Aoife Mairead McGrath; SVP of Exploration; Coeur Mining, Inc.
Michael Routledge; Senior VP & COO; Coeur Mining, Inc.
Mitchell J. Krebs; President, CEO & Director; Coeur Mining, Inc.
Thomas S. Whelan; Senior VP & CFO; Coeur Mining, Inc.
Michael Parkin; Mining Analyst; National Bank Financial, Inc., Research Division
Michael Stephan Dudas; Partner; Vertical Research Partners, LLC
Hello and welcome to Coeur Mining Second Quarter 2023 Financial Results Conference Call.
Please note that this event is being recorded. I would now like to turn the conference over to CEO, Mitch Krebs. Please go ahead.
Mitchell J. Krebs
Good day, everyone, and thanks for joining our second quarter 2023 earnings call. Before we start, please note our cautionary language on forward-looking statements in today's slide deck and refer to our SEC filings on our website. I'll kick things off with a review of the main quarterly highlights on Slide 3, before turning the call over to Mick, Tom and Aoife. Quarterly revenue totaled $177 million with production of approximately 68,000 ounces of gold and 2.4 million ounces of silver.
The quarter was underpinned by strong performances at our Rochester and Wharf operations offset by a weaker-than-planned quarter at our Kensington mine in Alaska. Through the first 6 months, we produced about 42% of our full year gold production guidance and about 45% of our full year silver production guidance, which highlights our expectations for a strong second half. The company's 2 key drivers for the second 6 months of the year are expected to be the ramp-up of Rochester as construction and commissioning activities wrap up and a stronger second half from Kensington.
Water and weather impacted both Rochester and Kensington during the second quarter. Out in Nevada at Rochester, we're very pleased to report that the expansion was approximately 97% complete as of July 31 and is moving quickly toward completion. However, downtime from lightning and rain in Northern Nevada, combined with an ongoing shortage of skilled labor and related productivity challenges is driving an increase in the number of contractor hours required to finish up the project this quarter.
Meanwhile, heavy spring, snow melt and runoff in Southeast Alaska, along with some pace backfill challenges led to a poor quarter at Kensington, which negatively impacted our company-wide gold production and financial results. The team has largely addressed these challenges, and we look forward to a stronger back half of the year there. Both Mick and Tom will provide some additional color on these 2 operations in a few minutes.
At Rochester, the focus is quickly shifting to commissioning and ramp-up efforts now that construction activities are beginning to wind down. We are now just weeks away from delivering initial silver and gold production from the new Stage 6 leach pad and Merrill-Crowe facility, which will be quickly followed by construction completion of the new 3-stage crushing circuit.
The site photo on Slide 10 of today's presentation shows the tremendous progress made to date. The team managing this project has done an incredible job under challenging circumstances over the past 3 years. After visiting there a couple of weeks ago, I was impressed once again by the sheer scale of this operation. Once ramped up, Rochester will be one of the largest open pit heap leach mines in the world projected to deliver lower-cost silver and gold ounces at production levels 2.5x higher than recent rates for many years to come.
While Rochester is our clear near-term catalyst, we see the development and drilling at Kensington as the next leg of lower-cost production growth for the company. Drilling results there point to a continuation of key mineralized zones and the potential for a longer mine life in Alaska. And just earlier this week, we issued an update on the excellent exploration results from Palmarejo in Mexico with recent assays returning the highest gold grades that we've ever had there.
Aoife will provide some additional details in a few minutes. Through significant multiyear investments in expansions and exploration at our North American assets were rapidly nearing the point where we expect to see the benefits of these investments accrue to our stockholders.
With that, I'll now turn the call over to Mick.
Thanks, Mitch. Across our whole asset portfolio, we see a great track record of excellence including long-term trusted relationships with our key stakeholders that allow us to continue to develop our mains and secure our key permits like the recent Boston expansion success at Wharf providing great opportunities for further growth within our operating footprint.
Getting into quarterly operating details on Slide 6 and starting with Palmarejo. Good silver and gold grades led to solid production for the quarter with the team overcoming a 4-day power outage due to wildfires. On the cost side, the strengthening PSO continued to create pressure, resulting in approximately $5 million of additional costs.
Moving on to Rochester. Better-than-anticipated production was driven by continued positive residual ounce production from legacy leach pads with the majority of ore placement now occurring on the new Pad 6, gold and silver production decreased as expected compared to the first quarter. Production rates will remain depressed during this transition period until first solution through the Merrill-Crowe plant is processed next month.
Looking ahead, we expect the cushion we've built up during Rochester's strong first half performance to sustain the main over the course of precommissioning, commissioning and ramp-up activities during the second half helping to keep Rochester production on track for 2023 guidance.
Getting into a bit more detail with a summary of recent milestones and what remained the head at Rochester. Following on schedule first quarter mechanical completion of Pad 6 and the Merrill-Crowe process plant, we are currently finishing up with commissioning and getting ready to start. Work on the Merrill crusher corridor is progressing well. Prescreen equipment and piping construction is well advanced.
The [stuck out] and feed conveyors have been erected, including Coeur sole secondary and tertiary stockpile stackers as well as the secondary feed conveyor. The 63 kV power transmission lines to the crusher substation have been energized. Secondary and tertiary crushers are in the final stages of electrical construction and programming of the crusher process control systems is also complete.
On the mining side of the project, looking at Slide 9, mining rates are scheduled to increase from 65,000 tonnes per day to 155,000 tonnes per day. Capacity for drilling and loading is already in place and no additional equipment is needed. The whole truck fleet will go from 14 trucks to 29 trucks, and we are currently right on plan to be at 22 trucks by the end of 2023 and the full complement by the end of 2024.
Headcount for the expansion is less than a 20% increase, and all additional people for the processing plant are already on board. Much like the first quarter, poor weather continued to affect overall project progress during the second quarter. The frequent periods of lightning creating a particular safety challenge. Considering the numerous work streams involving steel erection at heights and crane operations on the crusher corridor.
Taken together with ongoing inflationary pressures and skilled labor availability and productivity challenges, we expect the total project capital to come in between $710 million to $730 million or about 6% to 9% above the previously estimated $607 million discussed in last quarter's call.
Capital pressures notwithstanding, the pace of project development continues to advance. With mechanical completion of the crusher circuit expected in the current quarter and ramp-up to take place over the remainder of this year and into early 2024. In the near term, we expect second half production at Rochester to fall more evenly between the third and fourth quarters. Additionally, we anticipate costs in the second half of the year to be similar to the first half of the year as we complete the project and begin ramping up.
Turning to Kensington. A slower start to the year persisted in the second quarter with higher-than-expected water flows in key production areas further impacting a planned return to optimal stock sequencing. We have worked with the team at the site to develop a solid mine plan for the second half and recent performance indicators are looking more favorable. But improved performance is not expected to meet the original 2023 production guidance.
As a result, full year guidance has been revised to between 84,000 and 95,000 ounces. Lastly, at Wharf, results were slightly ahead of plan with the second quarter benefiting from high-grade material in tonnes placed earlier in the year. We are very proud to mark 2 big milestones at Wharf. Firstly, on July 20, the state of South Dakota approved the permit allowing for mining of the Boston expansion. A nearly 50-acre parcel immediately to the south of Wharf's current permitted operations giving us more flexibility and providing additional opportunities for mine life growth going forward.
Another milestone, the team at Wharf produced its 3 millionth-ounce of gold on June 23. Since Coeur acquired Wharf back in 2015, the mine has generated free cash flow for the company of approximately $360 million and continues to play a key role as a cornerstone of stable gold production in the heart of the United States.
Looking to the balance of the year, the ounces deferred at Kensington have resulted in overall gold production guidance decreasing slightly to between 304,000 and 352,500 ounces of gold. While silver production guidance remains unchanged at between 10 million to 12 million ounces. Per remains in a strong position midway through this critical year for the company.
With that, I'll pass the call over to Tom.
Thomas S. Whelan
Thanks, Mick. I will begin with a brief review of our second quarter financial results before providing a balance sheet update. Turning to the financial highlights on Slide 4. Operating cash flow in the second quarter swung to a positive $39 million compared to a negative $35 million during Q1 driven by solid operating performance at Palmarejo, Rochester and Wharf as well as favorable changes in working capital.
Our Q2 2023 adjusted EBITDA was impacted by the challenges at Kensington that Mick discussed. However, we are set for a strong second half of the year at all sites, including Kensington, which should lead to significantly higher EBITDA levels.
Turning to costs on Slide 5. We continue to see inflationary pressures on labor and power costs. These inflationary headwinds, combined with a stronger Mexican peso have been partially offset by lower diesel costs which have decreased 26% versus Q2 2022. Maintaining our balance sheet flexibility throughout the POA 11 construction ramp-up remains one of our top priorities. We are in the last weeks of heavy spending at Rochester, while we continue to invest in other organic growth opportunities across our portfolio, including our Kensington multiyear development plan and a resumption of drilling at Silvertip.
As highlighted on Slide 11, some key features of our financial flexibility include, we ended the quarter with only $80 million drawn on our revolving credit facility, leaving over $280 million of available credit capacity. We worked with our banks to complete an amendment to our revolver to provide additional flexibility on our key financial ratios through the first quarter of 2024.
We'd like to thank our syndicate banks for their continued support and confidence. We completed an innovative financing of Canadian flow-through shares during the second quarter, raising just under $30 million at a 21% premium to the market price, which will be allocated to fund exploration activities at Silvertip.
Our hedge book remains a key price risk mitigation tool during this period of capital intensity and ramp-up at Rochester. We have almost 70% of our non-Franco-Nevada related second half gold production hedged at $1,977 per ounce and approximately 50% of our second half silver production hedged at $25.41 per ounce. And we have established a new ATM program for gross potential proceeds of up to $50 million.
You add this all up, and we have approximately $415 million of total potential liquidity leaving us confident that the actions we're taking will not only see Rochester through the finish line but will also support Coeur's entire suite of high-value organic growth projects.
I'll now pass the call to Aoife.
Aoife Mairead McGrath
Thanks, Tom. As Mitch said earlier, we have had some great results from our exploration program at Palmarejo. Palmarejo is our largest mine with a land package of roughly 27,000 hectares of which only 7% has been drilled to date. The Hidalgo deposit was defined in 2019 and has since grown continuously to now be the second largest reserve after Guadalupe.
At Hidalgo, we recently intersected the highest gold grades ever at Palmarejo, discovered 2 new veins and drilling is continuing to extend mineralization along strike with 800 meters of additional strike length added over the last 15 months. The pace of drilling is expected to increase in the second half of the year and we are confident that further extensions to this deposit will result.
In addition to drilling, a large-scale mapping and sampling program has been underway in East Palmarejo, an area that has seen very little exploration or drilling. Two high-priority mineralized trends covering a combined 20 kilometers of strike length and containing multiple targets have been outlined for drilling in 2024 and beyond.
Earlier in the quarter, we also issued a news release on Silvertip, our high-grade polymetallic carbonate replacement deposit in Northern British Columbia. Since the project was acquired in 2017, the measured and indicated resource base has nearly tripled to over 7 million tonnes and grades continue to be amongst the highest in the world for similar-type deposits.
During the quarter, detailed logging at the geology intersected in the deep hole, testing the hub or mineralizing source showed geological evidence of proximity to porphyry and we plan to continue to test for skarn and porphyry-style mineralization over the next few years. However, the main aims of drilling over the next 18 to 24 months will be to continue growing the resource base to test additional carbonate units in the stratigraphy and to test Silvertip look-alike targets in the district.
I will now pass the call back to Mitch.
Mitchell J. Krebs
Thanks, Aoife. Slide 13 summarizes our top priorities for the remainder of the year, which starts with a safe and efficient commissioning and ramp-up of the expansion project at Rochester to set up the operation for a solid 2024 and beyond. Although Rochester is a primary focus in the second half, delivering stronger performance at Kensington and generating results from the development and drilling program there is a close second.
Together with steady performance from Palmarejo and Wharf, we should end 2023 well positioned to begin delivering the benefits of these multiyear investments, which include higher production particularly for silver, lower costs, free cash flow and lower debt levels. With a constructive macro backdrop for both gold and silver, we believe our strategy is well timed and well suited to drive outperformance for our stockholders in coming years.
With that, let's go ahead and open it up for questions.
Question and Answer Session
Today's first question comes from Michael Dudas with Vertical Research.
Michael Stephan Dudas
First question on Kensington. Maybe a little more details on how the grades will flow through second half of the year and as we kind of looked early into 2024, what your expectation levels are relative to say what the plan would have been 6 to 12 months ago?
Mitchell J. Krebs
Yes. Okay. Thanks, Mike, for the question. Mick, do you want to cover that?
Yes. So -- and really, the challenge that we had there, Michael, was inflow of water, and so it wasn't really around loss of grade, but more on timing of stocks and the sequencing there and really at this time in this part of the mine plan not having enough work for us to pivot to while we go through this development program. So we expect to see similar grades going through the end of the year and we're seeing good things around that, and we expect to get a few of those ounces back in 2023 and the majority of those -- vast majority of those will then be planned into 2024 as we go forward.
Michael Stephan Dudas
And 2024 plan is similar full year-wise, roughly to what we came into 2023?
Yes, exactly. A little bit better because we now have a few additional loans to plan into that -- into that package for 2024.
Michael Stephan Dudas
No, that's encouraging. I appreciate that. Yes. Secondly, you mentioned about your cost -- the inflation or the mix positive and negatives on the cost side. As you're trying to add labor and bring folks on for the expansion at Rochester, where are you on that process? You said you have a gold increasing, I said, by 20%, I think it was in the presentation. Is it relative to your expectation cost, availability, do you see any issues that's going to limit maybe the productivity or the plans to rock and roll as you get through as you move the ramp-up in 2024?
Mitchell J. Krebs
Yes, good question. Mick, do you want to cover that, too?
Yes. We're in great shape, actually, Michael. For the process plant, we have all the people that we needed. And that was less than an additional 40 people overall. But what we do have to do is as we bring on the trucks for the mining side of the business, then we hire new truck drivers. That's our NV-level job for Rochester and generally, we have good access to those folks, and we bring them on as we need them.
So we're not overloaded on people currently, we'll have exactly the right number to start up the process plant. And then the trucks that we'll have by the end of 2023, we have all the drivers for those trucks. And in 2024, we'll hire as we need. So we don't see any productivity impact with respect to access to people. And certainly, we've had some inflationary impacts from the cost of contractors for the project and then people to ensure that we can get those good quality people to run this project for the long term, but we have them right now.
Next question comes from Mike Parkin with National Bank.
Just give a sense of how Kensington is performing for like the month of July and how things are going in August? Or are you kind of getting -- like you've addressed it a little bit with the earlier question, but just trying to get a sense of where are you in terms of normal productivity?
Mitchell J. Krebs
Yes, absolutely. Good question. I'll start, and then Mick, you can fill in. July was a pretty significant step-up from June. A lot of that has to do with getting that water under control, up in the upper levels of the Kensington area where we mine an area called Zone 12, which is where we were delayed in mining because of the heavy water. So getting that addressed helped with July.
Equally, I think August is expected to be better than July. So incrementally, we're heading in the right direction as they sort of get back closer to being on plan. But Mick, did I leave anything out that you want to mention?
Yes, there were a couple of things in that area because we have a blend in the same area of development mining at the same time. And that development program was going really well. But as we saw a lot more water, we really just had to step back a little bit in the first half and reset our methodology.
Now we'll have a little bit of a change in methodology, which probes forward from those development contracts. And when we see that higher level of water, then we can proactively grout and control those floors. That's allowing us to perform a little bit better in July, and we expect that improvement to continue going forward.
Mitchell J. Krebs
Just one other thing I'd add on to that, Mike and Mick, bolter long-hole drill availability, improving new equipment on site. That's addressed that, that challenge.
Exactly. So that helps move a little bit faster. And then past management in the part of the main were employing a little bit of technology to support that process as well as really high up in the main as the wetness level of that piece, we have to have that a little bit higher. So we've been pump higher in the main and the team have a really good management plan for that, and we're seeing good results. So it gives you a lot of confidence. We're -- it's always a work in progress, of course, with miners, but it's going really well.
Okay. So it sounds like the water inflow is in the function of coming down, ramp access for ventilation. It's more just saturation of the surface and then eventually seeping into the mine. Is that correct?
It's a little bit of both, mostly though from the drilling program and then the [Frechette] sucks the ground and then it comes into the areas that we're mining. So that's where the majority of the inflow came from. And we saw some pretty high and unusual flows this year.
And you've seen some of the news in the local environment around some of the flooding and that hasn't impacted our operation but it gives you an indication of how wet it was up there in the early part of the year. And so we're managing that well now but it certainly was a challenge in H1.
So is there anything that you could do to like mitigate the risk of that being a severe going forward, like maybe lessening the egress through some of the infrastructural pathways going forward? Or is it just leave it and I hope it's not a 100-year event again kind of thing?
Yes. I mean, look, since Aoife came on, we're getting a higher and higher visibility around the structures and systems that we're mining through in Kensington. And that knowledge is helping us to look for and track we have potential additional water. I mean, come from. I don't know if Aoife wants to comment on that.
Aoife Mairead McGrath
Yes. Thanks, Mick. We've also deployed some new technology on the actual drill rigs. They're called AquaGuard and they prevent inflow into the hole. So we're deploying those with pretty good success at the moment as well. And there's this particular area where some structures seem to be more water-bearing than others, and we're mapping those out pretty rapidly and getting a much better understanding. So that makes that there's a number of fronts we're working on to mitigate that.
And then with respect to the Wharf land area expansion, is that going to see a conversion of any resources to reserves because of that? Or is it something that some more drilling? Like how should we kind of think about that mine life extending and the involvement of that?
Mitchell J. Krebs
Yes, I'll start, Mick, then you can fill in. It doesn't change the 8-year mine life that we have, but it's obviously something we needed in order to begin the stripping and then the mining in 2024 in that Boston area. So getting that now gives us a chance to maybe get a little bit ahead on the stripping so that we can get in there. There's some slightly better grade in Boston that will then come into the plan in 2024. Mick, anything you want to add?
Yes. And we already had a lot of that in our plan already because we made a good assumption that would get the permissions to be able to mine that area because we have such a strong relationship and such a good track record around permitting and access to that land in the local environment.
So we built it in, but that doesn't mean that we won't find some nice opportunities as we get into the mining in that area because we drill it enough to characterize it. And then once we start mining it, we'll optimize it and investigate what else we've got there. But at the moment, in the plan and should be executed through next year.
And then more switching over towards the balance sheet. Can you give us a sense like you've announced this ATM this morning? We've seen quite a bit of activity recently with like debt-to-equity conversion. Can you give us a sense and you've also done some seemingly very well-timed hedges for both gold and silver as well. What's your thoughts going forward?
Do you feel like the funds from the ATM are sufficient to kind of get you over the hump in addition to the remaining room on the RCF? Or is there additional levers that you're thinking of pulling that being maybe potential more debt-to-equity conversion, boosting prepaid, boosting hedges? Just looking for some general color there.
Mitchell J. Krebs
Yes. You kind of highlighted most of the levers that we have or tools that we have in the toolbox to make sure that we can manage our liquidity levels through this last period of elevated capital. We feel like we've got the flexibility that we need now to get over, like you said, the hump and get to the other side of the Rochester expansion so that we can start to see some free cash flow and begin delevering the balance sheet in 2024. But Tom, do you want to add anything to the question?
Thomas S. Whelan
I think the key was the -- we only have $80 million drawn on the revolver at June 30. So that leaves $280 million. And we sort of look at what's left on Rochester with the revised guidance, $140 million to $160 million. So again, the plan would be to fund that primarily through the revolver. And then as fast as Mick and the team can get Rochester ramped up, that's when we start repaying the debt.
But in the meantime, we've always said we're not going to come up short. And so we've got all these other levers to make sure that we don't come up short. And on balance, we've got great partners and our bankers who had no issue. They understood the challenge at Rochester and gave us that extra flexibility through to the end of the first quarter '24. And so we're feeling pretty comfortable.
Mitchell J. Krebs
I'd characterize it as kind of incremental at this point, smaller dollar amounts. And obviously, that comes with less time here to go until we're done with the expansion out there in Nevada. Does that answer your question, Mike?
Yes. Just a follow-up there. We've seen some recent increase in the accounts payable sitting at $143 million at the end of June. Is some of that associated with the completion of Rochester, and we expect that to kind of come back down? Historically, it looks like you're -- it does move around quite a bit, but maybe something closer to $100-ish million in about a year's time? Is that fair to assume?
Mitchell J. Krebs
Yes. You're spot on there. Tom, do you want to follow a little bit further?
Thomas S. Whelan
Yes. Look, we're, of course, managing the payables well. It's a big invoice from TIC that comes in every month. And as you might suspect, we're looking through that and coming through that pretty carefully. Having said that, there have been no issues on that front, but we're obviously not going to pay the bill any sooner than it's required. And as we're in the last of this big spending those bills every month, they're pretty significant. So -- but yes, we're almost through it. We'll revert back to sort of our normal working capital levels by the end of the year.
And is that typical kind of construction turns to it in terms of doability on those payables? Is it 90 days, 180 maybe you can't say because of privacy restrictions with the contractor. But do you have an ability to defer it a full year? Or is it the nature of the term basically shorter?
Thomas S. Whelan
Okay. I would say, pretty standard commercial terms. We have a great relationship there. And again, we want them to be paid to make sure that they're bringing in the 500-plus folks are coming across the gate every day. So now that's all I'd say there.
Seeing no further lines in the queue, I would like to turn the conference back over to Mitch Krebs for any closing remarks.
Mitchell J. Krebs
Okay. Thanks. We appreciate everybody's time this morning. Have a great rest of the summer and look forward to speaking again following the release of our third quarter results this fall. Have a good day.
The conference has now concluded. Thank you for your participation. You may now disconnect your lines.