Endeavour Silver Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 9 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. Second Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Galina Meleger, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Before we get started, I ask that you view our MD and A precautionary language regarding forward looking statements and the risk factors pertaining to these statements. Our MD and A and financial statements are available on our website atedrsilver.com. With us on today's call is Dan Dickson, Endeavour's CEO Christine West, our Chief Financial Officer and Don Gray, Endeavour's COO. Following Dan's formal remarks, we will open the call for questions.

Speaker 1

And now over to Dan.

Speaker 2

Thank you, Colina, and welcome everyone. I would like to start by acknowledging the tremendous achievements we made at Terronera in Q2, which advances our strategy in pursuing high margin production growth. During the quarter, we obtained formal Board approval, committed to project loan financing, established a seasoned team And now construction is well underway. Terronera is a unique opportunity that will reposition the company to generate significant free cash flow, Bringing us one step closer to achieving our mission of becoming a premier senior silver producer. Nevertheless, despite continued positive production performance, the headline for this quarter continues to be pressure on costs.

Speaker 2

As a company with operations in Mexico, we are facing the challenge of rising costs for which we remain vigilant to mitigate the impacts. Like all our peers, macroeconomic factors such as industry wide inflation and a strengthening Mexican peso Have continued to put pressure on consumables and labor costs across our operations. Unfortunately, we expect these trends to continue for the near term. In terms of production, consolidate Q2 silver equivalent production was up 8% year over year to 2,300,000 silver equivalent ounces, bringing us to 4,700,000 silver equivalent ounces for the first half of the year. This performance puts us well and in line to achieve this year's production guidance of 8,600,000 to 9,500,000 silver equivalent ounces.

Speaker 2

Compared to the same period prior year, both silver and gold production are up 10% and 6%, respectively. While our Guanacevi operation was generally in line, higher tons milled were offset by lower grades. Adjustments to the mine sequencing during the quarter resulted in lower grades compared to our planned in recent quarters. However, we expect to return to higher grades for both the 3rd and 4th quarters. As compared to Q1, both silver and gold grades had decreased by 20% in Q2.

Speaker 2

Performance of our other operating mine, Bolanitos, remains steady. Increased gold production was offset by lower silver production The Bolanitos operation seems continued a strong effort to meet or beat their targets, including mined and processed tonnes. Moving to our financials. We reported top line revenue of $50,000,000 with a cost of sales of $37,500,000 for operating earnings of $12,500,000 After exploration, G and A and other expenses, Excluding non cash mark to market adjustments on marketable securities, our adjusted earnings totaled $2,100,000 or $0.01 per share this quarter. At the site level, Guanacevi delivered mine free cash flow of $5,000,000 and Bolan Hills was pretty much breakeven.

Speaker 2

Regarding operating costs, we've seen pressures across several inputs. Our direct costs per ton were up 15% this quarter. At the time of guidance, Our inflation assumptions were 5%. However, year to date, we've seen those costs the costs of key inputs like steel used for ground support And consumables such as zinc and cyanide continue to increase well above our assumption. Additionally, labor costs are having a significant effect with the strengthening of the Mexican peso.

Speaker 2

The peso is strengthened to a 7 year high. Originally, our 2023 guidance had assumed a This is up 14% year to date, which is increasing our local costs in U. S. Dollar terms. All these factors manifest themselves into overall higher costs.

Speaker 2

Both quarterly cash costs and the all in sustaining costs are above our upper bounds of our guidance at $13.52 per ounce for cash costs and $22.15 per ounce for silver All in sustaining cost per ounce. As a result, management expects costs to be higher than cost metrics previously provided in our 2023 guidance. Inflation is an industry wide issue that's expected to persist throughout the year. We're closely reviewing our purchasing practices to see where and how we can mitigate the impact. Containing costs will Continued to be a key focus as we work to improve the efficiencies of our operations.

Speaker 2

Management anticipates cost metrics for the remainder of the year to align with H1 2023 actual costs. At June 30, we had cash on hand of $43,000,000 and a working capital of $78,000,000 To maintain flexibility on project execution. We initiated a $60,000,000 ATM filing in Q2. Completion of the definitive loan documentation for the 100 $20,000,000 senior secured debt facility is expected soon with closing and drawdown expected in Q3. After the quarter, we further enhanced our liquidity by selling a 1% stake in KapStone's Cosamine Royalty to Gold Royalty Corp.

Speaker 2

This sale will bring in a cash injection of $7,500,000 in Q3. We originally obtained that royalty through a concession division agreement back in 2017 for less than $500,000 Let me give you a quick update on construction at Terronera. At the end of Q2, we reached 30% completion. We have spent $70,000,000 to the end of Q2 on direct development. Project commitments totaled $144,000,000 and we are tracking in line with the optimized plan both on timing and on budget.

Speaker 2

During the quarter, we had steady momentum on engineering, surface construction at the plant site, mine development and establishing internal processes to best execute the project. If you're interested in seeing photos of the construction progress, I encourage you to visit our website under the Terronera page. A quick recap, on-site personnel has increased to over 4 50 employees and contractors detailed mill and surface facilities engineering is set over 70% complete Engineering was finalized to request proposals for the mill construction contract, including structural steel, mechanical, piping, electrical and greatly facilitated construction ramp up, especially prior to the rainy season. The camp to accommodate 550 personnel is substantially complete. Nearly all dormitory units have been installed.

Speaker 2

Several final living units remain pending. Mine development is advancing on two fronts with over 600 meters completed as at June 30. In the meantime, a new portal is being prepped To access the lower part of the ore body, bulk earthworks for the planter is nearing completion with nearly 300,000 cubic meters of material moved. Excavations were completed for the coarse ore reclaimed tunnel, grinding areas and now rebar installation has begun. On the procurement side, deliveries are advancing on schedule with shipments arriving at the company's lay down warehouse.

Speaker 2

Major equipment deliveries in Q2 include jaw and And lastly, on the community side, we continue to partner with local Schools to support education campaigns and cultural celebrations. Looking ahead, our main focus is now progressing mine development, advancing concrete work for the mill platform and awarding the mill construction contract, which will kick off the next major phase of construction. I think that wraps up today's formal comments. Myself, Don and Christine are happy to answer any questions that you may have. Operator, could you please open it up for Q and A?

Operator

Thank you. We will now begin the question and answer session. You will hear a tone acknowledging your request. The first question comes from Heiko Ihle with H. C.

Operator

Wainwright. Please go ahead.

Speaker 3

Thank you, Galina, Dan and team. I assume you can hear me okay?

Speaker 2

We can hear you well, Heiko.

Speaker 3

Excellent. Hey, on Terronera, I went through your July press release Again earlier today and I compared it with your note today. I mean Dan also you obviously provided some more color earlier in this call as well, but I still got to ask, Are there any factors that are giving you a bit of a headache, both from an availability and pricing point of view? It seems like the camp is mostly done and mine development continues at a good pace. But is there anything That we should maybe know about, I assume the answer is no, but I just want to double check.

Speaker 2

No, it's a fair question. I mean, like I say, we're seeing a lot of inflation Across our operations, I think Don and his team have done a really good job from a procurement standpoint and being ahead of the game and Locking a lot of our key components in, and I've mentioned this in the prior calls and prior press releases that Our entire mobile fleet has already been on-site. A lot of the key components of the plant have been procured quite early on and expect delivery here in Well, we got some in Q2 and back half of the year, the remaining will come. And a lot of that, those components or Key purchases have come in line with what our expectations were, come in line with what our optimized plan is and the feasibility study. So We did a really good job with that.

Speaker 2

Now there's always things that we get our concern with and that's our job as management and making sure that we hit our mine development headings and The rates and executing on that over the next year, year and a half, will help us be on time and on budget for Terronera. Of course, there's some things that we went on and hopefully there's some things or things that we'll lose on and hopefully there'll be things that we went on From a cost standpoint, but at this point in time, and it's early, like I say, we're only 30% complete at Terronera. We feel like We're tracking very well to what budgets have been.

Speaker 3

That was a very Nice lead over to my next question. Obviously, the Mexican peso has increased quite a bit. You mentioned earlier on this call and also So in your release, we were at 17.12 right now. What are you using in your model for the And I don't know if you have a longer term modeling number for the peso as well, please.

Speaker 2

Yes. For the remainder of our year, we're generally putting our cost guidance right around what we did with So we average just above 17 for H1, maybe it's closer to 18. So 18 to 1 is probably where we'd be comfortable saying that. For long term, we'll look at that at the end of the year. We're kind of going through our budgets for 2024 at this point and just getting that kicked off.

Speaker 2

Through different discussions with various banks, we do expect the peso to continue that depreciation that we've seen for the last 20 years. But again, We don't have a crystal ball. When does that turn around? And so we no longer see appreciation in the peso. It's hopefully in the next 6 months, but Again, don't have a crystal ball on that.

Speaker 2

And when we come out with guidance for 2024, we typically state what we're using for an FX rate at that time. Got it.

Speaker 4

Okay. Fair enough. I'll get back

Speaker 3

in queue. Appreciate your time.

Speaker 2

Thanks Heiko. Thanks for the questions. Good to hear your voice.

Operator

The next question comes from Craig Hutchinson with TD Securities. Please go ahead.

Speaker 4

Hi, guys. Thanks for taking my question.

Speaker 2

Hey, Greg. How are you?

Speaker 4

Doing well, thanks. Just on Terronera With regards to the Mexican peso, can you give us a sense of how much is exposed to, I guess, domestic currency, the peso versus how much is exposed To the U. S. Dollar?

Speaker 2

Yes. I mean, obviously, labor costs are significantly exposed To the peso compared to the dollar, a lot of the items that we procured have been in U. S. Dollars, and we've committed $144,000,000 of the 2.30 So for the $90,000,000 left to be exposed, we're expecting somewhere between $30,000,000 $50,000,000 to be tied to the Mexican peso, So not significant at this point in time.

Speaker 4

Okay, great. And then in terms of your operations, is it what's the kind of rough breakdown I think Guanacevi and Boling Hills in terms of exposure.

Speaker 2

Yes. Yes. 30% to 35% of our depending, I think Polyneal's hovers around 32% and Guanacevi a little bit higher around 34% or 35% of our costs are incurred in labor. Obviously, labor is Completely exposed. So for the remaining 65%, about half is tied to the Mexican peso.

Speaker 2

So in total, you're looking at 55% to 65% of our costs are tied to the Mexican peso.

Speaker 5

And just on the financing,

Speaker 4

I'm just giving you talk about the inflation and some pressures Is there a potential to upsize that from the $120,000,000 that's sort of been agreed to at this point? Or has It's sort of been finalized and that's the number we can expect.

Speaker 2

Yes. No, it's been finalized. And I think for us and the management team, we think that's Kind of the upper end that we want to take on from a debt standpoint. We did put in the $60,000,000 ATM facility that we haven't drawn on to give ourselves protection. Ultimately, if we do end up above the $230,000,000 we prefer that to come from equity just because we don't want to get To levered to debt.

Speaker 4

Okay. That makes sense. All right. Thanks, guys.

Speaker 2

Thanks for the questions, Craig.

Operator

The next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 6

Thank you very much, operator. Good afternoon, everyone. I also wanted to start out on the cost side and maybe more broadly kind of What sort of measures you've taken today to ring fence cost inflation? Are there things you're looking at the operational level? I would appreciate any additional color you might be able to share.

Speaker 6

Thank you.

Speaker 2

Yes. Thanks, Lucas. It's a difficult thing to ring fence inflation and ultimately the strengthening of the Mexican peso when it comes to labor. But from an efficiency standpoint and making Sure. We're operating as best we can.

Speaker 2

I think we've done that well at Bolanitos. At Guanacevi, we can be better at that. We're looking at improving our ventilation, Our electricity usage with pumping and being more efficient in that standpoint, we're also looking to be more efficient on our advances Underground, making sure that we have we're using the right amount of explosives, the right amount of steel, rather than Potentially using more than what we should have been. And so I think it's really an efficiency standpoint from our operations team that we can Find little wins here and there and whether it's about the inputs going in, so the number of units that we're using as opposed to those costs of those units, because There's only so much you can do from like for example, the strengthening of the peso, our labor costs, we need those laborers. Its question is, do we need as much labor as what we have?

Speaker 2

That's where we can make those adjustments. Of course, we've been kind of in good fortunes, I'd want to see with the discoveries we've made in 2019 in the high grade. I I think some of that grade is going to pick up in the back half of the year that will improve our costs on a per ounce basis. It's little things and being vigilant on those little things and making sure we're operating as best we can.

Speaker 6

Thank you for that. And a follow-up on Guanacevi, the higher grades with the Alcorso ore body, How sustainable is that over the you mentioned the back half of the year, but as we look into 2024, should we continue to See those benefits improve or kind of stabilize at the second half level? Thank you.

Speaker 2

Yes. I think it would stabilize. We do have A good life with El Curso remaining. I mean, obviously, we have Milache, we have Santa Cruz Sur, other areas that we're able to mine. But Santa Cruz El Curso is kind of the heart of where our production is coming from and that will continue for the foreseeable future, especially into 2024 2025.

Speaker 6

I appreciate that. Thank you. Then one quick last one for me. Just with Itaria, What's the outlook there and major milestones for the market to look forward to? Thank you.

Speaker 2

Yes. No, that's a very fair question. I'm glad you brought that up. For us, Pizzeria, as most of our listeners probably know, we purchased that in $23,000,000 for $70,000,000 and we've really been pushing there. And the end of 2023 and early 2024, we did a lot of relogging of the historical data.

Speaker 2

And for this year, we had $3,300,000 budget and most of that's to push the ramp To what we think is or what our predecessors thought was a Manto zone, and it was about 3 100 meters away to get there. We've had some delays. We've had some workarounds on the old historical ramp. It looks like we're going to have to push a parallel ramp, Which means rather than being 300 meters, we'll have to be 500 meters to 600 meters ourselves, which will delay our drilling program and end up being Either late Q4 or more likely into 2024. So, we're not going to have as much news on piteria, this year, which was Expected kind of the end of the year from a drilling standpoint and then economic analysis next year.

Speaker 2

So I'll push into next year just because of this ramp. But we do have big expectations still with Pitria. Obviously, we've defined a resource of over 600,000,000 ounces, but we are Looking at an expectation of seeing if we can make this an underground operation similar to what Silver Standard had looked at back in 2,009. Obviously, I always wish things went faster than what sometimes they do. And hopefully, we can still get to that economic analysis in 2024.

Speaker 6

Really appreciate all the color and detail. To you and to team, best of luck.

Speaker 2

Thanks, Lucas. Thanks for the questions. Hope all is well.

Operator

The next question comes from Justin Stevens with PI Financial. Please go ahead.

Speaker 7

Hey, everyone. Most of my questions have been crossed off. I'll say, if I got one last one. Obviously, the 1 SUV grades took At Q2, but you're expecting an uptick in Q3 and beyond. Was the sequencing impact there mostly Development related?

Speaker 7

And if so, do you think you'll be able to sort of stay ahead and keep enough stopes in the high grade sections to keep that grade pretty flat going forward?

Speaker 2

Yes, a couple of factors went into that sequencing. We actually lost one of our high grade stopes, and we've had Spent a lot of Q2 cleaning that up and re fixing that, so we can go back in here in Q3. Development has been a little bit behind, but Not terribly behind, but we have a recovery plan to make sure our development stays ahead. So we don't have these changes in our plans, our mine plan sequencing. And It's kind of the bugaboo of all underground operations and making sure that we have sufficient mine development and not getting ahead of ourselves and pulling out more ore Eventually that always catches up to you.

Speaker 2

But we do expect Q3, Q4 to stabilize and again grades to be slightly below Q1. I thought Q1 was Pretty high grade, and we really significantly deep plan, but it will somewhere be between Q2 and Q1.

Speaker 7

Just on that, the high grade scope, was that just like an isolated ground condition issue or?

Speaker 2

Yes, we believe it was isolated. Always looking at that, but we've had very good ground in El Curso And continue to expect to have good ground.

Speaker 7

Great. And I guess one other just maybe an idea of Potentially, I know you've been looking to twin some holes at Brenner and sort of re up to that resource. Is that just sort of should

Speaker 1

we expect that just by the end of the year?

Speaker 2

No, I think that's going to fall into 2024. We haven't really pushed on Bruner this year. We did get all our drilling permits, But again, there's no plans. We want to make sure that we keep that cash

Speaker 7

Priority is obviously on Terronera and everything.

Speaker 2

Yes, exactly.

Speaker 7

Yes. Great. All right. Thanks and looking forward to seeing the uptick back in Q3.

Speaker 2

Thank you. Thanks for the questions, Justin.

Operator

The next question comes from Cosmos Chiu with CIBC. Please go ahead.

Speaker 5

Hi, thanks Dan and team. Maybe my first question is on Bonannitos. I think in the MD and A, you mentioned that Q2 experienced higher gold grades, increased throughput offset by lower silver Production on lower silver grades. I guess my question is that higher gold grade and lower silver grade, is that going to continue? And is that going to revert sometime into the future?

Speaker 2

Yes. Thanks for the questions, Cosmos. I mean, we actually get quite variations between Bolanitos between gold and silver. In general, I think our silver equivalent grades were in line With expectations, with budget and following us is performing as expected, Q3, Q4, it would probably The lineup pretty good with H1s gold grades and silver ratio, and then going forward similar at that point.

Speaker 5

Great. And then looking at your guidance, Dan, as you mentioned, production guidance Has been maintained, cost guidance has been maintained. But as we talked about on this call, there's a lot of questions about inflation, foreign exchange, FX rates and you I guess in the MD and A you're going to make the comment that some of these inflationary pressures are expected to continue in the near term. Expect actual cost metrics to be higher than cost metrics previously provided by the company's 2023 guidance. So what does that mean?

Speaker 5

Are we Potentially looking at for the full year cost to potentially come in higher or is that just looking out Into Q3. I wasn't too sure what the wording around that.

Speaker 2

No, yes, I can be more clear on that, Cosmos. Ultimately, As you said, from a production standpoint, we're at 4,700,000 silver equivalent ounces produced. Our upper bound range is 9,500,000 silver equivalent. So We're tracking really well from a production standpoint to the upper bound. Unfortunately, from a cost standpoint, All in sustaining costs have been $22.15 Cash costs have been near $12 or $12.21 for the first half of the year.

Speaker 2

We're expecting our costs to be above the upper bound range of our guidance. So we're not restating the number, but we do expect For the second half of the year, our cost metrics to be similar to H1, which again puts us above the Upper bound range of our original guidance.

Speaker 5

Understood. And I guess, Dan, sorry, you were saying?

Speaker 2

No, no, it's good. I'm glad you understood. I just wanted to make that clear.

Speaker 5

Okay. I guess, as we talked about, one of the key components The Mexican peso, I just looked at it again. I don't think right now you are hedged In any way in terms of Mexican peso and then as you mentioned, you don't have a crystal ball, I don't have a crystal ball either. So is there any thinking behind Potentially hedging away that risk longer term, especially with some of the costs associated with Terronera.

Speaker 2

Yes, it's a very good question. And there's 2 parts to that almost. From an operating standpoint, we aren't going to enter into any FX hedges For Guanaceviir Bolanitos, I think a lot of the literature that we still get is we expect peso to be stay relatively strong through 2023, but to reverse course and get back on historical trend of depreciation against the U. S. Dollar.

Speaker 2

So that's part of the thought patterns on why nothing from an operating standpoint. From a Terronera standpoint, it's different, right? We have a big incurrence because of the debt that we're putting in place with SocGen and ING, it's $120,000,000 There is an FX component hedging with regards to Terronera. It's not significant. Craig had earlier asked the question about what remains from an FX standpoint.

Speaker 2

We've provided that detail to those banks, and we'll have to incur some FX hedging in place For as a covenant for the loan facility. Again, for everybody else on the call, With that loan facility, there's also a gold hedge requirement for the 1st 2 to 3 years, amounts to between 50,000 to 60,000 ounces of gold On that 3 year basis, so averaging 20,000 ounces of gold per year. And we'll get into that detail when that gets all finalized, hopefully this quarter, Cosmos.

Speaker 5

Great. And then one last question, as you mentioned, rainy season is coming up in Mexico. You've gone through many rainy seasons. And so, Bob, I just want to kind of talk about how have you prepared for it at the operations and also at Terronera. I'm reading there's upcoming major milestones at Terronera, but it's a lot of delivery, some concrete work.

Speaker 5

I don't see a lot of major earthworks. So, but again, how have you kind of thought about the risk around rainy season coming upon in Mexico?

Speaker 2

Yes. Obviously, as you stated with our operations, we've dealt with rainy seasons for 17 years, 16 years at the operations. I think they're pretty well Adverse to handling it and you don't see big changes in our production profiles because of the rainy season. We've had issues in the past Various years, whether it's clay in the crushers that impacted, but only on a, I'd say, minute level. From a Terronera standpoint, I think we've done a very good job preparing for it.

Speaker 2

That's the reason we've put so much work into the roads and the drainage Very well and probably can give you a better answer than I can. Don, do you want to give Cosmos a little bit of color around The work we've done around rainy season for Terronera?

Speaker 8

Sure. There's quite a few things that we've done and Similar to what it does on other projects previously and simple things like we pour lean concrete down in the bottom of the So that the contractor has something to work off of when it is rainy, ready with pumps and things like that for excavations where they may accumulate rainfall that kind of thing. The other thing is that we've Done in some other places is put up some tent and overhead structures, real simple things. But if the contractor is prepared, which our contractor is that we have the concrete contractor on-site now, Then we can get through it. So we've been prepared for it And are preparing for it and anticipate we can meet the challenge.

Speaker 5

Great. Thanks, Don. As you look out the window right now, is it ringing?

Speaker 8

Out the window right now, I've got mostly blue sky and a little bit cloudy. Afternoon, The clouds come in and we get the afternoon rains, but it's kind of typical for right now in this part of the rainy season.

Speaker 5

Thank you, Don. Sorry for putting you on the spot here. But and again, thanks, Jen, for answering all my questions.

Speaker 2

No, those are great questions, Cosmos, and we're always happy to answer them. So

Operator

This concludes the question and answer session. I I would like to turn the conference back over to Dan Dickson for any closing remarks.

Speaker 2

Well, thank you, operator, and thank you, everybody, listening to our Q2 financial results call. I can tell by the questions. I think everybody understands the importance of Terronera and on Terronera over the next year and a half for Endeavour. Of course, management is always eager to have you to answer calls from analysts and Hopefully, we expect good results here in Q3 from a production standpoint and we maintain our eye on costs and try to drive that down as best we can. Thanks

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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