Endeavour Silver Corp. (NYSE:EXK) Q4 2023 Earnings Call Transcript
Endeavour Silver Corp. (NYSE:EXK) Q4 2023 Earnings Call Transcript March 11, 2024
Endeavour Silver Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Full Year 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please go ahead.
Galina Meleger: Thank you, operator, and good day, everyone. Before we get started, I ask that you view our MD&A for cautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A and financial statements are available on our website at www.edrsilver.com. With us on today's call is Dan Dickson, Endeavour Silver's CEO as well as Elizabeth Senez, our Chief Financial Officer; and Don Gray, Endeavour's COO. Following Dan's remarks, we will then open up the call for questions. And now over to Dan.
Dan Dickson: Thank you, Galina, and welcome, everyone. As we commence this year's earnings call, I think it's important to acknowledge the dynamic landscape that shaped the mining sector in 2023. Roller coaster market forces led to volatile and lower equity prices. These events negatively impacted company valuations across the precious metal sector, creating a significant disconnect from the underlying commodity prices. But this broad market backdrop, we navigated higher operating costs, adding complexity to our operations. This theme was apparent for all Mexican mining firms, which saw cost pressures across multiple channels. To put this into perspective, I'll provide some key data points. Over the last three years, the Mexican consumer price index surged by more than 21% and was amplified within our industry as key inputs such as steel, reagents and other consumables were impacted by supply constraints.
Furthermore, from Q4 2021 to Q4 2023, the Mexican peso strengthened by nearly 20% against the US dollar had cascading effects on our in-country purchases and labor costs. As I look back on the year, I can affirm that our operations team displayed unwavering dedication in navigating these challenges. Today I don't want to just reflect on these challenges, but to emphasize the strategic initiatives we've implemented to ensure the growth and success of our company. On a consolidated basis this year, we produced 8.7 million silver ounces equivalent metal, which met guidance after two consecutive years of exceeding production guidance. Production was near the lower end of the guidance range with a production shortfall in Q3, largely due to mine re-sequencing changes, we implemented to improve ventilation and ultimately worker safety.
This temporary disruption in operations results in a reduced mine output and ore grades. I'm please to say Guanacevi's performance improved significantly in the fourth quarter as the planned improvements were executed extremely well and swiftly. Not only did Guanacevi's production return to historical levels, but our recovery strategy more than met expectations as silver grades, gold grades, and plant throughput exceeded our estimates. The plant refurbishments completed at the beginning of Q4 enhanced our operational flexibility to exceed the historical throughput of 1,200 tonnes per day. These improvements and enhancements led to escalated costs in the second half. However, cost metrics significantly improved in Q4. While Guanacevi had its challenges in Q3, Bolanitos' performance remained steady with increased silver production offset by lower gold production in the fourth quarter.
From a financial standpoint, for the year we reported revenue of $206 million with cost of sales of $169 million for operating earnings of $37 million and mine operating cash flow of $40 million. After exploration, G&A and other investment expenses, we reported a net income of $6 million or $0.03 per share. For the year, Guanacevi delivered 14.3 million of mining free cashflow and Bolanitos delivered $2.5 million. Our cost of sales increased 6% compared to the previous year. While there are a number of drivers, a strong Mexican peso and inflationary pressures on consumers were the two most impactful. Again, these two factors with lower than planned ore grades and mine -- ore grades mined due to the mine re-sequencing in Q3 contributed into elevated cost metrics for the year with cash costs and all-in sustaining costs at $13.49 and $22.93 per ounce respectively.
Both metrics were higher than we originally guided. However, the fourth quarter gave us some footing as cost came down significantly from Q3. Our fourth quarter cash costs and all-in sustaining costs were $12.54 and $21.48 per ounce respectively. The remediation efforts extended into early Q4 and the positive momentum on these initiatives are expected to carry forward. Looking to 2024, containing costs and finding efficiencies will remain in focus. While we continue to experience inflationary pressures and strong local currency, we are aggressively implementing business improvement initiatives to mitigate these headwinds. As of year-end, we had cash of $35 million and a working capital of $43 million. Cash decreased in Q4 as funds were spent on the development activities at Terronera and long-term prepayments went up significantly as we placed deposits with contractors and equipment.
Working capital has fallen as we continue to invest in the Terronera project. With this investment, we've built up our non-current assets, including 22 million in construction deposits related to the Terronera build and 23 million in value added tax. The IVA receivable has been submitted for processing and the company is working with authorities on timely collection. However, we conservatively classify these as non-current assets until collection starts. As per requirements under the $120 million senior secured debt facility, we must primarily self-fund development through cash on hand before drawing on the facility. As such, we are well positioned to satisfy the financing requirements of the project and are expecting to complete our first draw in March.
During Q4, we raised gross proceeds of $39 million through the ATM and another $24 million was raised subsequent to year-end to ensure there is sufficient funding in place for the development of Terronera. When you add this all up, we have sufficient capital. We're confident that the actions we've taken will see Terronera through the finish line, while also supporting the high-value organic growth initiatives in place at Pitarrilla. As a reminder, Pitarrilla is our next project in the pipeline located in the Durango State of Mexico, it's one of the world's largest undeveloped silver deposits with nearly 600 million ounces of silver defined. Let's give a quick update on the construction progress at Terronera. In January 2024, we completed a risk analysis on the project for the remaining expenditure and provide an updated initial capital cost and execution plan.
Mirroring the trends we experienced at our producing mines in Mexico, we face similar headwinds at Terronera during the construction year. The impacts of a stronger Mexican peso, ongoing inflation and tight markets for equipment and bulk materials all contributed to an 18% increase to our updated initial capital estimate of $271 million, up from $230 million. Capital pressures notwithstanding, the pace of the project development continues to advance and is on track with previous guidance with commissioning planned in Q4 of 2024. At the end of the year, we reached 46% completion on the overall project progress compared to the original guidance. However, due to the adjusted weighting on the updated initial CapEx, management estimates an adjusted 43% completion as of December 31st.
We'd spent $122 million on direct development, while project commitments totaled $171 million or 63% of the updated capital budget. During Q4, we concentrated our efforts on completing key items, including earthworks for our upper mill platform, procurement of equipment and advances in plant concrete and achieved significant progress in constructing our process plant. If you are interested in seeing photos of the construction progress, I encourage you to visit our website under the Terronera page. Let me provide a few recent highlights of progress at Terronera, which demonstrates our strong commitment to responsible, sustainable development and working collaborative with our local key stakeholders. Starting with safety, our taquito culture has served as a solid foundation for building a strong safety record at the project.
We finished the year with no lost time accidents over 172 days of work at site, which translates to about 600,000 man hours. Specifically, we heightened safety protocols significantly, especially during the rainy season and notably in Q4 when we were alerted to the imminent arrival of Hurricane Lidia along the coast line. Despite facing a Category 4 storm, our site weathered the event admirably, experienced only minor damage to exterior fixtures and some fallen trees. The robustness of our drainage system proved crucial in maintaining the integrity of the site and roads. As a precautionary measure, we suspended on-site activities to ensure the safety of our personnel. Fortunately, power and normal operations were swiftly restored within a few days.
We also supported local relief efforts with our on-site team helping local communities to recover. Over the year, we've emphasized the importance of the efficiency of our mine development. To address this, we strategically onboard a top-tier talent and successfully transition to our in-house mining team after start-up with mine contractors. This shift was always designed and has yielded significant development efficiencies with notable enhancements in Q4 where we met our daily advance rate targets facilitated by improved blasting techniques, water control and better ground conditions. As the year concluded, our cumulative underground development reached over 2,200 meters, marking a substantial 70% increase in meters compared to Q3. The positive momentum in advanced rates indicates a promising trajectory forward.
During the quarter, Portal 4 incline broke through to surface and preparations are now underway to complete the portal structure in Q1 2024. The majority of construction activities have progressed well at the plant site. Currently, surface construction stands at nearly 50% completion and the advanced stage of concrete work sets the stage for commencement of vertical construction, which started in January. At year-end, the concrete was nearly done in both the grinding and the flotation areas and was being prepared for the general contractor begin structural steel and mechanical installations. Also during Q4, we initiated the construction of the access road connecting the lower platform to the Tailings Storage Facility area and the upper mill platform.
Our Terronera workforce continues to grow with over 520 employees and contractors on site. On the procurement side, all major equipment was ordered by year-end, and the team is focused on procuring bulk materials, including structural steel, piping and electrical cable. And lastly, on the community relations side, we continue to have full support from the municipality and continue to engage and educate the municipality as we progress at site. Okay. So I've touched a lot on 2023. Let's have a look at what's at store this year for Endeavour. We enter 2024 in a solid position, both financially and operationally with a number of strategic initiatives underway that will drive our future growth. Our production outlook anticipates gold and silver to be consistent with 2023 and managing costs will continue to be a key focus as we aim to offset the impact of rising costs.
Guanacevi and Bolanitos are mature assets and we have plans to invest more than $30 million in sustaining capital to optimize their performance and maximize output. Equally important on this year's agenda is advancing our growth profile. We have $9 million earmarked across our exploration portfolio to continue our long successful track record of growing through the drill bit. For instance, at Pitarrilla, we hope to invest over $5 million on several initiatives. This year's plan is to conduct a 6,000-meter drill campaign to target the high-grade zones and theater structures of the existing resource. We'll use the data collected to guide our next steps with the expectation to assess this project as an underground silver mine. Ultimately, the combination of Terronera and Pitarrilla supports our long-term vision to become a 20 million ounce senior silver producer and provides a value proposition that is best in the silver space.
With the constructive macro backdrop for both gold and silver in place, we believe our growth strategy is well timed and well suited to drive outperformance for our stockholders in the coming years. I'd like to add that over the past few years, we have deliberately reinvested in the business for long-term growth. Now with less than a year to go before Terronera comes on stream, we can expect to see the benefits of these investments accrued to our shareholders. 2024 is about execution at Terronera, which is clearly transformational. Upon completion, we expect Terronera will nearly double our production, significantly reduce our cost profile and provide substantial free cash flow for our shareholders. It's going to be an exciting year for Endeavour and our stakeholders.
While we face a few more capital intensive months ahead as we ramp up to production, we look forward to the arrival of strong free cash flow generated in 2025. Before opening for questions, I'd like to formally welcome Elizabeth Senez, our recently appointed CFO to our executive leadership team. Libby joined us in January, and we're thrilled to have her on our team as a finance executive with a predominantly Latin American focus. She brings over 20 years of value in accounting, corporate finance and corporate treasury to her role. On behalf of the entire team at Endeavour Silver, I would like to also thank Christine West, our former CFO, for her many contributions to the company over the past 16 years. Throughout her career with Endeavour, she has demonstrated incredible dedication to work and to the success of our company.
Christine, we wish you all the best in retirement. Together with the other members of our management team, we'd be happy to take your questions. Let's open up the lines, operator.
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