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Coeur Mining Inc (NYSE:CDE)
Q4 2019 Earnings Call
Feb 20, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Coeur Mining Fourth Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to your host today, Paul DePartout. Please go ahead, sir.

Paul DePartout -- Director, Investor Relations

Thank you and good morning. Welcome to Coeur Mining's fourth quarter and full year 2019 earnings conference call. Our results were released after yesterday's market close and a copy of the press release and slides for today's call are available on our website.

I would like to remind everyone that our press release, slides and some of our comments today include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentation as well as the Risk Factors described in our 2019 10-K.

Now, I'll turn it over to Mitch.

Mitchell J. Krebs -- President and Chief Executive Officer

Thanks, Paul, and good morning. Tom Whelan and Terry Smith are here with me today, along with a handful of other members of the management team. Starting off on Slide 4, our 2019 results reflect a strong second half from our three primary gold operations and higher precious metals prices.

We saw our 2019 revenue increase 14% to over $700 million. Our adjusted EBITDA grow 11% to $174 million and our operating cash flow increased fourfold. We were also successful in achieving our full year guidance targets for capex and G&A.

Looking at Slide 3, some additional highlights include: three consecutive quarters of positive free cash flow to finish the year; encouraging silver recovery results from HPGR at Rochester; notable improvements to our balance sheet, including the retirement of over $160 million or over one-third of our remaining debt; and solid results from our exploration programs.

Looking more broadly at our exploration results and our year-end reserves and resources, Slide 13 highlights the year-over-year growth across most categories in metals. This slide also highlights the extent to which our reserves and resources have grown, since 2015.

Given the attractive returns and results from our investment in exploration, we plan to substantially increase our spending level in 2020 by over 60% to roughly $50 million, which will by far be the largest program in the Company's history. Our Palmarejo, Kensington and Wharf operations all had a great second half of 2019, while Silvertip and, to a lesser extent, Rochester had disappointing ends to the year.However, we believe that both of these assets have clearly defined paths forward that lead to strong cash flow and solid returns.

Starting with Rochester, we lost some operating time last summer when we had to replace a failed secondary crusher, which led to lower placement rates during the second half. And Terry will talk more about this in a couple of minutes. We are now achieving a sustainable level of crusher performance and starting to see positive recovery results from HPGR, which gives us confidence in our 2020 plan.

The final environmental impact statement was published yesterday. And we expect to receive the record of decision from the Bureau of Land Management next month for POA 11. This expansion is expected to begin later this year and be largely completed by late 2022. It's hard to overstate the expected impact this expansion will have on Rochester and on the entire Company, in terms of the level of production and cash flow over a long mine life from an operation, located in, arguably, the best mining jurisdiction in the world.

Now turning to Silvertip, we took a $251 million non-cash impairment charge at year-end, then also made the decision to temporarily suspend active mining and processing activities, while we retool and expand the operation to be more resilient to zinc and lead markets, and to be a more stable and consistent source of cash flow for the Company.

We've put a tremendous amount of effort into commissioning and ramping up Silvertip over the past two years. And our stabilization efforts have made significant progress. However, the falloff in zinc and lead prices, and sharp escalation in spot treatment charges have become an insurmountable challenge to the operation's ability to achieve positive cash flow.

Although, we are hitting pause at Silvertip, we are not taking our foot off the gas. We believe the best way to maximize the value of the operation is to accelerate our investment in exploration to extend the mine life and expand the mill to achieve the benefits of scale.

Our confidence in our ability to expand Silvertip's resource comes from the success of last year's program. We invested about $4 million in resource expansion drilling and saw the inferred resources increase by over 70%, and M&I resources increase by nearly 40%. We plan to double our investment this year and expect the program to kick off next month.

In parallel, we'll complete a pre-feasibility study this summer to further define our plan to expand the mill, allowing us to apply lessons learned and restart the operation from a position of strength. An expansion was always in the works for Silvertip, but current market conditions have caused us to accelerate our thinking.

We anticipate that the earliest possible restart at Silvertip would be in late 2021 and will be driven by the results of our exploration program and the feasibility study as well as prevailing market conditions. Before passing the call to Terry, I want to point out a set of slides, starting on Slide 20, which highlight our best-in-class corporate governance initiatives and proactive approach to environmental health and safety.

Gold and silver are both key inputs for products that we all use on a daily basis. Ensuring that we have an ethical supply source for these commodities will be important for generations to come. I also want to give a special thanks to everyone at Coeur for their continued commitment to operating in a safe and responsible manner. Our injury frequency rates decreased by roughly 10% in 2019 and we improved our environmental performance across numerous metrics.

Now I'll turn it over to Terry.

Terry Smith -- Senior Vice President, Operations

Thank you, Mitch, and good morning, everyone. As Mitch highlighted, our three primary gold operations delivered strong results, while our Rochester and Silvertip mines both experienced challenges last year. Slides 5 and 6 summarize our performance in 2019 and provide an outlook for 2020. Starting with Palmarejo. Higher throughput rates and improved silver grades drove solid production results during the fourth quarter. Most of the increase in throughput was attributable to additional ore feed from La Nacion, which averaged approximately 700 tons per day in the fourth quarter.

For the full year, we mined through some geotechnically challenging areas and increase the proportion of longitudinal stopes, which impacted grades and recoveries for both metals. Looking ahead, we plan to increase throughput by roughly 10% in 2020 to help offset some lower grades that we expect to see during the year.

Switching over to Kensington, 2019 was a year of very strong results, showcasing our multiyear effort to discover, develop and mine higher grade material. Gold production increased over 20% during the year to roughly 128,000 ounces, largely driven by average gold grades that were over 15% higher than the prior period. We produced over 18,000 ounces from Jualin at an average grade of 0.36 ounce per ton or 12.3 grams per ton. The addition of this high-grade ore feed helped to generate record free cash flow of $33.5 million, while also lowering unit costs by $140 per ounce or 13%.

Looking ahead, we expect another strong year despite slightly lower grades from Kensington main deposit. We also anticipate Jualin will account for roughly 20% to 25% of Kensington's total production for the year. At Wharf, 2019 was another great year for the operation. Gold production was nearly 60% higher in the second half of the year, helping us deliver both production and costs in line with full year guidance ranges.

Wharf generated $37 million of free cash flow during 2019, bringing its cumulative total to $173 million since we acquired the operation five years ago for about $100 million. Additionally, Wharf mine life is currently seven years, the same as when we acquired it back in early 2015, after producing 450,000 ounces since then. Looking ahead, we expect similar production levels year-over-year, but plan to mine additional tons which will increase our strip in 2020.

Turning over to Rochester, we view the second half of 2019 as a temporary setback in what we expect will be a long and prosperous future for the operations. We had a secondary crusher fail in the middle of last year during commissioning of our crusher expansion. We implemented our contingency plan by replacing it with a smaller idle crushing unit we had on site. However, the replacement unit became a bottleneck as we struggled to ramp up to desired levels, which resulted in lower stacking rates. Our crusher production is hitting its stride early in the year, and we are confidently expecting an average throughput of 34,000 tons per day in 2020.

We anticipate a slower start to the year as we build momentum on our leach pad and restock metal inventories. We expect production to pick up during the second quarter. This will be a big year for Rochester as we focus our efforts on expanding the operation and plan to publish an updated technical report late in the year.

And finally, at Silvertip. We continue to have strong conviction in the long-term potential of the high-grade deposit. However, even at a consistent 1,000 tons per day and an optimized cost structure, we would not expect to generate any material free cash flow given the current market environment for zinc and lead. We didn't arrive at this decision lightly. After much analysis and discussion, it became clear to us that temporarily suspending operations, while focusing on growing the resource and expanding the mill was the correct decision. We believe the mill will be -- the mill expansion will be relatively straightforward. The majority of our engineering work will focus on expanding and modernizing the flotation and dewatering circuits as the front and back ends of the plant already have the capacity to handle more throughput. Other than the mill, the mine and ancillary site infrastructure will be upgraded to support higher throughput all of which will be incorporated into our pre-feasibility study, Mitch mentioned earlier.

During this temporary suspension, we anticipate holding costs to total approximately $6 million per quarter and to incur onetime costs of $5 million to $10 million during the first half of the year.

With that, I'll pass the call over to Tom.

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Thanks, Terry. I'd like to start off by highlighting the improvements we made to our balance sheet during 2019. As presented on Slide 15, we retired over $160 million of debt during the year, roughly a 36% reduction. We also increased liquidity by over $75 million in 2019, ending the year with an undrawn $250 million revolver and $56 million of cash. Driven by our debt reduction initiatives and an 11% increase in adjusted EBITDA, our total leverage ratio at the end of the year dropped to 1.7 times compared to nearly 3 times at the end of 2018.

I'd like to highlight our top line results as seen on Slide 7. Gold sales accounted for roughly 70% of our revenue in 2019. And from a geographic perspective, our U.S.-based operations generated just under 60% of total revenue during the year, while Mexico and Canada contributed 36% and 6%, respectively. These results showcased our balanced portfolio of North American precious metals assets.

Shifting over to Silvertip and looking at Slide 9, which goes into detail on the current and zinc/lead markets. We have seen continued deterioration in prices, while treatment charges for our concentrates have risen considerably. Both zinc and lead prices have dropped well below 2020 consensus levels in recent weeks. In just the past three months treatment charges for our zinc and lead concentrates have increased over 15% and 35%, respectively. This severe deterioration has impact of significantly reducing revenue and adding substantial amount of cost to the operation.

Global zinc mine supply excluding China is forecast to increase in 2020 as some major zinc operations are expected to ramp up production. We expect the annual zinc benchmark to be at or near $300 in 2020 with spot treatment charges at least 10% higher. Off-spec zinc concentrates will likely incur even higher treatment charges or perhaps not be marketable in this environment.

On the lead side, tepid demand, increasing mine supply and availability of secondary or recycled lead have fueled a sharp increase in treatment charges during the second half of 2019 and have continued into 2020. We anticipate the annual lead benchmark to be at or near $170 in 2020 while spot treatment charges are expected to at least be 20% higher. We've just returned from the International Zinc Association conference and the outlook for zinc and lead remains weak. However, unlike copper, both markets are small and can turn quickly.

On a positive note, I am very excited about the pre-feasibility study and the potential to improve recoveries and concentrate grades with a larger redesign plan. Before handing the call back over to Mitch, I wanted to provide a brief update on our hedging program for 2020, which is highlighted on Slide 16. You may recall that we layered in some zero-cost collars for 2020 last year. This since added to this program. In total, we have hedged nearly 180,000 ounces of gold or just over 50% of our 2020 production, based on the midpoint of guidance. These collars have an average floor of $1,437 per ounce with an average ceiling of $1,813 per ounce.

With that, I'll now pass the call back to Mitch.

Mitchell J. Krebs -- President and Chief Executive Officer

Thanks, Tom. Looking at Slide 17, you can see our top priorities for the year. Number one, continue validating HPGR and accelerate the Rochester expansion project. Number two, deliver results from our large investment in exploration. Number three, complete a successful PFS and advance our efforts to retool and expand Silvertip. Number four, deliver consistent operating and financial results across our operations. And number five, further improve on our already strong environmental health and safety performance.

With that, let's go ahead and open it up for any questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question comes from Mark Reichman with Noble Capital Markets.

Mark Reichman -- Noble Capital Markets -- Analyst

Good morning.

Mitchell J. Krebs -- President and Chief Executive Officer

Hi, Mark.

Mark Reichman -- Noble Capital Markets -- Analyst

Just a quick question on the Crown Block, I think permitting limited the number of step-out holes that you were able to drill in 2019 and if memory serves correct, you were looking at getting some additional permitting to allow drilling on a larger area and I was just curious whether you still expect that by the end of the second quarter?

Mitchell J. Krebs -- President and Chief Executive Officer

There's still the timing and we'll accelerate then our drilling both at Crown and at Sterling starting in the middle of the year and throughout the second half of the year.

Mark Reichman -- Noble Capital Markets -- Analyst

Okay. Well, so much attention is focused on the Silvertip and I think investors really look at Coeurs as a precious metals play, so I'd kind of like to focus on that there and you've got this Rochester expansion. You've got a lot of potential with Sterling, developing the Crown Block, you've got Wilco, Lincoln Hill. I was just curious if you could just maybe update us a little bit on the timing of the Rochester expansion? I know the technical report will be done at the end of the year, but kind of what's your thinking is in terms of when the timing really starts to accelerate on that? And then, how these other pieces fit into supporting that expansion?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, sure. It's Mitch here, Mark. Hi. The main driver is to ensure that we have POA 11 largely completed by end of 2022. That will allow for a smooth transition from the current Stage IV leach pad on to the new to-be constructed Stage VI leach pad that forms one of the key elements of this planned expansion. So, there'll be minimal capital this year spent on POA 11 and then the ramp-up is in '21 and '22 to have that ready to go then by the time we're nearing capacity on the current Stage IV leach pad around the beginning of 2023. And then on the backside of completion is where we really are excited as a company in terms of what Rochester will then deliver in terms of production and cash flow, good long mine life and really allows us to kind of take another step-up overall as a company in terms of size and cash flow and longevity of that cash flow. So, does that answer your question?

Mark Reichman -- Noble Capital Markets -- Analyst

It does, but how does like in terms of developing out Lincoln Hill and then, what's your expectation on how you integrate Sterling and the Crown Block and Wilco into the portfolio on a little more active basis? I guess that all kind of plays into this Rochester expansion as well?

Mitchell J. Krebs -- President and Chief Executive Officer

Definitely, sequencing is a huge element to our thinking. You don't want to try and do everything at once for all kinds of reasons, obviously. Just to, I wrote down the three or four assets that you mentioned. Lincoln Hill, which sits adjacent to Rochester, we will be drilling there this year and we will look to continue to advance our engineering work and around how and when Lincoln Hill can become a part of the mine plan at Rochester post POA 11 expansion, but given the minimal capital to get that into the plan out there, it's only a couple of miles from where this new Stage VI leach pad will be located and the grades, as you might recall are gold grades are something like four times higher than what we're mining at Rochester. So we'll definitely want to try and pull those ounces into the mine plan as soon as we can. So that one sort of goes hand in glove with the POA 11 expansion and our focus there at Rochester.

Sterling and Crown, I would separate those two into two distinct projects where Sterling is likely to be a smaller, but probably higher grade; shorter life, but good margin, gold oxide, heap leach kind of operation that won't require much capital to get into production whereas Crown will take a few more years of drilling. That's where we likely have a much larger resource, a stand-alone capital project there and that, very clearly, would need to slot in post POA 11 from a timing standpoint. And then, you mentioned Wilco, which it's funny, when we bought the asset package from Alio Gold, our main focus was Lincoln Hill for all of the obvious operational synergies, but with gold now continuing to drift higher and higher, those Wilco resource ounces start to become something that we're going to have to turn a little and pay a little bit more attention to. It's not quite as near-term or doesn't have quite the operational synergies as a Lincoln Hill, but there's a large resource there that's very price sensitive and we'll need to kind of dust off our thinking around Wilco, but I would put that in the bucket of much kind of longer-term growth.

Mark Reichman -- Noble Capital Markets -- Analyst

Okay, great. Well, listen, I really appreciate that. Very helpful. Thanks.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, sure. Thanks for the question.

Operator

Thank you. [Operator Instructions] And the next question comes from Joseph Reagor with Roth Capital Partners.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Good morning, guys. Thanks for taking the question.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, sure.

Joseph Reagor -- ROTH Capital Partners -- Analyst

So looking at the cash cost guidance, it seems like it's kind of working its way higher a little bit compared to last year. Is there any particular thing driving that? Is it treatment charges, tax rates, what's the main driver there? It seems like kind of across the board a little bit higher cost.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, a good question. I'll start and then Tom, I'll flip it to you and then, Terry, you can fill in any blanks. Clearly, Joe, every asset has its own unique story and rationale. Overall, we're trying to enter 2020 with a set of guidance ranges that we feel are achievable and something that we can deliver into throughout the year, but I'll let Tom start with a few details on each that have ranges that maybe caught your eye Joe, and then Terry, fill in and then Joe, maybe you can tell us if we've answered your question or not?

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Hey, Joe, so I always like to go and order PRKW, so Palmarejo first. You know, Palmarejo, we're seeing a drop in the grades, but as you see we've been able to maintain the same production. So the unit cost of mining process, G&A are all staying the same, but the grade is kind of the answer there and I know, Alberto and Timo [Phonetic] will be doing their best to handle that. Again, what we saw last year was a bit of an increase in some of the inputs, so diesel etc, etc. So we're expecting those to stay flat. Rochester, again, I think what we have there is a pretty conservative estimate in terms of where we see things going. We've got, as Terry has mentioned, a lot riding on Rochester this year and so again, I think that is reflective of what you see in the cost estimate. Going to Kensington, again, I would say, Kensington is kind of a pretty steady year-over-year. So that wouldn't have much to add there. And then the one issue at Wharf is we're in probably one of the highest strip years, Terry has a little more history than me, but one of the highest strip years. So that's sort of the reason for an uptick in the cost. Terry, I don't know what else -- did I miss anything?

Terry Smith -- Senior Vice President, Operations

Those are the big moving pieces, Tom, I think you captured it pretty well.

Mitchell J. Krebs -- President and Chief Executive Officer

Joe, does that answer your question?

Joseph Reagor -- ROTH Capital Partners -- Analyst

Yeah, that helps and then just kind of a bigger picture on the Rochester expansion, I think the expectation is to fund that via cash flow. If for some reason that's not an option, what would be the financing plan there?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, good question and as we work through this year and firm up capex and get an updated 43-101 that provides a more comprehensive view of the whole project by the end of the year, along with that, we'll have a more definitive kind of funding plan to go along with that 43-101, but you hit it. I mean, between the cash, the revolver, and free cash flow and with 70% of our revenue coming from gold and gold now seeming to be pretty buoyant. That, all of a sudden opens up a whole other pretty big opportunity in terms of available funding to allocate to POA 11. Beyond that, then we'll look at whether it's leasing or we'll still going to be taking a good crack at this capex here throughout the first half of the year to see how we can shave and streamline and reduce and then we'll see what, if any gap remains. Hopefully, there won't be one. If there is, we've got a lot of other alternatives. It is one of the drivers, though, Joe, behind putting more of this price protection in place underpinning this gold to help increase our confidence level in that free cash flow coming from gold and from this higher gold price. So that's a little bit of the rationale there, so that that can be a sizable source of funding for POA 11, but as Rochester goes through the year and we get more and more confidence out of these higher and faster silver recoveries. Its own operating cash flow will be, I think, by far the largest source of funding to deliver POA 11.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Okay. Thanks. I'll turn it over.

Mitchell J. Krebs -- President and Chief Executive Officer

Okay. Thanks, Joe.

Operator

Thank you. And this concludes the question-and-answer session. I would now like to turn the conference back over to Mitchell Krebs for any closing remarks.

Mitchell J. Krebs -- President and Chief Executive Officer

Okay. Well, hey, we appreciate everybody's time this morning. I know it's a busy day and we'll look forward to speaking with you all again in the spring to go through our first quarter results. So have a good day. Thanks for your time.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Paul DePartout -- Director, Investor Relations

Mitchell J. Krebs -- President and Chief Executive Officer

Terry Smith -- Senior Vice President, Operations

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Mark Reichman -- Noble Capital Markets -- Analyst

Joseph Reagor -- ROTH Capital Partners -- Analyst

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