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Endeavour Silver (EXK) Q4 2018 Earnings Conference Call Transcript

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Endeavour Silver (NYSE: EXK)
Q4 2018 Earnings Conference Call
Feb. 25, 2019 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Endeavour Silver 2018 year-end financial results call. [Operator instructions] 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, director, investor relations.

Please go ahead.

Galina Meleger -- Director of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver Corp. 2018 year-end financial results conference call. With me on the line today, we have the company's CEO Bradford Cooke as well as our President and Chief Operating Officer Godfrey Walton, and our Chief Financial Officer Dan Dickson.

Before we get started, I'm required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2018 and future year, including revenue and cost forecasts, silver and gold production, grades and recoveries, and the timing and expenditures required to develop new silver mines in 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 with that and on behalf of Endeavour Silver, I'd like to thank you again for joining our call today.

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And I will now turn it over to our CEO Bradford Cooke.

Bradford Cooke -- Chief Executive Officer

Thanks, Galina, and welcome everybody to this year-end conference call on our 2018 financial results. I'd like to start with some of our financial and operating highlights and then a brief discussion, and then we'll open it up for Q&A. So in 2018, the company recorded a headline loss of $12.5 million, compared to about $10 million of earnings last year. I should point out right off the bat though that virtually all of that loss was a noncash item related to depreciation and depletion of the reserves at our Guanacevi operating unit and that we did actually have a very successful year in the resource conversion last year, so that the reserve tonnes at Guanacevi were actually up 150% and equivalent ounces were up 200%, meaning that we shouldn't have to face this depletion issue next year in 2019.

EBITDA was down 14% year on year to $22 million. Cash flow from operations before working capital changes were down 6% to $22 million. Mine operating cash flow was down a little bit 3% to $44 million and revenue was relatively flat at $150 million based on 5.5 million ounces of silver sold and 51,000 ounces of gold sold. Our cash costs were flat on the year at about $8 per ounce of silver payable, net of the gold credit.

And all-in sustaining costs actually decreased 9% to about $15.5 per payable silver ounce last year. We finished off the year with working capital of about $54.5 million, $33 million of which was cash, and no debt. So those financial metrics were really driven by slightly higher production and slightly lower metal prices. Our consolidated production costs drifted a bit higher last year due to primarily to operational challenges at one mine, Guanacevi, and it was offset partially by improved operating costs at El Cubo.

So Guanacevi issues last year were primarily trying to segue out of the deep narrower and lower grade portions of our two original discoveries that we have been operating since 2005 and into the development of two new shallower and higher grade orebodies at Milache and Santa Cruz Sur. I can give you an update on that. We penetrated the ore zone at the Milache development in the fourth quarter of last year and we have for some weeks now been shipping development ore to the mill. I think we're running about 200 tonnes per day of Milache ore to the mill at this time.

And we expect that to reach the capacity of about 300 to 400 tonnes per day over the next quarter or so. Our other development asset at Guanacevi is Santa Cruz Sur ore body, and we did commence development in the fourth quarter. We do expect to contact ore in the second quarter and see that one in full production in the second half of the year. So Guanacevi, we believe, is in the middle of a turnaround.

We took some operating losses there last year. It drag down the consolidated performance of the company. And to the development of these two new orebodies at Guanacevi, we do believe we can return Guanacevi to good financial health. The El Cubo and Bolañitos mines continue to generate positive free cash flows in 2018, and we took most of those free cash flows and reinvested them partly at Guanacevi for the development of the two new ore bodies, partly at El Compas to develop our fourth mine.

We also had a $12 million exploration spend last year, primarily at [Inaudible] and secondarily at Parral. Both of these projects are in the development pipeline. [Inaudible] will be up next and Parral, we hope, will follow [Inaudible] in 2021. So some operating metrics.

We had 12% increase in silver production last year to 5.5 million ounces. Gold production was relatively flat year on year at 53,000 ounces. Our equivalent production was about 9.5 million ounces. And some of the milestones for the year, Guanacevi achieved 1 million hours work without lost time accident.

First time it's done that. Bolanitos drilling returned multiple high-grade intersections from a new area we call San Miguel vein. We did update the prefeasibility study for the [Inaudible] project late August last year and subsequently increased the [Inaudible] mineral reserve substantially, so we are looking at yet another update of the prefeasibility study going forward. Parral was, I think, our biggest exploration project last year with very successful drilling and a significant bump in resources at Parral, primarily from the San [Inaudible] high-grade vein area in that district.

El Compas, which we had originally scheduled for commissioning last year, ran into a number of start-up issues and we are through them now, thankfully. The mill is back up and running a couple of weeks ago and we have built a very healthy stockpile from the mine, which continued to work while the plant had to sort out its operating issues, and we now are forecasting that we should achieve commercial production at El Compas by the end of this quarter. We have two major appointments in our senior management group last year with Nick Shakesby joining us as VP of Operations and Manuel Echevarria appointed as our VP of New Projects. So all in all, a busy year.

It was really very much a transitional year for Endeavour as we move away from the older mines and into new mines. And so where I'd like to finish this presentation is just a high-level overview of where we're going with the company. We've enjoyed 15 years, believe it or not, of operations starting with Guanacevi in early 2005. We had a very similar business model for our first four mines: Guanacevi, Bolanitos, El Cubo, and El Compas were all basically small high-grade mines in historic districts that were closed or about to close for lack of ore or financial issues.

And in each case, we recognized opportunities to restart those operations, restart the exploration, make new discoveries, fast-track the development of new mines, but ultimately grow those mines organically that we could consider to be our first phase of organic growth. The next phase of organic growth basically came about because the opportunity to pick low-hanging fruit in Mexico became more and more challenging as time went on. So, we just decided that if we couldn't buy, we'd have to find. And the fifth mine, [Inaudible] is a result of this change of strategy to go to again historic districts but without the built-out infrastructure and look for virgin ore bodies, build mines from scratch, and effectively evolve our growth strategy.

So we are in the final stages of commissioning mine No. 4 at El Compas. We hope within weeks, we'll be seeking a development decision on mine No. 5 at [Inaudible].

And Parral, which is still in the advanced exploration stage, will go to its first economic assessment this year with a view to following [Inaudible] in our development pipeline. So, I do believe because of those three projects, Endeavour actually has the most compelling organic growth profile in the silver mining sector. We also announced, in February of this year, a large portfolio of drill-ready projects in Chile. And that represents again the next phase of our organic growth profile as we move away from new ore high-grade mining and into, what we hope will be, new larger open-pit discoveries in Chile.

So that's my summary of the year-end performance for Endeavour and I think what we'd like to do now is open up the call for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Hey, guys. Thanks for taking my question.

Bradford Cooke -- Chief Executive Officer

Hi, Heiko.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Hey, there. Hey, so on El Compas, you mentioned in the release and also in the presentation at Galena center around earlier today that the El Compas commissioning has been delayed for a number of reasons. Just going through them one by one, can you give some detail on the excess clay in the ore-to-cost recovery issue in the plane and the cash impact from this? I mean, it sounds like a metallurgical study is ongoing. And how much of a solution do we have and what are the longer term impact please?

Bradford Cooke -- Chief Executive Officer

Heiko, I'll I'll just give you a brief overview and then Godfrey can fill in the details. In a nutshell, we discovered more clay in the ore when we started the -- feeding the ore to the plant. And so it actually [Inaudible] up each successive circuit. Initially it was crushing issues then it was causing recovery problems in the flotation cells.

We managed to get through both of those and pushed the clay out into the tailings only to have the clay block the drains in the tailings facility, and that caused us to shut down actually in August and actually actively completely clean out the tailings facility and expand it so we can handle not only clay but more material. The other issue that we had recently was some breakages in the mill. And I guess for that -- for those two things, I'd like to turn over to Godfrey. Maybe he can fill you in on some details.

Godfrey Walton -- President and Chief Operating Officer

Hi, Heiko. This is Godfrey. Yes, we did have those play issues. So, it went right to the plant and ends up in the tailings pond, and that was combined with very high rainfall.

And so we actually filled the tailings pond pretty quickly. And as Brad mentioned, we did shut it down and we got it organized now so that we can handle, A, the water if we get that much rain again; and B, the clay. We've got two settling areas to help us settle the clay out of those tailings. And then we had a truncheon on the mill break and we had to -- that's the last thing that could happen, so we had a recast that and that he is now up and running.

I've just been run about 10 days now. So we expect to be able to continue with the mill and as Brad mentioned, we'll going and get in commercial production by the end of this quarter. Recovery-wise the clay did affect the recoveries. We are working on a number of ways to increase that recovery and I think I think we will have a solution here in the near future.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Very helpful. Thank you. On that same token -- I don't know. This might be a Godfrey question as well.

Can you provide some color on the cost of the water issue in the tailings facilities? I mean, it sounds like they've been resolved but -- and also the cost impact from the [Inaudible] shutdown of the [Inaudible] mill? And I assume you guys stockpile the ore rather than anything actually getting held up. Correct?

Godfrey Walton -- President and Chief Operating Officer

Yes, we stockpiled the ore. We -- I think we have somewhere around 15,000 tonnes or maybe as high as 20,000 tonnes being in front of a plant. The cost was about 400,000 to -- a lot of work on the tailings pond, where we did a lot of work on that and prepared a lot for the future there. So it wasn't just looking at the clay, it was just looking at potential issues down the road.

I think that answered your question.

Dan Dickson -- Chief Financial Officer

Yes, the last part -- Heiko, it's Dan here. The last part is just the truncheon. And to recast that truncheon with [Inaudible], some additional costs of having staff because in Mexico if you -- you cannot do layoffs that doesn't make financial sense unless we're gonna be down for more than three months. So we'd be [Inaudible] at the operation.

Other than that, there is no significant capital requirements. Like Godfrey said, there's about $400,000 to $500,000 on the tailing. And then the ball mill effectively was just small but we didn't have that part. Now, we have that spare part as well.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Got it. And just so -- a slight clarification. At Guanacevi, and I'm not sure if you're willing to answer this scientifically but maybe just guide us in the right direction. You have a silver equivalent grade 269 grams per tonne in 2018.

In the presentation you mentioned that grades will rise this year, and you'll probably not going to tell me the exact amount, but can you just sort of tell us where January and February, which is essentially overcame in please. Just doing the math at the 1,100 tonnes per day and doing the same recovery and everything else, I mean, it looks like 280, 285 grams per tonne, is that about in line with what you're thinking?

Dan Dickson -- Chief Financial Officer

Yes, Heiko. It's Dan again. It's -- your number there is a little bit higher than what's in our plan. Brad touched on it.

Milache is going to bring up our grades this year. Milache is a higher-grade zone but we're not only fully pulling from there and we're not going to -- when we're at 300 to 400, we should see that grades come up into that area but in Q1, we're going to be more in the 250 240 range.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

No. I meant the 280 was for the full year. Is that in line with what you're expecting?

Dan Dickson -- Chief Financial Officer

No, still a little bit high for a full year.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

OK. Perfect. Thank you so much.

Bradford Cooke -- Chief Executive Officer

Thanks, Heiko.

Operator

Our next question comes from Joseph Reagor with Roth Capital Partners. Please go ahead.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Hi, guys, and thanks for taking the questions. Heiko hit on some smaller items already, so I'll try to take the other approach, a big picture. What are you guys thinking on the M&A front right now? I know there's a few companies that have announced -- that are putting some Mexican assets up for sale both on the silver and gold side and then there is, obviously, some larger mergers going on in the gold space, and -- could that create some opportunities for you guys as well? What do you think there?

Bradford Cooke -- Chief Executive Officer

Thanks for your question, Joe. We are active on M&A, have been for many years. And if you look back, we've actually pulled the trigger on six asset acquisitions in the last 15 years, so we are active in the space. We haven't yet done a corporate transaction but that's really for valuation reasons.

We're pretty tough on -- pretty disciplined, shall I say, on our valuations to acquisitions and our ability to add value post-acquisition. So what are we looking for and would any of the current assets out there be of interest? Yes, we're looking at a couple of things. We typically would like to go up the ladder in terms of size and quality, and anything that we look at has to compete with what's already in our pipeline. So 50 to 100 million ounces per year of silver equivalent reserve resource with the ability to grow.

5 to 10 million ounce per year production profile with the ability to grow. Perhaps one of the most important things is that for the first four mines that we bought in Mexico all basically had zero reserve life when we started, and we've now been operating Guanacevi for 15 years and we're still running a one-year reserve life there as well as two or three years of resources. So building [Inaudible] with initially a 10-year-plus mine life is very important for us in anything we acquire, we'd like to see a material mine life as well. So that's kind of our shopping list, and it is hard to find quality projects in the silver space, as you know.

So you just have to cast a very broad net and look at everything. We've kissed a lot of frogs in the last few years.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Fair enough. And then kind of another big-picture item. Can you walk us through what the corporate plan is for financing [Inaudible], given that you're hoping to be in a position to make that construction decision soon.

Bradford Cooke -- Chief Executive Officer

Yes, Joe. I think there's actually two answers there because we published prefeas in August of last year with a $76 million Phase 1 CAPEX in our public guidance in our presentations was that we'd like to do $50 million of debt and about $30 million of equity, and there is $30 million cash in the kitty right now and we have about $30 million left in our ATM facility. So one could argue that once the debts are in place then we're good to go. We are because of the success in drilling last year, updating and optimizing the prefeasibility study.

We do think there's a bigger and better project there, so the CAPEX number will probably move. And conceptually, if you included Phase 2 from last year's PFS, we're looking at $100 million in total CAPEX. So conceptually, we would like to see half of that is debt and the balance as cash and equity.

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. And the -- do you think it would be done all upfront or kind of as you go so you can see how much cash flow you can generate along the way?

Bradford Cooke -- Chief Executive Officer

Well, it's been as we go so far because we don't yet have our final permit. But as soon as we have the final permit, then we can go to the board and get our development decision and then I think we would like to see either all or the larger part of the financing package in place. We hope to have a debt announcement shortly and we'd also hope to have permitting and decision announcement shortly. Certainly looking for that this quarter and the financing will flow from that.

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. Thanks I'll turn it over.

Operator

[Operator instructions] Our next question comes from Chris Thompson with PI Financial. Please go ahead.

Chris Thompson -- PI Financial -- Analyst

Hi. Good morning, guys. A couple of quick questions. A number of my questions have been asked but just looking at the assets here, starting off with Bolanitos.

You guys said about looking at grades here 82 gram per tonne silver and 1.77 gram per tonne gold in the fourth quarter. What should we be looking at for this year while we have upgrade?

Bradford Cooke -- Chief Executive Officer

Godfrey?

Godfrey Walton -- President and Chief Operating Officer

Hi. Hi, Chris. Thanks for the question. We're looking at very similar grades as we did in the fourth quarter, so it should be the same grade.

Chris Thompson -- PI Financial -- Analyst

Great. At about 1,200 tonne a day?

Godfrey Walton -- President and Chief Operating Officer

At around 1,200 tonnes a day. Yes, that's correct.

Chris Thompson -- PI Financial -- Analyst

Perfect. All right. Just moving on to El Cubo. Obviously you guys are guiding that you're going to be reducing the, I guess, the throughput output to 750 tonne a day.

What should we be sort of modeling by way of stepping down to that as far as timelines?

Bradford Cooke -- Chief Executive Officer

So, Chris, thanks again for your question. And our announcement that we're going to half the plant capacity is intended primarily to buy more time for the exploration group to replace this year's reserves. But for modeling purposes, one year at 750 tonnes per day will have to do for now.

Chris Thompson -- PI Financial -- Analyst

All right. Thanks, Brad. And then I just wanted to be -- if I get this right, I mean, you're basically -- you're pulling in ore from Milache, you've got Santa Cruz as well. Is Porvenir also supplementing the production from the asset, Porvenir Norte?

Bradford Cooke -- Chief Executive Officer

Yes. Dan probably has the better breakdown on that.

Dan Dickson -- Chief Financial Officer

Yes, no problem. I'm happy to answer that question with Godfrey in front of me but I do have it. We get a -- at Santa Cruz and Porvenir Norte are a big chunk for it right now. Probably about 800 tonnes coming from Milache.

Porvenir Norte in itself is about 250 tonnes per day and the remainder coming from Santa Cruz. And then when Santa Cruz Sur comes online, that will be about another 200 tonnes to 300.

Chris Thompson -- PI Financial -- Analyst

OK. Perfect. Great. Final question -- actually, one or final one of two.

You've got stockpiles, obviously, at El Compas. Can you give us a sense of grade on this?

Bradford Cooke -- Chief Executive Officer

Godfrey?

Godfrey Walton -- President and Chief Operating Officer

Yes. Thanks, Chris. It's -- the grade is sitting somewhere in the order of 3 to 4.5 grams per tonne gold.

Chris Thompson -- PI Financial -- Analyst

OK. Great. All right. Final question, obviously.

Just looking, I guess, you guys are sort of neutral on the cash flow from operations before working capital adjustments in the fourth quarter. At current metal prices, do you see that being the case for much of this year?

Dan Dickson -- Chief Financial Officer

At today's prices? No. We should see an improvement for most of the year and really that's going to stem from Guanacevi, making sure we can hit our production tonnes at Guanacevi. And with Milache and Santa Cruz Sur coming online, that should help. And then, obviously prices of gold and silver have increased since the Q4 averages, so we should get a little bit of a pickup there as well.

Chris Thompson -- PI Financial -- Analyst

Great. All right. OK. Guys, thanks for that.

Thanks for asking the questions.

Bradford Cooke -- Chief Executive Officer

Thank you for the questions, Chris.

Operator

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

Bradford Cooke -- Chief Executive Officer

Thanks, operator, and I think I just want to say that it was a challenging year last year in the silver mining business for all operators. I think we came through it reasonably well and we're looking at a much better year in 2019. Operationally, it's critical that we do three or four things well this year: finish off the development to turn -- of Milache and Santa Cruz Sur to turn around the Guanacevi operation; finish off the commissioning so that we have a commercial operation at El Compas; getting our final permits and financing in place, so we can start building [Inaudible]; and obviously finding more reserves at Bolanitos and El Cubo. I think that we've got a good start to the year and don't be surprised if we do find something on the M&A side.

So with that, I'd like to close the call. Thank you.

Operator

[Operator signoff]

Duration: 27 minutes

Call Participants:

Galina Meleger -- Director of Investor Relations

Bradford Cooke -- Chief Executive Officer

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Godfrey Walton -- President and Chief Operating Officer

Dan Dickson -- Chief Financial Officer

Joseph Reagor -- ROTH Capital Partners -- Analyst

Chris Thompson -- PI Financial -- Analyst

Godfrey Walton -- President and Chief Operating Officer

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