Edited Transcript of EDR.TO earnings conference call or presentation 8-May-20 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2020 Endeavour Silver Corp Earnings Call

VANCOUVER May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Endeavour Silver Corp earnings conference call or presentation Friday, May 8, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradford James Cooke

Endeavour Silver Corp. - CEO & Director

* Daniel W. Dickson

Endeavour Silver Corp. - CFO

* Galina Meleger

Endeavour Silver Corp. - Director of IR

* Godfrey J. Walton

Endeavour Silver Corp. - President & COO

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Conference Call Participants

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* Bhakti Pavani

Alliance Global Partners, Research Division - Senior Research Analyst

* Chris Thompson

PI Financial Corp., Research Division - Head of Mining Research

* Craig Hutchison

TD Securities Equity Research - Research Analyst

* Heiko Felix Ihle

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst

* Joseph George Reagor

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

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Presentation

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Operator [1]

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Welcome to the Endeavour Silver Q1 Financial Results Conference Call. (Operator Instructions) I would now like to turn the conference over to Galina Meleger, Director of Investor Relations. Please go ahead.

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Galina Meleger, Endeavour Silver Corp. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver 2020 First Quarter Financial Results Conference Call. With me on the line today, we have the company's Chief Executive Officer, Bradford Cooke; our Chief Financial Officer, Dan Dickson; and our Chief Operating Officer, Godfrey Walton.

Before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2020 and future years, including revenue and cost figures, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines and mineralized zones.

We do not intend to and do not assume any obligation to update such forward-looking information, other than as required by applicable law.

So on behalf of Endeavour Silver, I'd like to thank you again for joining our call.

And I'll now turn it over to our CEO, Brad Cooke.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [3]

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Thank you very much, Galina, and welcome, everybody, to this conference call on our first quarter financials. I'd like to start by pointing out that the numbers released today show that we're not out of the woods yet, but we did make great strides during the first quarter, both in operations and in our financial performance.

Let me explain. From the operational point of view, we were significantly better compared to both the first quarter and the fourth quarter last year. Our Q1 production was actually in general line with our guidance for the year prior to the government-mandated suspension of our mining operations. One of the key takeaways in our operational performance was the sharp decline in our cash cost, 37% down year-on-year. That reflects primarily the success of our operational turnaround and our transition into higher-grade orebodies at our largest silver mine, Guanacevi.

All-in sustaining costs also fell by only 5%, and that reflects the still elevated sustaining CapEx that we are investing to achieve a similar turnaround at Bolanitos over the next 3 months to -- compared to what we achieved already at Guanacevi.

I should point out that the significant headline net loss, almost half of that can be attributed to foreign exchange event. Basically, the 25% depreciation of the Mexican peso devalued both our peso receivables and caused a deferred income tax expense.

Other extraordinary items that hit our bottom line include the still elevated care and maintenance costs at our now closed El Cubo mine in Q1. Those costs will decline going forward. There's really no more severance to be had at Cubo, and there's a significant reduction in security costs coming.

We still report high -- a relatively high mine depletion due to our short reserve lives, and we're working through our exploration group to try and extend those reserve lives. Guanacevi has been a success from that point of view. And even though the government shut us down, April 1, the government has now declared in Mexico that municipalities with lower no COVID-19 cases can look to start-up again May 18. And since each of our 3 mines are located in such municipalities, we're now in advanced planning stages to bring our 3 mines back to production in May.

So moving to the first quarter highlights. Metal production was 857,000 ounces of silver and 8,500 ounces of gold. And on an equivalent basis, that's 1.5 million ounces of silver equivalents at an 80:1 ratio, 1.8 million ounces at the current 110:1 ratio, and that drove about $22 million in revenues.

Cash flow and net income, as I pointed out were negative, primarily due to the significant foreign exchange expense.

Balance sheet at the end of the quarter was $15 million cash, $27 million working capital, long-term liabilities. We have some term loans on equipment.

Operating costs. We basically cleared the quarter with a cash cost of $7.85 per ounce of payable silver and the all-in sustaining costs were $18 and change.

Couple more quick highlights from the operations. I've already highlighted that Guanacevi, the turnaround is now complete. We are able to tick that box. And what was our largest money loser last year made a small amount of money on a mine site operating basis in Q1.

Moving to the development projects. We do expect in June to release the final optimization of our pre-feasibility study and the economics therein, using our in-house expertise as well as an independent engineering firm.

So Terronera is advancing steadily. And on the exploration front, we do have some decent drill news coming from both Guanacevi and Bolanitos. We expect those news releases in the coming months.

So those are the highlights of the quarter. And I think now, operator, let's just open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Heiko Ihle of H.C. Wainwright.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [2]

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This question may be a bit out there. But I mean, you're talking about higher maintenance costs at El Cubo. How much of a potential, given all the social distancing issues that we're having in the world, is there a way that you can use the workers from Bolanitos to take care of some of that maintenance work and thereby save some costs in order to then also create some distancing that you're probably required to do?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [3]

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Heiko, it's Dan. The main thing in Q1 at El Cubo was just getting all the fleet effectively maintained, raising the mill in the plant, getting things all cleaned up. We haven't gone to close or anything like that. Just kind of putting everything as it is. We also had about $200,000 of severance costs in what we spent at El Cubo and depreciation of the plant, light vehicles, office and IT equipment. So you'll see that care and maintenance costs of Cubo come down significantly going forward. I think we have a staff of about 10 security and 10 individuals. So a total of 20, 25 people there. Guanajuato or Bolanitos and El Cubo are about 45 minutes away. So that's real social distancing in that context. So now ultimately, the key for us as Cubo going forward is just maintaining security at the site. And monitoring the tailings facility with the town right there. But you're talking about $200,000 for next quarter compared to what we just spent for $1 million.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [4]

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And so that with significant reduction includes a reduction in the security staff as well. And Dan's numbers reflect current numbers, right?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [5]

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Yes.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [6]

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We are still working diligently to find a way to restart Cubo. It does require us to do some land acquisitions and/or exploration. And it's a work-in-progress. So nothing to say on that yet, but that's the whole purpose of continuing to keep Cubo on care and maintenance.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [7]

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Maybe I'm the eternal optimist, but I have a feeling that mine at some point in time will reopen.

I don't want to open Pandora's box too much here, but I'll bring it up since you put it into the third paragraph of your earnings release with almost half the net loss being due to the 25% devaluation of the Mexican pesos. At what point in time, if ever, and the answer might be, never. At what point in time would you ever consider hedging some currencies or something, just to avoid future large-scale impacts and swings that -- maybe get taken a little bit out of context by some folks reading earnings releases?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [8]

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Well, the peso devaluation is a good news/bad news. It hits our assets, but it's great for our costs. So we don't mind the lower peso at all. And we would not hedge the peso. It would impact our costs. We think the direction of the peso is more and more depreciation relative to the dollar.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [9]

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Okay. So I understand that. But I mean, you might still, at some point in time, things might go the other way for you. And just because you've won so far, it doesn't mean you're going to come out ahead for good now?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [10]

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Well, that's a fair question from a conceptual point of view, but from a practical point of view, we've been in Mexico 16 years, and the peso has gone at one direction, and one direction only. It was 10:1 in 2003. It's 25 -- 24:1 right now.

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Operator [11]

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The next question is from Joseph Reagor of Roth Capital Partner.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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I guess, maybe following on Heiko's questions about currency. What percentage of your total cost you think benefit from the weaker peso going forward?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [13]

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Yes. Dan. Thanks, Joe, for the question. 30% of our costs are directly tied to labor and our cost of sales. So 25% reduction in our labor costs for the foreseeable future can be built in pretty quickly. And then of the remaining 70% of costs, about half of that comes from sourced out of Mexico and tied to the Mexican peso. Eventually, you'll see those costs adjust a lot quicker than what typically you'd see from a labor standpoint. But we generally, we're expecting about 45% to 50% of our costs to be affected by the depreciation of the peso.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. So in [cents], by Q3, if we stay at this level, we could be looking at a 10% to 12% reduction in costs?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [15]

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Yes. That's fair.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [16]

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Yes. And keep in mind that most of the depreciation was in the last 2 weeks of March. So it hit our assets right away, but it hasn't hit our costs yet. It's just hitting our costs now.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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Okay. Then on the COVID-19 front, what should we expect as far as capital spending in Q2? I mean given you guys spend almost half the quarter with your mines shut down. I would anticipate it's a lower capital spend, in that the guide at the beginning of the year for capital spending has probably been reduced in general as well, right?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [18]

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Yes. No. That's fair. For the quarter, I mean, ultimately, we still have all the mine development in the plans that we had. Everything is just going to be delayed by 6 weeks to 7 weeks. So in Q1, we spent or had total additions of about $9 million. In Q2, it'll probably be closer to $5 million, just because of the delay of 6, 7 weeks.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [19]

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Okay. Then shifting gears a bit. Guanacevi royalties as a percent of revenue kind of spiked in Q4 last year, and they stayed elevated in Q1 of this year. Is that a reflection of mining from an area where you guys pay a higher royalty? Is that just some kind of short term issue? Or is there something else at work there?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [20]

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No, you're exactly right, Joe. It's Brad here. We have a new properties last year called El Curso, and a new discovery that we developed in Q4 and have been producing since late last year. And that particular property has quite a high royalty on it to a Mexican group. Whereas the other portions of the Guanacevi operating unit have much, much lower royalties. So it's just that. We did put an emphasis in Q1 on mining the El Curso areas simply because it's got phenomenally higher grades. But we do also have in our plan this year to go back to a more reasonable mix of Curso versus other ores. Milache, for instance, so we're just about caught up on the mine development. So it should be able to do more percentage tonnes to the plant going forward and Santa Cruz Sur also is in the advanced stages now of development and should also do a higher contribution going forward. Maybe not in Q2, but because we basically spent 7 weeks of standing still, but certainly Q3 and onwards.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [21]

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Okay. That's helpful. And then last thing. I know you guys used a little bit of the ATM in Q1, a little more to start Q2. What's left available to you guys on that?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [22]

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We filed a new base shelf. You would have seen it. April 27, they got finalized. That sterilized the remaining amount on that ATM, which was about $500,000. So that ATM program is now over.

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Operator [23]

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The next question is from Chris Thompson of PI Financial.

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Chris Thompson, PI Financial Corp., Research Division - Head of Mining Research [24]

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Yes, look, tough quarter. Got a couple of maybe tough questions here. Firstly, the standby costs, I guess for the 3 operating mines. Dan, you said $5 million is for the Q2. Is that what we can anticipate the cost to be?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [25]

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That's not cost. That was capital expenditures for Q2. So on -- in our original guidance for 2020, total capital spend for 2020 was going to be $32 million in Q1. We spent $9 million. Joe's question, just -- asked how much would our cost of capital -- we're going to spend on capital in Q2. Typically, that $32 million is going to be split pretty evenly through the year. So $8 million to $9 million a quarter. And just because we've been shut down for 6, 7 weeks this quarter, I don't see that spend being larger than the $5 million just for Q2, but that -- we still need to get to that 32%, and maybe that goes into 2021 a little bit, Chris. But that won't change because of COVID. We still have our mine development programs that we have to get done and get accelerated, so we can maintain these production levels.

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Chris Thompson, PI Financial Corp., Research Division - Head of Mining Research [26]

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Okay. Thanks for the clarification on that. Just looking at, I guess, Guanacevi and by the way, congratulations for bringing down those costs. Obviously, Santa Cruz Sur, Milache coming on stream. You did mention, I guess, in your text, P4E was behind plan. I'm just trying to understand what component of mill feed is that? Is that minor or major?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [27]

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So yes, we'll need to explain that. We use in-house, the extension of a Porvenir Cuatro orebody onto the El Curso property. We call that orebody P4E, Porvenir Cuatro extension. And maybe in Q4, it was still under development, but I don't think we referred to that one being behind plan. Maybe SCS. Maybe, Santa Cruz Sur.

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [28]

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Santa Cruz Sur, we're slightly behind from development standpoint. And that just reflected that. In March, when we saw silver dipping to the 12 handle. We focused on increasing production from El Curso, which has higher gold grades and higher silver grades. And then just kind of moved away from Santa Cruz. So we'll pick up the development that go into Santa Cruz and ultimately, what we're looking for, what we originally were looking for and depending where prices go, is basically 1/3 of our production coming from Santa Cruz Sur. A 1/3 coming from Milache and a 1/3 coming from El Curso. And what we've never had in the past -- or I shouldn't say never, what we haven't had in the recent past, it's Guanacevi, Chris. It's just that flexibility. So, as soon as we got stuck in 1 area, we weren't hitting our tonnage, and in Q1, we're just short of 1,000 tonnes per day. And our goal is to get up to 1,200 tonnes per day. So having Santa Cruz Sur catch-up from development, allows us to hit the 1,200 tonnes per day for the next 8 months, so to speak.

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Chris Thompson, PI Financial Corp., Research Division - Head of Mining Research [29]

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Okay. And just remind us, what sort of turnaround time are you looking for Bolanitos and El Compas ? They are somewhat delayed. I get it. But obviously, hopefully, following the same track as Guanacevi, but maybe quantify the turnaround time there for us.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [30]

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Yes. We started the turnaround in Guanacevi after the first quarter last year. So it took basically a year. We started the turnaround of Bolanitos in Q3 last year, and it will take about a year. So of course, this quarter was pretty much discounted, but we do expect to break through in Q3.

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Chris Thompson, PI Financial Corp., Research Division - Head of Mining Research [31]

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Right. Okay. I'm looking at the depreciating, I'm looking at the dwindling cash position right now, and I'm a little concerned you might not have a luxury of time here for this turnaround. I mean at what point do you actually maybe just dial it back, and just live off Guanacevi. I know it's a tough question, but I have to answer -- ask it.

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [32]

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No. That's a fair question, Chris. I think you'll see once you get through the numbers with Q1, Bolanitos cost per tonne came down to $68.25 or even $68.50, which is an improvement. And we can get lower from that standpoint. And what Bolanitos was short on was tonnes this quarter. And the idea, I think, we came in around 87,000 tonnes, and we want to be up around 100,000 tonnes is in the plan. Ultimately, we have 2 areas: one, San Miguel, which we discovered last year. We've got about 300 meters more development in there to get that to full capacity and be really contributing at Bolanitos. So we're not far away there. And then we also have a vein we call Melladito, which is about 300 meters away from working. So it needs some development again there, but it will give us flexibility and be able to get into the above the 1,000 tonnes per day to 1,200 tonnes per day later this year. So as Brad touched on it. So we're about 3 months away from seeing Bolanitos turnaround. We've done a good job from a cost standpoint. Now it just means getting these tonnes to where it historically has been. We're not that far. So that's why we expect, hopefully, by Q3, in middle of Q3 just because of the delay of, like I say, it was COVID delay, but Bolanitos is a lot closer to the turnaround, and it's just hitting that tonnage output now.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [33]

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And if I could add, Chris, that the cash costs are already down at Bolanitos. And the reason is that the operational turnaround, the changes in management, the change of mine methods, the addition of new equipment, all of that's had an impact. But we still have elevated capital investing, which is the accelerated mine development at San Miguel and Melladito. That 300 meters remaining to do at San Miguel is not to get to the ore. We're already at the ore. Now we have to drive sills and raises and ramps and that -- it'll be fully ready for production. So not that much time left to, and not that much capital investment left to, to get Bolanitos, get that up and running in the proper way.

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [34]

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On the second part of your question with regards to El Compas, maybe it's not as easy to see for Compas. Compas is a very small mine contributor for us. With it being 1 million silver ounces. And costs were elevated in Q1. We made a change. We've been moving from contractors to employees. So we did onboarding and training in March and got rid of the contract of those mining underground. And our mine tonnes actually dipped significantly in March, but we expect that to come back up, now that our staff was also in place and ready to go. So hopefully, here in late May, we can get going. We can ramp up relatively quickly at Compas. And if we can hit the tonnes and grade and then our costs should reach -- again, seems things that it's hard to see in Q1, but those costs are going to come down significantly with the contractors out of the mine.

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Chris Thompson, PI Financial Corp., Research Division - Head of Mining Research [35]

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Right. Okay. And then Dan, maybe the final question for you here. Your equipment leases and loans, did you push those out thereby -- by 3 months?

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [36]

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Yes. Yes. We have. $11.5 million of total equipment loans, and it's all to do with the turnaround and refreshing our fleet. And we went to Sandvik. And just to be careful, at the start of the COVID-19 and the shutdown April 1, the government had come out and said, shut down until April 30. But as we've seen globally, those goalposts have continued to change. And we want just to protect ourselves. So with Sandvik, we approached them immediately, and they're very happy to work with us on it. And we just delayed principal payments by 3 months. So we didn't have to pay any of that until August, and it just gives us a little bit of flexibility.

Now I think we're probably being too conservative. Those are in place now, as is. And with us, hopefully, getting going here, May 18 we'll be fine. But at the time, we're looking for any alternatives to save cash, in case this would have gone through the summer in Mexico.

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Operator [37]

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The next question is from Craig Hutchison of TD Bank.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [38]

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I think most of my questions have been answered. But I was just wondering, once you guys get the green light from the Mexican government to go ahead and restart these operations, how long do you think it's going to take to kind of get your back up to full run capacity?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [39]

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Godfrey, if you're on the line, do you want to handle that one?

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Godfrey J. Walton, Endeavour Silver Corp. - President & COO [40]

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Sure. Craig, thanks for your question. We are doing a little bit of prep work to make the start-up a little bit faster. But I think it's going to be probably, say, 3 weeks to get up and running properly. We have a few maintenance issues that we've taken care of during the shutdown. And so Guanacevi should come up very, very quickly, but Bolanitos and Compas should be probably the slower ones coming up. So Compas maybe more like, 3 weeks to 4 weeks? Bolanitos, probably 2 to 4. And Guanacevi, I think it'll be up and running in about 2 weeks.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [41]

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Okay. Perfect. And then just following up on the question on the ATM. I know you guys mentioned that the new shelf sterilized the old ATM. Are you now able to access to the new financing ATM? Or is that still...

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Daniel W. Dickson, Endeavour Silver Corp. - CFO [42]

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The base shelf -- yes, the base shelf space, we haven't put in a prospective supplement on our new ATM program to date or -- so you have to file new prospectus to get a new ATM in place.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [43]

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Okay. So that's not in place at the moment. Okay.

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Operator [44]

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The next question is from Bhakti Pavani of Alliance Global Partners.

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Bhakti Pavani, Alliance Global Partners, Research Division - Senior Research Analyst [45]

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I just have a couple of questions. Considering the ramp-up time frame at each of the individual mines, once the restrictions have been lifted. During that time, do you have any stockpiles currently on-site that maybe you can process, while you ramp up production?

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [46]

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Thanks for your question, Bhakti. It's Brad. And maybe, I'll refer to Godfrey on this one.

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Godfrey J. Walton, Endeavour Silver Corp. - President & COO [47]

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Bhakti, thanks for the question. Yes, we, do have about 15,000 tonnes of stockpile material at Guanacevi. And so we'll be processing that very quickly. And we're also -- we have stockpiles -- smaller stockpiles at Bolanitos and at Compas. So we will be using those to start-up the payer plants. And then the development that we're doing ahead of fully ramping up will help to supply the tonnes as we go forward from there.

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Bhakti Pavani, Alliance Global Partners, Research Division - Senior Research Analyst [48]

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Got it. And second question is from the cost standpoint. Once the operations open up, do you expect to incur any additional cost in order to comply or mitigate with the safety measures due to COVID?

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Godfrey J. Walton, Endeavour Silver Corp. - President & COO [49]

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This is Godrey again. I -- we don't expect a lot of extra cost. There will be some. But we implemented a number of -- temperature checking and disinfecting and cleaning. So it's added a little bit. But in the overall scheme of things, it's not a lot, and not significant.

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Operator [50]

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This concludes the question-and-answer session. I would like to turn the conference back over to Brad Cooke for any closing remarks.

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Bradford James Cooke, Endeavour Silver Corp. - CEO & Director [51]

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Thanks, operator, and thank you all for listening in today. Again, not out of the woods yet, but good progress in the quarter. Ahead of schedule on Guanacevi. And even though we had to shut down in Q1, or sorry, Q2, and we'll get a later start, mid- late-May for the 3 operations is what we're anticipating.

I think Bolanitos is within the next 3 months of operations will also show the turning of the corner that we have previously forecasted. So I think operationally, it's a work in progress, but we've been able to tick the Guanacevi box. And we fully expect to tick the Bolanitos box this summer. Keep your eyes peeled for news coming up in May/June. We have good drill results coming from Guanacevi. Good drill results coming from Bolanitos. And a final pre-feasibility update on Terronera. So with that, operator, let's finish the call.

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Operator [52]

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

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