presentation. So all the risk factors described in our recent 10- Q2 018 10-K, now I'll turn it over to Mitch. Thanks, Paul and good morning with me here are Tom Whalen, and Terry Smith, along with a handful of other members of the management team.
Results from our five North American operations were largely in line with our expectations and represented a strong increase over the prior quarter.
As we look to the second half of the year.
We are reiterating our full year production and cost guidance as our plans for a stronger third quarter and an even stronger fourth quarter remain intact.
Four of our five operations saw improved operating cash flow and free cash flow during the second quarter.
And overall, our operations delivered solid double digit production growth across all four metals, leading to a 17% increase in adjusted EBITDA.
There are four highlights from the quarter that stood out to me first it was great to see Kensington generates strong free cash flow in the back of higher grades from the Jew Allen deposit, which we expect to continue.
Second I'm very proud of our team at Rochester as they have now begun to feed material through the new crusher configuration, and we look forward to reporting its impact on silver recoveries to you in coming quarters.
Third at Silvertowne, We recently hosted an analyst tour. Many of you attended the goal was to provide better visibility into the operation and to showcase the potential of the high grade deposits.
Well silvertip is not yet achieving breakeven cash flow, we demonstrated significant quarter over quarter improvement.
We resumed our drilling efforts in June which have returned exceptional results, thus far and make us optimistic about our ability to significantly expand reserves and resources at silver tip overtime.
And finally I was glad to see our total debt declined by $82 million during the quarter or nearly 20%, which greatly improves our balance sheet flexibility going forward.
Tom will provide some additional color on this in a few minutes.
Before handing the call over to Terry I wanted to note. Another another another item you may have noticed in our earnings release relating to an option agreement, we signed for the Richmond Hill project.
Richmond Hill is a pass producing gold project owned by Barrick Gold is adjacent to our wharf mine and represents an opportunity to further extend that mine life and leverage its nearby infrastructure.
Lastly, I want to highlight a set of slides starting on slide 18, then outline our proactive approach to managing our tailings facilities and with that I'll turn it over to Terry.
Thanks, Mitch and good morning, everyone.
From an operation standpoint, the second quarter represented a step up from the prior period.
As Mitch mentioned this trend is expected to continue into the second half was 29 team as we remain focused on generating positive free cash flow.
Slide five highlights our production results and the key catalysts at each mine for the remainder of the year.
Starting at Palmarejo, we saw a gold and silver production increased 22, and 36% respectively quarter over quarter, largely due to the completion of maintenance and an expansion of our cement cemented rock fill plant, which took place in the first quarter.
This allowed us to access secondary stopes with better recovery characteristics and to increase mill throughput by nearly 20%.
At the end of the quarter the team achieved an important milestone by reaching the orphan, but the line obviously on deposit and began mining in early July .
As a reminder, leno's John is expected to add around 400 tons per day of additional mill feed once ramped up.
We also completed commissioning of a new thickener last week, which is expected to improve metallurgical recoveries for both gold and silver.
Roughly 2%.
Together these initiatives are expected to deliver production costs and Capex in line with Palmarejos full year guidance ranges.
At Rochester Slide seven of today's presentation summarizes the current status of the new crushing configuration, which includes the HPG argument.
The newly upgraded crushing circuit is now fully up and running and I'm pleased to report that preliminary gradation and Leach recovery test work is in line with our expectations for higher and faster silver recoveries.
With the Crusher upgrade complete we plan to place fresh material on a newly completed section of the stage for Leach pad, which will allow solution to Atlanta quickly helping to accelerate recoveries.
In addition, we have been hauling higher grade run of mine to stage four.
We plan to continue using this strategy and maximize excess fleet capacity through the end of the year.
With the exit fully operational promising preliminary metallurgy results and our supplementary run of mine ore stream, we remain confident in the team's ability to deliver on rochesters full year production cost and Capex guidance.
At Kensington production remained ahead of our internal expectations with approximately 17% of production coming from Jew Allen at an average grade of 0.38 ounce per ton.
We anticipate this trend to continue in the third and fourth quarters with plans for a Jew Allen to contribute approximately 20% of Kensington total production for the year driving strong expected free cash flow and improved unit costs.
Kensington generated approximately 11 and a half million of free cash flow at an average cost of 842 per ounce during the quarter.
Ending in the second quarter operating and financial results demonstrate what a high grade deposit liked to Alan can do for the overall economics of the operation.
Our strategy at Kensington is to continue drilling other known Jew Allen like deposits, including O'meara Urika Comet Raven and Johnson to extend this higher grade lower cost profile.
At Wharf, we experienced unseasonably wet weather during the quarter, which diluted leach pad solutions and impacted crushing capacity.
In fact, we've treated and released almost double our annual amount of water in just six months.
Our investment to upgrade our D. nitrification plant last year has proven to be extremely beneficial, allowing us to keep up with these unseasonable conditions.
To help us achieve our 2019 plan a crusher contractor has been mobilized to crush an additional 300000 tons of ore, which is planned to take take place primarily during the third quarter.
Production is also expected to benefit from the stacking of higher grade ore through the remainder of the year.
And last but not least I'll finish off with silver said.
As we've highlighted on slide eight second quarter 29 team was the best periods of operational performance since acquisition.
Although our throughput was down slightly quarter over quarter higher grades and improved recovery rates drove significant increases in production.
As expected we work through the tight mass balance challenges, we discussed last quarter.
It was also very encouraging to see recovery rates increased during the quarter, including many days of mill recoveries for all metals above 80%.
Well feed grade and recoveries are heading in the right direction, we still have a ways to go on mill availability.
We remain focused on key priorities, which are highlighted on slide nine and our confidence.
We will continue stabilizing the operation.
As Mitch mentioned, we are seeing very encouraging results from resource expansion drilling at Silvertowne, which are highlighted on slide 10, and help demonstrate the potential of this high grade deposit.
Our goal said silvertip remain simple stabilized top line performance begin reducing costs and achieve positive operating cash flow by the end of the year.
Before handing the call over to Tom I'd, just like to take a moment and thank everyone across our operations for their continued dedication to safe production and delivering positive results for the business.
No Tom will cover the financial highlights for the quarter.
Thanks Terry.
Before I dive into our financial results I'd like to add a bit of color to the balance sheet initiatives that Mitch referred to in his opening.
That mentioned during last quarter's call. We are focused on reducing our debt to more comfortable levels. We took several steps during the quarter to work towards this goal.
In the second quarter, we executed a 50 million dollar at the market equity offering and completed a $25 million prepay with an existing sales counterparty.
For a portion of gold concentrate at Kensington.
These initiatives helped us reduce our revolving credit facility balance from $135 million down to $53 million and led to a 19% reduction in total debt quarter over quarter.
We remain in compliance with our key covenants at June 32019, including a minor amendment.
Of the revolving credit facility for no additional cost.
Providing some additional color on the prepaid is recorded as deferred revenue.
Flowing through our working capital for the quarter and is presented in accrued liabilities on our balance sheet in effect. We brought forward $25 million of cash flow that was originally expected to be received in the second half of the year.
However, it is important to note that we maintained our exposure to the potential upside in the price of gold and expect to recognize the full value of the prepay by the end of the year.
As highlighted on swap slide 12, we increased our liquidity by $53 million during the quarter to $235 million.
Turning over to our financial results on slide four second quarter free cash flow was positive $6 million compared to negative 43 in the prior quarter. This was driven by higher operating cash flow from improved top line performance disciplined cost management as well as the proceeds from the pre k. and lower Capex in the second half of the year, we expect to continue investing in key growth projects across our portfolio and remain within our full year Capex guidance range.
As we stated in the past we are extremely focused on delivering positive free cash flow for the business between our strong intuitive dissipated second half performance and strengthening gold and silver prices. We are optimistic about achieving this goal we plan to continue focusing on generating dollars not ounces managing our costs and can eat continuing to allocate capital. According to our framework summarized on slide 11 with that I'll hand, it back over to Mitch. Thanks, Tom looking at Slide 13, you can see the key items, we need to deliver on during the second half of the year.
To reiterate our top three priorities for the remainder of 2019 our.
Generating higher silver recoveries from H.P.G.R. at Rochester between now and the end of the year.
Optimizing top line performance at silver tips, and starting to rationalize its cost structure with the goal of achieving positive operating cash flow by the end of the year.
And reducing leverage levels and maximizing free cash flow. So we can be well positioned to generate meaningful long term value for our stockholders.
We will continue to pursue a higher standard in everything we do and remain focused on delivering positive results and quality growth from our balanced portfolio of North American precious metals assets.
With that let's go ahead and open it up for questions.
We will now begin the question and answer session.
To access a question you May Press Star then one on your Touchtone phone.
Okay Speakerphone, please pick up your handset before pressing the keys if at any time. Your question has been addressing you will.
Your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
[noise].
The first question comes from Michael Douglas.
Vertical research partners. Please go ahead.
Hi, good morning, everybody.
Hi, Mike.
First question again wonderful results at Kensington.
To talk about the mix onto Wow and.
20%.
Early look into going forward is that can that mix gets suite and a little bit even through 2020, and how how helpful or quickly somebody the drilling that you've been doing on some of those like targets can help the mix going forward in <unk>.
In the profile.
Yes, sure. Thanks, Mike I'll ask Terry to take that sure Hey, Mike Good question.
We're just really getting going a Jew Allen we declared commercial production late last year as you'll remember and we're just two quarters into the project now.
We're starting to take a long hole stopes more consistently and so I think that there is a good consistent Jew Allen profile that will establish.
And there are numerous other.
Hi, Great sources Kensington Raven is another one that we've been mining in for some time I will have more news on some of the other.
Veins that we've been exploring and we're pretty excited about so the idea is to continue this high grade supplemental or stream for as long as we can.
Thank you for that secondly on Rochester.
Good news on the early metallurgical indications.
Anything else, that's been surprising to the upside or somebody up and maybe any challenges as you look through the second half to meet the targets and.
Looking at the plans on it accelerating those investments into 20 2021.
It's Mitch I'll start and then Terry go ahead I, the as you'll recall, Mike from our production release, we highlighted the fact that there was a secondary crusher that failed on us and the team out there did a great job of implementing its contingency plan to get that thing removed and replaced and and everything up and going.
Here in the last part of July early part of.
Of August so that was that was a challenge the team did a great job.
Responding to that I think you know now what we've seen is pretty steady 24 hour a day performance out of the entire three stages of the crusher and ready.
Very little is going out on to.
The liner and and the test work that we've seen is so far so good.
Terry anything as you look out between now and the end of the year that.
You should be mindful of yeah.
Mike I think.
As we get through the third quarter here, we're going to have.
More metallurgical information more operating history on this oh crushing configuration.
We're just starting to dial in the system now so there is a lot of opportunity to optimize around that.
So I think by the time the third quarters through we'll have a much more to say about the performance of the system certainly on a preliminary basis were really excited we've been working on this for some time to get to this point and look forward to.
Talking more about it in a in a couple of months.
Thank you just two more from me first on the on your Capex expectations for full year relative to what you've done so far in the first half I'm. Certainly is is it timing related on the range or is there.
Certainly with the market's somewhat from cash flows that might accelerate a little bit more than maybe plan to accelerate try to get some things done before we turn to 2020.
Yeah, you're right, Mike, it's mostly timing, it's mostly underground development related.
And as we see mining rates.
Pick up at Palmarejo.
And and its silvertip, we'll see underground capitalized development increase.
At both of those locations Kensington has.
Has been for that through the first half of the year a little ahead of its capex.
Yeah, I think that is expected to kind of stabilize in the back half of the year now that they're up and and go in there and enjoy and on a more sustained level. So yeah. We're yeah. We're at half time of the year here were a little less than halfway through our capex midpoint guidance range, but.
Based on our plans that we're looking at here still shows us ending up within that range for the for the full year.
[noise] X and my final question is Mitch.
I'm intrigued by the Richmond Hill announcement, or maybe some background, how long you've been thinking about it and what what's the concept there.
In addition, we just got to kind of just a brief you mentioned in your prepared remarks.
Yeah sure I'll I'll.
I'll give you my my views Terry feel free to.
Chime in on this.
I think that you will recall, Mike we bought wharf in in February of 2015. This had been on the radar screen of the work team.
Prior to our ownership this was an old lack minerals.
Producer that said less than five mile. Yeah, exactly you haven't heard that even though in a lumpy.
Right, but you know so as we look around for opportunities to grow the business in a way that can generate the best returns obviously leveraging existing infrastructure is the best way to do that that there's only a few you know those are a fairly short list of opportunities to do that Richmond Hill since they're that close to the infrastructure at.
At Wharf, and so you know with the historic resource and Barrick for Barrick I think it's a kind of a non non factor. So it makes a lot of sense for us to to have that and to to look for a way to tack that onto to worse operation and have that be a further extension they option.
Yes, we thought was a good way to go about this to give us two years to better understand the opportunity and have a better sense of exactly how.
How and when Richmond Hill could potentially fit into towards future.
So we're excited I think I know the folks at wharf are excited to start taking a look we'll spend only I think it's less than $2 million. There. This year on some metallurgical work and some some drilling so not a big spend it all but could be a nice.
Nice enhancement to to work.
Turning to pretty much covered it pretty well I think what we see there is very similar to or from a technical perspective. The geology is very similar at the metallurgy is very similar.
So this to me is a is a natural fit with with with the wharf operation.
Excellent. Thanks for your both gentlemen.
Yes, Thanks, Mike.
The next question comes from Joseph Reagor with Roth Capital Partners. Please go ahead.
Good morning, guys. Thanks for taking my questions. Yes, just a couple of minor items. So I guess the first one on.
Silver TEGP Theres a.
Once you get the permit there's a 25 million dollar payment due I believe what's the timing on that do you have to make the payment immediately is that within a certain number of days or quarters.
And then also with the resource drilling you've been doing how soon do you think you'd have to make the resource related payment.
Yes sure.
It do both of those are do 15 business days after.
In the case of the permit after we receive it 15 business days and then that that initial 25 million dollar payment which is.
75% stock 25% cash.
I'm, sorry, I mixed up 25% stock, 75% cash and then in terms of resource a milestone payment of up to have another 25 structured the same way that would come down on the back of year end reserve and resource calculations that we typically complete in kind of the February timeframe and then a similar.
15 business day timeline on the back of that.
Okay.
And given the resource drilling you've done so far would you say, it's more a 2020 or 2021 item for that.
That's.
I think we could fall out of bed and still hit that number by.
Early 2020 with the results were having.
Okay on a different note you guys purchased the northern Empire assets.
Over a year ago now and.
That area has seen a significant land grab a there's a number of majors that are ticking up land down there from your neighbor, a corvus has been purchasing additional and staking additional land and obviously that would imply that the valuation of land in that area has gone up.
Is it possible you guys would look to sell that I know, it's a big part of the long term future, but given the focus on debt reduction and improving the balance sheet is that an opportunity you think is out there right now.
I would I would never say never to anything.
It's really it.
Function of a value.
If someone is willing to pay us a price for something that's in excess of what we think it's worth.
And it's something we obviously need to.
To look at and think real hard about I think the challenge. There is is we're still in that.
Yeah early phase of determining you know.
Just what the value potential is.
They're at Northern Empire, both at Sterling and Crown I agree with your comment Joe that the activity in the area has.
He has been quite significant over the last last 12 months and without having done a ton of drilling I think we have seen probably that value increased just by virtue of of all that activity going on around US you know, we're really excited about the drilling that were seen at one of the deposits in the Crown block we've been drilling on Daisy.
For now.
And so you know what the land position that we have there it's quite strategic and I think you know ideally we'd like to see our own work progress and see how things evolve in the neighborhood, but always always open to anything that we think can unlock some value.
Okay, and then one final one on silver to.
You guys goal is to get to cash flow breakeven by the end of the year.
One what is the things that you think might stop you from getting there or might help you get there and then two if you don't get the mine to cash flow breakeven by the end of the year, what would that mean moving forward.
Yeah, I'd say it.
It all comes back to mill availability, you know the sooner we get to high Eightys, where 90% mill availability the sooner we will.
Achieved that objective and.
I'd like to think that we can do that before the end of the year, but well given ourselves until the end of the year to to achieve that by far outweighs what.
Operating cost reductions.
Can do in terms of achieving that goal, but that said on a.
On a on a go forward kind of sustained basis, you know we need to see and we will see we think the opex there declined pretty dramatically you know the cost that were showing right now are not very indicative of what a sustain sort of ongoing operation. There should look like just given the resources that were throwing at addressing somebody's mill mill challenges that weve been wrestling with it.
As those get peeled back.
And those will take a little bit more time, you know that will kind of give us a second tailwind behind the achieving that mill availability.
And in terms of the second part of your question. You know look we we have to not be emotional about how we allocate capital we need to maintain a discipline we need to.
You know stick stay true to our framework and our priorities as you know when we'll always assess you know is if we're not there by the end of the year, we'll need to take a sober look at it and say are we allocating capital to a good.
Opportunity there versus other opportunities inside the business.
Now I'd like to think that it's a pretty given that the nature of that ore body with the grades and drilling results you know there's a.
A very.
Attractive business sitting there for us.
Once we get to that steady state and you know our main focus is on getting there.
And that really like I said is driven by the mill availability focus that we have.
Okay. Thanks, I'll turn it over.
Yes sure. Thanks, Joe.
The next question comes from Brian Macarthur with Raymond James. Please go ahead.
Hi, Good morning, a couple of questions. Just Mitch can you just go over the options for paying the 25 million said, it's 25% stock and 75% cash is that at your option or the sellers auction or how does that actually work.
It's just defined that way, Brian its 25 million.
In total.
For the first payment of 25 million on the resources.
And it's a it's just a prescriptive in terms of the agreement of the 70 525 breakdown.
So that's not negotiable, that's just the way it will be.
That's right.
Okay second question, Jeff. So just obviously have to make those payments.
What's your focus on debt reduction.
I thought the pre pay was kind of interesting do you see yourself doing more of that going forward and would you do it on silver as well as gold.
Well I'll start Tom feel free to to add to what the Thompson kind of speed spearheaded the effort on this.
In the second quarter, and and I agree. It was a it was a good way an elegant way of bringing forward some cash flow to help us.
Accelerate our.
Goals around around debt reduction and it's a it's a good tool to have in the tool box going forward.
As I think about funding sources for the next expansion at Rochester. This Pos 11, that's sitting out there in a couple of years from now utilizing this type of a tool to help us with the internal funding alternatives for a project like that is something that definitely worth keeping on the radar screen and and silver you know could be used just as much as as gold I guess when we looked at it you know goals had a much better run relative to silver and that that was.
A bit of a of a consideration, but yeah, it's something that we'd we'd keep keep in the tool box for sure.
And there are those prepays are they asset specific so I assume if something went wrong and you couldn't deliver from Kensington you just deliver in from one of the other assets you are buying in the market, it's not kind of the way it works.
Yeah, that's exactly we would we have they alternative to deliver from another asset or or find some other ways as a fulfilling that.
Are delivering into that the the ounces that we committed to.
Such as buying in the market, but again.
Just to give some perspective $25 million based on current prices I mean, that's.
No that's that is that.
Will easily be able to.
Achieve that it for from Kensington in the second half of the year.
Right no I get that it's more just to some drastic thing happens or whatever just curious what the other side of the trade was so that's very very helpful. Thanks very much.
Thanks, Brad.
The next question comes from Adam Graf with B. Riley. Please go ahead.
Hey, guys. Thanks for thanks for taking my question, just getting back to the silver tip.
Hi, guys, a second second quarter in a row now that costs attributable attributable to sales have been about 24 million there.
Or should we expect that to be steady a steady run rate per quarter going forward.
No that'll that'll start to decline here as we achieve steady state on the topline and we start to.
Peel away some of these.
Kind of one time costs that we're incurring right now to help us address some of these mill projects.
We'll see that.
That spend level decline Terry do you want to give a couple of maybe examples are yeah sure Hey, Adam.
There's just a number of different resources that were throwing at silver to to help with this revenue stabilization that we're describing a contractor's additional employees a lots of onetime items associated with just wrapping up a mill throughput and trying to turn.
Mill availability and to Eightys in low Ninetys, you know that it's just requires a lot of resources and.
You start to pull back those resources after you've achieved that stability. So it's a it's sort of a a series of stabilization optimization that makes sense.
Do you guys have a feel for the run rate the quarterly run rate you guys would be expecting a once you got what you have all those things in hand.
Yeah, you know its Michigan, Adam you look at where we are right now and mining cost per tonne and it's in the seventies, which is not too far off I think what we.
Would it expect to be and as you can imagine it's it's more a function of processing and DNA costs I think on a per ton basis right now both of those are up in the 150 $840 a ton range.
You look at our other underground mines, you look at any kind of benchmarking or you look at sort of where we think that could get you know that's not.
It's not a stretch it all to think that that should be kind of both of those should be half of those numbers and that gives you a sense of the magnitude of the.
Opex reductions.
To go from 140 down to 75 on a per ton basis thousand tons a day.
I think last quarter I mentioned to you know an objective of hitting on an operating cost basis about $7 million a month or so.
On a on a steady state basis. So you know obviously multiply that times times three that gets you into the.
Low twentys.
I think that's.
That's not that bad way to think about it.
That's that's a perfect answer Mitch now I don't have to ask you to break down into mining milling and <unk> [noise] perk up her dog perfect. Thank you.
Well.
And.
Just to switch tracks over two to Rochester Wharf, when I look at your cost per ton numbers.
I'm left scratching my head there that.
Perhaps Rochester, and perhaps war, if I know you've had issues there in the quarter, but perhaps they had high stripping quarters that would oh that would bring sort of the numbers in line on a on a cost per ton basis can you give us an idea of the of the strip in the second quarter. It at Rochester, and wharf and what that's going to look like for the rest of the year.
Yeah, I want to say the rochester's strip ratio and last quarter was around playing through your 0.4.
So as you know low like we traditionally have seen there.
If if you're looking at mining cost on a unit basis.
And you go back sort of through Rochesters last couple of years, when we're sort of.
Open pit.
Mining tonnage north of 5 million times, you will see our unit mining costs below $2 and when it's a sort of in the.
Three and 4 million ton range like it is at the moment our unit costs are obviously above $2 sent to compound our unit costs problems lately, we've been doing a PCR is on or haulage fleet, which show up in our costs and those are completed or every couple of years and we've just been hit with a.
A lack of them here in the last couple of quarters. So that's compounding although tonnage a fixed variable issue there so that the l. baum.
Yes, so it sounds like it wasn't a stripping issue because that's sort of the regular strip more or less for war. If you are sorry for Rochester and worth I know you guys had a lot of water issues. So was it what was the strip at wharf rough roughly this quarter in the second quarter.
Oh, that's a good question.
Let me I want to say that it was around two and a half to one.
I think our reserves there are.
Roughly four to one but we've we've had a lot of positive or reconciliation.
And Oh, yeah, sorry, <unk> three to one in the last quarter.
We've got a lot of positive reconciliation, there, which is a good problem. It means there is more on every bench than we are.
Though we thought.
The the mining costs at war for quite a while they fluctuate a lot.
We have a reasonable leach pads, which is different than Rochester, which our life of mine pad. So every time, we have an off load event at wharf that kind of compounds are our.
Our our costs and you see that show up in the mining costs.
So that's.
You know, you'll get some variability quarter over quarter from those types of activities.
Excellent.
Great. Thank you for the additional color I appreciate it.
No worries on problematic.
Okay and if you have a question. Please press Star then one.
Okay, well hey, we appreciate.
Everyone's time.
I'm sorry.
I was going to conclude the question and answer.
This concludes our question and answer session I would like to turn the conference back over to Mitchell crabs for any closing remarks.
Okay, well I was just going to say that we appreciate your your time to get on the call. This morning, and we we look forward to speaking with you again this fall to talk about our third quarter. So thanks again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.