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Edited Transcript of CDE earnings conference call or presentation 21-Feb-19 4:00pm GMT

Q4 2018 Coeur Mining Inc Earnings Call

COEUR D'ALENE Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Coeur Mining Inc earnings conference call or presentation Thursday, February 21, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hans John Rasmussen

Coeur Mining, Inc. - SVP of Exploration

* Mitchell J. Krebs

Coeur Mining, Inc. - President, CEO & Director

* Paul DePartout

Coeur Mining, Inc. - Director of IR

* Terrence F.D. Smith

Coeur Mining, Inc. - SVP of Operations

* Thomas S. Whelan

Coeur Mining, Inc. - SVP & CFO

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Conference Call Participants

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* Brian MacArthur

Raymond James Ltd., Research Division - MD & Head of Mining Research

* Joseph George Reagor

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Mark La France Reichman

NOBLE Capital Markets, Inc., Research Division - Senior Natural Resource Analyst

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

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Presentation

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Operator [1]

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Good morning, and welcome to the Coeur Mining Fourth Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Paul DePartout, Director of Investor Relations. Please go ahead.

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Paul DePartout, Coeur Mining, Inc. - Director of IR [2]

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Thank you, and good morning. Welcome to Coeur Mining's Fourth Quarter and Full Year 2018 Earnings Conference Call. Our results were released 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 and some of the comments today include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentation as well as risk factors described in our 2018 10-K.

Now I'll turn it over to Mitch.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [3]

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Thanks, Paul, and good morning. Thank you, everyone, for joining. Before we get started, I'd like to introduce 2 colleagues here with me. First is Tom Whelan, our new CFO, who joined us last month. Tom will walk through the financial highlights and provide some detail on working capital and on capital allocation. He will also highlight some modifications to our guidance framework and how we plan to report our results going forward. Also with me here is Terry Smith, who recently took over as Senior Vice President of Operations after having served as our Vice President of North American Operations for the past 5 years. Terry will provide some operating detail in a few minutes.

In summary, the fourth quarter reflected strong performance at Palmarejo, Rochester and Kensington, while Wharf had a weaker than expected quarter, but has since bounced back strongly so far here in 2019.

Meanwhile, the ramp-up of the Silvertip mine in British Columbia continues. Progress has been slower than anticipated, but mill availability continues to improve each month. And we remain enthusiastic about our newest operation there.

Overall, I was pleased with the progress we made last year in delivering on our strategy of discovering, developing and operating a balanced portfolio of high-quality North American precious metals assets.

We continued upgrading our asset quality last year by successfully exiting Bolivia and starting up a new higher margin operation in Canada.

We added more high-quality Nevada gold and silver assets with our acquisition of Northern Empire in Southern Nevada and with the package of assets located next to Rochester that we bought from Alio Gold. Those projects more than doubled Rochester's land position and provide additional future growth potential where we can leverage Rochester's existing infrastructure.

Approximately 2/3 of our reserves are now located in the U.S. and 100% of our production and cash flow now come from our platform of 5 North American operations.

It's also worth noting that 59% of our revenue last year came from our U.S. mines and that gold sales represented 69% of our total revenue with silver contributing 31%.

Our investment in exploration, which ranks among our most attractive capital allocation priorities, successfully replaced production last year and led to a fourth consecutive year of reserve growth. Reserves, measured and indicated resources and inferred resources all increased last year. In the case of inferred resources, gold and silver ounces increased 145% and 39%, respectively, reflecting our growing pipeline of high-quality future growth opportunities.

Similarly, our organic growth investments are beginning to pay off. The initial HPGR unit is being installed at Rochester, which should start impacting silver recoveries in the second half of the year. This investment represents the first step toward a larger expansion in 2020 and 2021 to establish Rochester as a source of higher-margin, long-term production and cash flow and is expected to generate an attractive return.

At Kensington, we are now generating a return on our investment to access the high-grade Jualin deposit with the first 10,500 ounces of gold produced during the fourth quarter. Jualin is expected to be a catalyst for what should be a very strong cash flow year at Kensington in 2019.

Our investments in the Palmarejo beginning 4 years ago, including the restructuring of the Franco-Nevada gold stream, the acquisition of Paramount Gold, development of 2 new higher-grade underground mines, sustained levels of near-mine exploration and numerous incremental optimization projects have resulted in substantial reserve growth, average grades nearly double 2014 levels, unit costs that are now over 40% lower and over $130 million in free cash flow generated in just the past 2 years.

And finally, although Wharf had a weak fourth quarter, the acquisition continues to be a real winner for us. We paid $99 million for it in 2015 and have generated $136 million of free cash flow to date. Wharf's reserves at the time of the acquisition were 560,000 ounces. After mining 450,000 ounces since that time, reserves now stand at 882,000 ounces.

Lastly, I want to call your attention to several slides, starting on Slide 20, that highlight our best-in-class corporate governance and our proactive ESG programs and priorities.

We maintained a 1 rating by ISS for our governance practices, including our board's independence, refreshment efforts, diversity, executive and director ownership targets and incentive compensation design. Also, we have included materials summarizing our environmental stewardship related to water and to our support of local communities. In fact, in 2018, we partnered with over 220 community organizations to help make a positive impact on people's lives in the communities where we have a presence.

As I've said before, these priorities are a key component of our strategy and essential to who we are as a company.

And with that, Terry will now provide some details on our operations.

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Terrence F.D. Smith, Coeur Mining, Inc. - SVP of Operations [4]

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Thanks, Mitch, and good morning, everyone. Before diving into operations, I just want to reiterate Mitch's comment regarding cash flow. Our operations team is focused on generating sustainable high-quality cash flow and prioritizing quality over quantity. We invest in our mines and development assets to support this concept through success-based exploration, high-return capital projects as well as an emerging business improvement culture across the company.

Looking at the fourth quarter, Palmarejo, Rochester and Kensington all had strong finishes to the year. At Palmarejo, fourth quarter mill throughput increased as the team did an excellent job of making up for the 17 operating days that we lost in the third quarter by milling roughly 25% of our ore. With increased throughput, Palmarejo delivered approximately $7.5 million in quarterly free cash flow despite roughly 4,600 ounces of gold and 277,000 ounces of silver, being impacted by the RMC bankruptcy.

In 2019, we will continue advancing underground development towards La Nación, where we expect production will commence during the second half of the year. La Nación's grades are similar to our reserve grades, but accessing this zone will facilitate higher throughput.

Our mine plan anticipates La Nación adding around 400 ton per day of additional mill feed once ramped up. We also anticipate a new thickener to come online in the third quarter, which is expected to increase recovery rates by about 2% for both gold and silver. This project with an estimated investment of $4.5 million and about a 1-year payback is a good example of the type of investments we prioritize according to our capital allocation framework.

At Rochester, we continue to see strong performance from both the Stage IV and Stage III leach pads. As a reminder, we commissioned the expansion of the Stage IV leach pad back in mid-2017. This strong performance has helped us deliver approximately $15 million of free cash flow in the quarter and $23 million for the full year.

This year, the primary focus will be on upgrades to our crushing facilities, including an initial HPGR unit. These upgrades are expected to increase our crushing capacity, reduce operating cost as well as improve timing and overall silver recoveries. The project is advancing on schedule with commissioning expected in the second quarter. Currently, earthworks have been completed with steel erection underway, and we anticipate improved second half production because of all of these upgrades. We are excited to demonstrate what these improvements will mean for Rochester's long-term business performance.

Touching on Kensington briefly. We saw a great fourth quarter, largely due to high-grade ore from Jualin, where we declared commercial production on December 1. We mined approximately 23,000 tons of development ore and 3,000 tons of stope ore from Jualin during the fourth quarter. This yielded nearly 10,500 ounces of gold at a grade of 0.4 ounce per ton, which is more than double the grade we mined from the Kensington Main deposits. I'd like to thank our team at Kensington for bringing Jualin online, and we look forward to delivering stronger results in the quarters ahead.

Switching over to Silvertip. As Mitch mentioned, the ramp-up has been slower than we originally anticipated, primarily due to mechanical issues leading to low availability. I'd like to offer some additional color on what we have been dealing with up there. First off, it's important to point out that the Silvertip mill was originally constructed as part of Dena Hes mine operated by Teck in the Yukon in the early 1990s and moved to Silvertip in 2015.

Due to the age of the facility, the mill lacks modern instrumentation and supplier support and parts have been proven challenging to find. In addition, several areas of the facility were underdesigned or poorly installed, requiring significant rework. We continue to enhance our workforce at Silvertip with a combination of high turnover, lack of training and a challenging mill facility have also been factors.

Although our due diligence identified these issues, we were overly optimistic about the amount of time it would take to address them. However, our strategy to improve mill performance is leading to upticks in availability and throughput, while making the plant simpler to operate.

Most importantly, the underground mine is well developed and in good shape. And we think the potential to expand the reserves and resources is quite significant. Over the past year, our geologists have developed a good understanding of the deposit and are excited to do some step-out drilling this year.

We are all looking forward to demonstrating Silvertip's value and developing it into one of our cornerstone assets.

Now I'll hand it over to Tom, who will hit on a few financial points.

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Thomas S. Whelan, Coeur Mining, Inc. - SVP & CFO [5]

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Thanks a lot, Terry, and good morning, everybody. Really excited to be here on my first conference call with Coeur. Super excited to join the team and also important for all of you to note I'm a shareholder of Coeur. I bought some shares right after the announcement. So I'm excited to be -- have enough skin in the game.

Anyway, I'd like to start out with a few comments about our capital allocation strategy. We are continuously investing in our business to drive value. In addition to the 2 acquisitions Mitch outlined, we invested over $140 million of capital expenditures in 2018, including over $55 million in development capital across our 5 mines and various projects in North America.

The benefits of these investments include: maintaining and extending our mine lives as demonstrated by a fourth year of growth in our overall reserves, as we highlighted in yesterday's news release; derisking our overall production profile at Silvertip, on which we look forward to reporting progress throughout 2019; positioning Kensington for positive free cash flow to our investments in underground development, drilling and improved mining equipment. These efforts are expected to lead to higher grades, improved operating efficiencies and help identify several new high-grade exploration targets.

Finally, prioritizing capital to Palmarejo, which continues to prove itself with strong operating cash flow. With excess mill capacity, finding supplemental ore sources that can further improve profitability remains a priority.

We ended 2018 with approximately $230 million of liquidity including $115 million of cash and coincidentally, a $115 million of revolver capacity. Overall, our cash position declined roughly $77 million from 2017, primarily due to lower cash flow from operating activities in 2018 and the investments that I mentioned earlier.

Let me add some color on these numbers. Our ability to generate cash is driven by our metal sales and the associated cost of production. On balance, we sold approximately the same amount of gold and silver ounces as we produced in 2018, with the exception of the material affected by the RMC bankruptcy.

Operating cash flow from our 5 mines was $70 million during 2018 versus $260 million during 2017. Key drivers of the difference include lower top line revenue, primarily due to 15% fewer ounces of gold sold. Secondly, the timing of Mexican income and mining tax payments, which totaled $40 million in 2018, including $17 million associated with 2017 earnings.

And finally, our overall profit margin per unit sold decreased during 2018, largely due to higher cost at Silvertip, Wharf and to a lesser extent, Kensington.

I also want to highlight a few items that impacted working capital, particularly, in the fourth quarter. We saw unfavorable movements in our inventory, largely driven by inventory write-downs at Silvertip as well as the inventory buildup at Wharf. The RMC bankruptcy resulted in approximately 6,500 ounces of gold and 400,000 ounces of silver not being sold. The costs associated with these ounces also impacted working capital.

But before Mitch wraps up, I want to briefly cover our new reporting framework and high-level guidance figures for 2019. We are modifying how we will report production and costs to better reflect how we manage the business. While our exposure to silver remains important, our portfolio remains a much more balanced set of operating assets. More importantly, our focus remains on cash flow.

Starting in the first quarter, our site-level costs will be reported on a co-product basis with the exception of Wharf, which will be done on a by-product basis, given the small amount of silver production at that operation. Costs will be allocated based on the relative revenue contribution from each metal. We believe this revised disclosure will improve transparency. Our full 2019 production and cost guidance ranges are highlighted on Slide 19 of our corporate presentation and Page 12 of our earnings release.

Given the HPGR project at Rochester and the ramp-up of Silvertip, we expect production to be skewed towards a heavier second half of the year, 45% in the first half, 55% in the second half, for those of you eager to tweak your models.

Our CapEx guidance for 2019 ranges from $100 million to $120 million, 15% to 30% below our 2018 expenditures. We believe that this is the appropriate level of investment to continue executing on our overall strategy. We also want to stress our focus on maintaining our balance sheet liquidity and flexibility. We have done a great job improving our leverage profile over the past few years, but would like to continue to delever the balance sheet as we deliver overall financial performance.

With that, I'll hand it back to Mitch.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [6]

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Thanks, Tom. So just to quickly wrap up, I think the key takeaways from the fourth quarter and 2018 are that Rochester had an all-around solid year last year and an exceptionally strong fourth quarter. And this year, we're focused on installing that initial HPGR unit and expect to begin seeing the impact of that beginning midyear.

Rochester finished -- sorry, Palmarejo finished the year strongly and is expected to continue generating strong free cash flow this year despite lower expected gold grades.

Silvertip is slowly, but steadily ramping up. We're executing a solid plan there designed to address the challenges. And we still remain confident in the long-term value of this new and high-grade asset.

The weaker than expected results at Wharf in the fourth quarter look to be behind us, with 2019 expected to be more like prior years.

And finally, Kensington had that great fourth quarter led by Jualin, which we expect to lead the strong free cash flow here this year.

We are all intently focused on returning the positive free cash flow in 2019 and remain committed to allocating capital according to our framework that's summarized on Slide 12. We'll continue to pursue a higher standard and remain focused on executing our strategy from our balanced North American platform of precious metals assets.

So with that, let's go ahead and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Joseph Reagor of Roth Capital Partners.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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So a couple of items. I guess, first one right off the bat, the guidance for this year felt a little more, I'll use the word conservative, than last year. Is this an indication that with last year where the couple of mines didn't meet initial expectations that you guys are taking a revised approach to how you guide as far as the production numbers go? Or is there anything else we should read into that?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [3]

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I think you've got it there, Joe. We're taking what we think is a realistic and prudent approach to setting our guidance achievable, but fairly realistic and I might say, conservative, but hopefully, beatable.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And on the 45-55 split, is there any more color you can give us there as far as which mines will be the biggest drivers of that? I'm assuming Silvertip is one of them as it ramps up, but other than that.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [5]

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Yes. Silvertip, for the obvious reasons of the ramp up. And then Rochester with the -- everything going on there with the crusher upgrades going on in the first quarter. We'll see that then hopefully kick in and lead to a stronger second half at Rochester. We also have that Nación ramp-up at Palmarejo that will add a little bit more to the second half at Palmarejo than the first half.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then one final question, if I could. Tom mentioned balance sheet and trying to delever a little bit. Do you have any assets producing or at development stage that you consider non-core that could be used as a way to raise capital and repay some of the debt?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [7]

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It's a good question. We are always evaluating our portfolio. Everything is for sale at the right price. I think that's the prudent way to be thinking about it as a management team of a public company. Our 5 operating assets are all solid contributors in terms of free cash flow. And we have got good organic growth at all of those that we're excited about sort of crystallizing over time. But if somebody wanted to come in and pay us for all of that upfront, we will always be open to anything. But there's -- other than we have some small equity positions that are probably more easily monetized than an operating asset, we've gone through a pretty thorough monetization of non-core assets here over the last 2, 3, 4 years. I think we've sold, on an individual basis, something like 8 or 10 different interests and assets.

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Operator [8]

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The next question is from Michael Dudas of Vertical Research Partners.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [9]

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Mitch, can you hear me okay?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [10]

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Yes. We can hear you, Mike.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [11]

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My question is -- first, I want to commend you guys on the presentation, your ESG discussion and the added details on the operations of mines. I think it's going to be very helpful going forward. And also the change in how you're reporting report on the business.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [12]

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I appreciate that feedback, thanks.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [13]

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Cash flow -- and I think free cash flow is on the minds of most investors thinking about the company this year. Can you maybe discuss about timing of how the business is going to run this year? But certain things at the mines relative to offset some of the cost inflation or labor availability that Coeur's working on? Maybe a couple of examples of what you're doing at some of the operations to squeeze some of the costs out of that business?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [14]

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Yes. I'll give you a couple of examples that come to my mind. And Terry, if you have a couple from the last time, feel free to chime in. Probably one of the biggest swing factors in 2018 versus 2019 is Kensington. So if you look at capital expenditures, down about -- in half from last year. And that's really a reflection of the heavy investment that we've been putting in there to gain access to some of this higher-grade material. So even though you see in the cost guidance at Kensington a number that might not sort of sync up with what expectations might be. From a cash flow standpoint, Kensington's pretty well set up now to go from what was a negative cash flow year last year to a healthy free cash flow this year. So that's largely a grade story. The other example that comes up is just Wharf. There's -- probably -- for the first time, certainly, in our time of owning Wharf, there is a clear hiccup there in the fourth quarter and that dragged down Wharf's results for the full year. That is something we don't anticipate having happen again here in 2019. And so that's going to be a real big swing in terms of not only ounces of gold production, but free cash flow as well. Obviously, Silvertip, as that scales up, will be probably the largest swing between last year and being a consumer of cash. And as we continue to ramp up there, having that flip over. So that's good growth that lies ahead there. Terry, did I leave any -- I hit about all the mines.

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Terrence F.D. Smith, Coeur Mining, Inc. - SVP of Operations [15]

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Yes. Well, I mentioned Palmarejo earlier. And we're always trying to fall for free cash flow at the operations. So we're ramping up throughput in the second half of the year at Palmarejo to solve for that and maximize free cash flow. And at Rochester, really the HPGR crusher and upgrades to the ex-pit that we're doing will drop our operating costs, increase recovery, increase timing of recovery. So it's like a magical free cash flow project that we're pretty excited about. So that will give us some really good free cash flow results out of Rochester in the second half of the year.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [16]

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Does that give you some good color, Mike?

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [17]

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Yes. It does, Mitch. What are you looking for this year out of your work at Sterling and Crown as you guys get a better handle on the deposits and the opportunities there? And what should we anticipate to look forward to in positive data from that?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [18]

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Yes. I'll hit on that, and Hans is actually calling in from Reno. He had just been down there at Sterling and Crown earlier this week. So Hans, feel free to chime in. But Mike, the big -- 2 big things there worth mentioning, we'll spend, combined, about $5 million this year in exploration, that will be split roughly in half between the 2. Sterling kind of getting the first attention, Crown then in the second half of the year, with us focusing initially there at Crown then on the SNA deposit initially. Both programs, both at Sterling and at Crown are really geared towards resource expansion. The other key point, I think, to think about there is these need to fit into an overall sequence in the portfolio that work for us for our cash flow timing, for our organization. And so while Sterling probably could be put into production quickly for probably a modest amount of capital, what we envision there is something that could be larger based on additional time to drill and expand that resource. For us right now, the initial focus is Rochester. We get Rochester in this next expansion in 2020, 2021 behind us. We see the free cash flow from that. Then these 2 new deposits down in Southern Nevada, first probably Sterling and then later, Crown. Then these could become sort of in the development pipeline next. And that would fit well with our company and overall kind of cash flow timing. So that's a little bit on what we expect to be doing there in the near term and how we think about it slotting into the overall portfolio and sequencing. Hans, is there anything you'd like to add to that?

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Hans John Rasmussen, Coeur Mining, Inc. - SVP of Exploration [19]

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Yes. Mike, the focus obviously is resource growth, the shallower the better. We want to lower the strip ratio. It's a good high-grade oxide system there. So we're focused on heap-leachable oxide gold for the foreseeable future. We started out with 1 rig. We basically inherited Northern Empire's staff and operation in full. And moving forward, you'll see us ramp up slowly as we get the geologic model figured out and the targeting figured out. So by second quarter, we'll have 2 rigs. And eventually, we'll get to 24-hour shifts and things like that. So the data will be rolling in much faster later in the year than it is now. That gives our geologists a chance to get ahead of the rigs and where to target the holes. The Crown area I look at as the biggest growth story there, whereas Sterling will be the initial cash flow generator. The Crown area has potential to really grow as evidenced by our neighbor Corvus and all their drilling.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [20]

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My final question would be for Mitch. As -- you have a lot going on in 2019 to kind of get to -- get Silvertip off and get companies to a more normalized level. Is the capital intensity of the business as you look going forward and I don't want to get guidance on '20 and '21, but is it -- you feel there's a chance to have it more reduced on the development capital side. As prices improve, you can really drive that cash flow as you exit 2019 and beyond?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [21]

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Yes. That's exactly how we're thinking about it, Mike. We've got the capital that will need to go into Rochester to realize the significant impact of this next expansion, where we'll -- new leach pad, expanded crusher. That is the next kind of hump in terms of CapEx. That's mostly 2021 capital. But by then, you look at what everything else inside the company and you've got Silvertip in steady state. You've got Kensington continuing to have this nice balance between the Kensington Main and then these higher-grade ore sources. You got Palmarejo continuing to do what it's doing. You got Wharf continuing to be a cash flow machine for us. Then once you get on the backside of that Rochester expansion and you see the cash flow from that thing, there is really a nice attractive-looking cash flow profile sitting out there beyond that year.

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Operator [22]

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(Operator Instructions) The next question is from Mark Reichman of NOBLE Capital Partners.

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Mark La France Reichman, NOBLE Capital Markets, Inc., Research Division - Senior Natural Resource Analyst [23]

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Given the expected growth in zinc and lead production at Silvertip, the projected cost applicable to sales at least for lead and zinc at the high end don't seem very competitive, given where current prices are today. And so I was just wondering when you think about the cost at Silvertip, are there some ways to get those costs down? Or what's it going to take to get it at the low end of your cost guidance? Because I know you're shooting for the 1,100 tons per day, but then there were also those 4 key areas that I think you were focusing on to try to get those costs down?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [24]

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Yes. A good question and something we gave a lot of time and thought here too. I'm going to let Terry start, and then Tom chime in on anything that you would like to add. Terry?

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Terrence F.D. Smith, Coeur Mining, Inc. - SVP of Operations [25]

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Yes. Thanks, Mitch. So at Silvertip, really what we're trying to do initially is stabilize the operation and then we can look at optimizing the operation in the later part of the year. And that's when we'll attack operating cost. Right now, it's a pretty inefficient operation. We have a mill that requires a lot of labor to operate it. We have an underground mine that still has a lot of manual activities going on. So I can see us producing the amount of labor we need to operate that place. And that will result in some operating costs rolling off. We have a lot of contractors we're using to support the operation at the moment and some of those costs will roll off. So it's still quite early as far as the genesis of Silvertip is concerned. And I think once we get into that optimization phase, we'll be well prepared to make Silvertip very competitive in the base metal space.

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Thomas S. Whelan, Coeur Mining, Inc. - SVP & CFO [26]

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Yes. And as Mark had said, Tom Whelan here, we only hear -- a couple of other comments I would talk about is, in the base metal business, you're only halfway home once Terry produces the wet concentrate of lead and zinc for us to sell. And I'm actually pretty excited about, once we get to a stable state, of finding some ways to reduce our cost even further around finding happy homes for this concentrate. So there's opportunities on the supply chain, on shipping, all of those areas sort of post the mine where I think there's some opportunities to find further cost savings. So again, I know that the guidance is conservative here for 2018. But again, we think that's prudent at this stage, but absolutely stabilize and then optimize on all our whiteboards and our office here in Chicago.

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Mark La France Reichman, NOBLE Capital Markets, Inc., Research Division - Senior Natural Resource Analyst [27]

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Okay. And then the second question, at the high-end, Rochester's 2019 production guidance is pretty much roughly flat with '18. And you've got the HPGR unit that will go into effect that should benefit the second half of the year. So I was just wondering when you talked about that 45%, 55% split company-wide, how would you address that just for Rochester?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [28]

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Good question. The one thing I'll say about Rochester, and then Terry, I'll turn it over to you, is our guidance -- our thought process around Rochester's guidance is we're going to have a lot of new information in terms of how does this HPGR unit impact OpEx, for example. Just how quickly can we expect to see or will we see impacts on the silver recoveries. And so we -- hopefully that will provide us with some ways of beating our guidance both on the production and on the cost side. As far as the split between first half, second half, Terry, do you have...

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Terrence F.D. Smith, Coeur Mining, Inc. - SVP of Operations [29]

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Yes. So production will be stronger in the second half as we've been sort of guiding over the morning here. And obviously, as we get this unit in, leading to higher recoveries, that timing is in the second quarter, that will facilitate and improve production profile in Q3 and Q4. From a -- were you looking for specifics around capital, like our split in capital?

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Mark La France Reichman, NOBLE Capital Markets, Inc., Research Division - Senior Natural Resource Analyst [30]

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Well, no. What I was trying to address is at the high end of your guidance, it's pretty much flat with '18 production, okay? And so I guess what I'm looking at is you've got the benefit of the high pressure grinding roll in the second half. And I understand that the second half is supposed to be up a little bit. But I mean, should we imply kind of a weak first half, just given the fact that you're getting all that squared away? Weaker than, say, what maybe we saw in some of the quarters in '18? And then a really robust second half? Or -- I was just trying to kind of get the magnitude and the difference between the first half, second half.

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Terrence F.D. Smith, Coeur Mining, Inc. - SVP of Operations [31]

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Yes. So just going back a little bit, we shut down 1 of our 2 crushing plants last year. So the tons we placed out on our leach pads there has gone down and really won't return back to strong levels until after this upgrade has been completed. So we will go through a lull here in the first half of the year in terms of overall production, so we are seeing a pretty strong second half to the year.

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Mark La France Reichman, NOBLE Capital Markets, Inc., Research Division - Senior Natural Resource Analyst [32]

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Okay. And then I think I understand the increases and decreases in capital spending at each mine versus '18, with maybe the exception of Palmarejo. So I was just wondering is the increase there due mainly to the underground development that the La Nación deposit?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [33]

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Yes. You've got it there, Mark. I think last year, our total capital was right at $30 million. This year, guidance is $40 million to $45 million. And I think Nación is about $10 million associated with that. So much of what we have at CapEx -- have in CapEx at Palmarejo is underground development. And I think that's $25 million or so at just Independencia and Guadalupe. And then you add in the additional capital required to get Nación up and going and that gets you right into the guidance range for 2019.

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Operator [34]

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The next question comes from Brian MacArthur of Raymond James.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [35]

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I have a few questions and they mostly focus on Silvertip. So just one of the other comments was made earlier about efficiently placing concentrate going forward once you get up and running. Are you -- because it's been slower than expected, was that stuff committed, so that you've had penalties in the fourth quarter and the first quarter by not delivering stuff into contracts? Or is it sort of still open contracts where there's like no penalties involved and you just ship it as you get it now?

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Thomas S. Whelan, Coeur Mining, Inc. - SVP & CFO [36]

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Brian, it's Tom Whelan. So when we bought Silvertip, we inherited long-term offtake agreements. And we have not been able to deliver into those offtake agreements because they anticipated much higher concentrate grades. So we've been working with the offtaker to find happy homes for this. And I wouldn't say we're incurring penalties per se. We're just having to pay maybe a teeny bit more than benchmark terms just because of the lower quality of concentrate grades that we've had. So no penalties. I would -- for purposes of 2019, Terry and the team at Silvertip -- again, music to my ears is seeing those concentrate grades go up. And so we should be able to -- we may be able to deliver into this contract. We'll wait and see. But certainly, we'll be achieving benchmark terms at worst in 2019.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [37]

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Great. Okay. That's very helpful. It's just hard, I got to be honest, the accounting for Silvertip in the fourth quarter is a bit hard to follow, at the end of the day, exactly what was going on there. So second thing then, just as far as other cash flow this year. So technically, when you get to 1,000 tons, you still have to make the $25 million payment, right, for back to the JDS?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [38]

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Yes. Tied to the receipt of that permit. And that's $25 million. 25% in shares, 75% in cash. And I think that's due 15 days after receipt of that permit.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [39]

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So it's not like it has to be sustained. It's just purely a permit thing. It's not even if you can sustain it at 1,000 tons, right? You pay it at the time you get the permit. There's no like ramp-up or execution time period that you have to hit or anything? It's purely a permit-related thing?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [40]

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Exactly. Yes.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [41]

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Okay. Second thing then, you also -- do you still get the -- and I apologize if I mispronounce it, the Manquiri note receivable I think was coming in, in the third quarter of this year, is that still right?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [42]

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That's right.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [43]

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For the Bolivian transaction?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [44]

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That's right. Yes. There are 2 things still sort of -- that lie ahead there. One is the repayment of the remaining balance of the note, which I believe is $6 -- $10 million. I think it's $6 million. And then there's an NSR that's attached to the mill there. And that will start kicking in -- I think it's in September. So we'll be entitled to a stream of cash flow out of that 2.5% NSR, but the last biggest chunk is that remaining note balance.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [45]

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Right. And then I guess, the third component of what I would call it -- I mean, if I read the financials right, I think both the receivable and the payout are in the current assets and liabilities, which makes sense for me, so that I can net cash them out. The final payment, though, on the Silvertip deal based on reserves, which I think is done at the end of December 31 this year, right? Is that -- the question I have here is -- really is that on the balance sheet anywhere? It didn't look like it was in current assets and current liabilities, but it may be in these other long-term liabilities, which there's no subnote to?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [46]

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Correct. You got it, Brian. It's in other long-term liabilities. And when we acquired -- when we made the acquisition, we set up the liability for the full $25 million because that's our expectation that we'll owe it. And we're just slowly -- so I'm pointing at an accountant here. We had to discount it at the time we acquired it and we're slowly accreting it up to that $25 million at December 31. So actually, it'll -- again, astute observation. It will move to current as part of our Q1 results.

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Brian MacArthur, Raymond James Ltd., Research Division - MD & Head of Mining Research [47]

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But then you may not actually pay the $25 million depending on what happened, right? So then it may go back -- that's the maximum. So you fully accrued for the -- well, best case, worst case, I guess, whichever way you look at it?

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [48]

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No. Our best estimate -- again, and we could go on about our confidence about the ore body, our best estimate is we'll owe the full $25 million.

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Operator [49]

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There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Krebs for closing remarks.

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Mitchell J. Krebs, Coeur Mining, Inc. - President, CEO & Director [50]

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Okay. Well, thanks. We appreciate everyone's time this morning. I know it's a busy day. We look forward to speaking with you again in the springtime to discuss our first quarter results. So thanks again, and have a good day.

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Operator [51]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.