Coeur Mining, Inc. (NYSE:CDE) Q3 2022 Results Conference Call November 10, 2022 11:00 AM ET
Company Participants
Mitchell Krebs – President and CEO
Mick Routledge – SVP and COO
Tom Whelan – SVP and CFO
Aoife McGrath – EVP, Exploration
Conference Call Participants
Operator
Good morning, and welcome to the Coeur Mining Third Quarter 2022 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 Mitchell Krebs, President and CEO. Please go ahead.
Mitchell Krebs
Good morning, and thanks for joining our third quarter earnings call. With me here in Chicago are Mick Routledge, Tom Whelan, Aoife McGrath, and several other members of our team.
Before I begin, please note our cautionary language on forward-looking statements in our slide deck and refer to our SEC filings, which are available on our website.
Starting off on slide 3, third quarter production results were in line driven by quarter-over-quarter production growth at Rochester, Kensington and Wharf. While cash flow in the quarter was negatively impacted by lower prices, higher consumable costs and lower grades at Palmarejo along with a $21 million noncash inventory adjustment at Rochester.
We’re set up for a strong fourth quarter to finish the year within our full year production and cost guidance ranges and look forward to delivering strong production and cash flow growth on the back of the Rochester expansion that is expected to be completed mid next year, followed by commissioning and ramp-up in the second half.
Turning to a few third quarter highlights, Rochester achieved an important milestone with the successful installation of pre-screens into the existing ex-pit crusher circuit. Since it was commissioned, the team has seen meaningful improvements in crush size and has been able to better manage the level of fines, which bodes well for the expansion as we transition from the existing operation to the newly expanded operation next year.
The expansion is advancing on schedule with overall completion now at 61%. We’ve updated the total capital estimate to incorporate the cost of adding pre-screens into the new crusher to factor in potential price and quantity risk related to steel, cement and labor needed to complete the project and to add contingency to cover remaining potential project risks.
The updated range represents an increase of about 9% to 12% from the prior estimate. The photographs on slide 10, 11 and 12 show the impressive progress we’re making in Rochester. Our team has done a tremendous job of overcoming a pandemic, disruptions from the breakdown of the global supply chain, an incredibly tight labor market, and the highest inflation in 40 years to get this project to where it is today, all while maintaining zero lost time incidents, after totaling over 1.2 million hours on the project.
We remain focused on delivering what we believe will be a world class long life operation, and one of the largest primary silver mines at a time when global silver demand is beginning to strengthen. Toward the end of the quarter, we sharpened the focus on our core assets, agreeing to the strategic sale of the Crown and Sterling exploration properties in Southern Nevada. The transaction closed on November 4th and further streamlines our portfolio, while crystallizing significant value for Coeur in the form of $150 million in upfront cash.
Before I hand the call over to Mick for a review of our operations, I want to briefly turn your attention to slide 24, which highlights the importance of gold and silver in everyday life. The world is beginning to realize the importance of metals and the need for responsible mining. The products we provide sit at the very beginning of the supply chain for essentially everything we need and use. Virtually every global trend today, be it decarbonization breakthroughs and technology that improve lives and public health or the growing importance of sovereign natural resources in an increasingly fractious world, supports a strong long-term fundamental outlook for our industry.
With that, I’ll turn it over to Mick.
Mick Routledge
Thanks, Mitch. It’s great to witness the growing recognition of mining to the 21st Century economy and to everyday lives. I know that the people at our sites take that very seriously and come to work every day with commitment and purpose. That hard work and dedication are apparent in our operating results to date. Through three quarters of 2022 our mines continued to demonstrate growing consistency and stability. Looking forward, we have a tremendous opportunity to further entrench best practices and business improvement in our operating culture to sustain and grow our performance. We have the right assets and the right people in place to accomplish this.
Turning to our third quarter production summary on slide 6 and beginning with Palmarejo. Production was affected by lower grades, which were partially offset by higher recoveries due to flotation plant improvements. Costs for most consumables remain elevated but are beginning to trend in the right direction, with recent decreases in diesel and cement costs, reflective of cost control efforts and ongoing efficiency improvements. Lower labor costs in the quarter were due to the tightening of contractor payments. Year-to-date metals production continues to exceed forecast and we remain in good position to achieve production and cost guidance.
Moving to Rochester, following a significantly improved second quarter, gold and silver production increased again, driven by strong ore placement rates in the prior period. Gold ounces produced increased 5% quarter-over-quarter, while silver ounces produced increased 8%.
Tons placed in the third quarter were impacted by the installation of the prescreened pilot system, which was completed on July 22nd. Third quarter adjusted CAS for gold and silver on a co-product basis were impacted by continued increased fleet maintenance and consumable costs.
As Mitch mentioned, ramp-up of the prescreen pilot system continues to progress well, with encouraging preliminary results shown on slide 9 for product size distribution improvements and fines management. Our focus to-date has been on testing the limits of the system and on dialing in operating windows. We’re now transitioning to locking in operating discipline and establishing consistency with repeatable results.
Count tests are underway to give early indications of recoveries with initial results expected in the first quarter of 2023. As mentioned last quarter, we anticipate a period of elevated costs throughout Rochester’s transition period as the integration and testing of the prescreening system takes place and construction activities accelerate. Despite expectations for a strong finish, Rochester’s slow start to the year is expected to result in gold and silver production tracking to the low end of the 2022 guidance.
As the photos in our presentation clearly illustrate, the pace of construction at Rochester has picked up significantly with approximately 450 contractors now working on site. Virtually all concrete work is now complete with the exception of the primary crusher pocket and the pre-screens, which are now under way. The Merrill-Crowe plant is taking shape.
Slide 10 in the presentation shows the October 19th placement of the de-aeration tower. Construction of the Merrill-Crowe plant is on track for completion by the end of the first half of 2023 right in line with the P85 project schedule. With engineering of the pre-screens assembly now complete, we have aligned all work streams on the crushing circuit and construction continues on schedule. I’m also pleased to report that the construction project has now passed two years as of August 1st without a lost time incident.
Moving to Kensington, production increased quarter-over-quarter with great contributions from Jualin and Kensington. The focus of fourth quarter production is on Kensington, Eureka and Jualin. And we began to see production from Elmira last month. With strong contributions from Zone 30, we believe Kensington is on track to achieve the lower end of the 2022 production guidance.
Wrapping up with Wharf, a 6% production increase quarter-over-quarter was driven primarily by recovery timing of higher grade ore placed in the previous period. Wharf remains on track to finish the year around the top of its 2022 production guidance range.
With that, I’ll pass the call over to Tom.
Tom Whelan
Thanks, Mick.
Turning to slide 4, I’ll quickly run through our consolidated financial results before spending some time to review the key initiatives we have taken to bolster our balance sheet over the remaining duration of the Rochester expansion during these uncertain economic and geopolitical times.
Our third quarter financial results were impacted by significantly weaker spot gold and silver prices and continued cost inflation. Revenues decreased by $21 million quarter-over-quarter, driven primarily by 24% lower silver sales. This decrease was due to a 16% decrease in average realized silver price and an 8% decrease in silver ounces sold.
Gold revenues decreased by 5% quarter-over-quarter due to a 4% decrease in gold ounces sold. During a quarter when the spot gold price decreased by 8%, it is important to note our average realized gold price only decreased by 1% due to the positive impact from the downside protection we have in place via our gold hedging program. We realized an $11 million gain on our gold hedges for the quarter, which equated to a $133 per ounce boost to our average realized gold price this quarter. The estimated market value of the hedge book was approximately $47 million at September 30th.
Operating costs were in line with expectations for the quarter, but remain elevated due to ongoing inflationary pressures on diesel, other consumables and labor. We are seeing pockets of cost moderation throughout the portfolio, and our aggressive cost management and business improvement initiatives contributed to a lower increase in 3Q compared to the prior quarter. As we all see in our daily lives, fuel prices remain frustratingly high. Coeur consumes between 16 ,, to 18 million gallons of diesel per year.
Our average realized diesel price for the quarter was $4.33 per gallon, which was a modest 5% decrease from Q2 2022. However, this price still represents a 45% increase in Q2 2021 as outlined on slide 5.
A couple of additional items to note on the third quarter. Operating cash flow swung to negative $90 million, driven by the aforementioned 24% decrease in silver revenues and the semiannual interest payment on our senior notes.
Capital expenditures for the quarter were $97 million, reflecting the planned POA 11 expenditures. Notably, approximately $575 million of the estimated POA 11 capital has now been committed and $443 million has been incurred towards the expansion. The fourth quarter of 2022 and the first quarter of 2023 are the peaks of our capital expenditures on the project as we drive towards achieving our P85 schedule, as Mick outlined.
Against the backdrop of geopolitical and global macroeconomic uncertainty, we remain concerned about commodity prices and continued cost inflation over the short-term. Slide 13 highlights the proactive initiatives that we have completed during 2022 to position the Company to fund the remainder of the revised POA 11 expansion and to continue our exciting high-return exploration plans against this uncertain backdrop.
I wanted to highlight a couple of key items that give us confidence that the balance sheet will be able to provide the required flexibility. We received inflows of $150 million of cash from the strategic sale of Crown Sterling last week. We worked with our banks to complete an amendment to our revolving credit facility to provide additional balance sheet flexibility through to the end of 2023. We would like to thank all of our syndicate banks for their continued support and confidence as we round the final turn on the POA 11 expansion.
We continue to hold approximately $46 million of equity investments. And we have established a new ATM for gross potential proceeds of up to $50 million. We add this all up, and we have approximately $492 million of total potential liquidity. These key initiatives taken to enhance our total potential liquidity leave us feeling comfortable that the balance sheet will provide the required flexibility to deliver the industry-leading high-return growth that will transform our company.
I’ll now pass the call back to Mitch.
Mitchell Krebs
Thanks, Tom. Before moving to the Q&A, I want to quickly highlight slide 14 that summarizes our top priorities for the remainder of the year.
On December 15th, Coeur will hold a virtual Investor Day, during which we will provide in depth updates of our progress against these goals, as well as provide a three-year outlook for the company, and a more detailed review of our exciting exploration efforts taking place at Kensington and Silvertip.
We continue to believe that the execution of this strategy is the right roadmap for adding significant long-term value for stockholders, and positions Coeur as a truly differentiated opportunity for investors seeking industry-leading organic growth.
With that, let’s go ahead and open it up for questions.
Question-and-Answer Session
Operator
Mitchell Krebs
Okay. Well, hey, we appreciate everybody’s time this morning. And we hope you’ll join us on our Investor Day on December 15th. Otherwise, we look forward to speaking with you all again in early 2023. And if you have any follow-up questions from today, please don’t hesitate to reach out. Have a healthy and safe holiday season, everyone. Thanks.
Operator
The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.
Be the first to comment