Endeavour Silver Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Corp. 2nd Quarter 2024 Financial Results Conference Call. As a reminder, all participants are in a 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 Alison Petit, Director 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 at edrsilver.com. On today's call, we have Dan Dickson, Endeavour Silver's CEO Elizabeth Sennas, 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, Alison, and welcome everyone. It's been a productive Q2 at Andeavor Silver. As gold reached new all time highs and with silver starting to follow, company's cash flow and financial position should continue to benefit from these higher prices. At Terronera, there was significant events of the upper platform surface infrastructure and the overall project progress reached 65% at June 30. Terronera is on track for commissioning in Q4 2024 and we are excited for it to contribute to our production profile next year and become a cornerstone asset.

Speaker 2

Q2 silver equivalent production totaled 2,200,000 ounces or 1,300,000 ounces of silver and 10,500 ounces of gold. We are in great position to meet the upper range of our 2024 production guidance. Silver equivalent grades have been in line with expectations with gold grade slightly higher and silver grade slightly lower. This is expected to be similar going forward and therefore we expect a similar production profile for the second half of the year. We reported top line revenue of $58,000,000 up 17% year over year due to higher metal prices compared to Q2 2023.

Speaker 2

Cost of sales totaled $48,000,000 up 28% from Q2 2023 due to the strength in Mexican peso contributing to higher labor, power and consumable costs and continued inflationary effects from 2023 that flowed into 2024. At Guanacevi, purchased material from local miners increased to 18% of throughput and accounted for $5,000,000 of our cost of sales. In Q2 2023, purchased material was $1,500,000 With higher precious metal prices, the availability and costs of the purchased material have both increased. There are a number of benefits of purchasing the local material and management expects the purchase of material to remain elevated for the foreseeable future. The higher prices also means higher royalty expense and we are generating mining profits increasing our special mine activity work which are impacting our cost metrics.

Speaker 2

Direct operating costs, our mining, processing and site administrative costs are within management's expectations. Cash costs and all in sustaining costs benefit from the higher gold credit than estimated at the beginning of the year, offsetting the higher royalties, special mine duty and increased purchase material. The company reported a net loss of $14,000,000 for the 3 month period ended June 30, 2024, compared to a $1,000,000 loss in Q2 of 2023. Excluding certain non cash and unusual items items that are subject to volatility, which are unrelated to the company's operations, the adjusted loss was $1,000,000 compared to the adjusted earnings of 1.6 in Q2 2023. With production results and construction results previously released, today's substantial share price action was unexpected and still the magnitude is somewhat puzzling.

Speaker 2

With higher precious metals prices, clearly there's an expectation for better earnings and I believe this is one data point and over time we will deliver on those expectations. As at June 30, 2024, the company's cash position was $68,000,000 and working capital was $65,000,000 The company raised $14,700,000 through share issuances, primarily to fund Terronera and during the quarter the company completed its 1st drawdown of the Terronera senior secured debt facility drawing $60,000,000 Subsequent to the reporting end, the company completed a second draw of $15,000,000 and has an additional $45,000,000 committed and available for future drawdowns expected in the 3rd or 4th quarter. As I mentioned earlier, the Terronera project reached 65% completion with more than $204,000,000 of project budget spent to date. Project commitments totaled $260,000,000 which is 96 percent of our $271,000,000 capital budget and remains on track for commission in Q4 2024 as we continue to advance on schedule. Over 12 50 meters of underground mine development were completed in Q2 for a cumulative total of 4.5 kilometers and our mine crews continue working in Portals 1, 2 and 4 declines.

Speaker 2

Development has cut through the Terronera vein and we've started to develop test stopes. On the upper platform, surface mill and infrastructure construction is 88% complete with concrete and structural steel erection being fully complete and mechanical piping electrical installation is well underway. The excavation of the tailing storage facility embankment key trench is about 95% complete and the lower platform is nearly 50% complete. Concrete work on the lower platform is scheduled to start early Q3 and remains the critical path for commissioning in Q4. Through June 30, 87 of 95 procurement packages are now complete and it's now really an exercise in execution and in productivity over the next 6 months.

Speaker 2

The company anticipates commissioning using temporary power with the LNG and power generation to be operational subsequent to commissioning. The temporary power has been planned and is expected to be available for Q4. Similarly, there will be other minor structures under construction during commissioning. And lastly, from a community relations standpoint, with the local community support continue to be a major commitment, a plant operator training program was established, a comprehensive training and support service plans is being prepared for groups and individuals seeking to form businesses that can provide local guidance services within the community. Again, for a fulsome construction update at Terronera, I would encourage you to visit our website where you'll find our quarterly photo gallery showcasing the latest developments, progress and information on Terronera.

Speaker 2

Before we move to the Q and A part of the call, I would also like to highlight that we published our 2023 sustainability report titled Transformation in Motion in May that provides a deep dive into Endeavour's sustainability commitments, performance and ongoing approach to responsible mining. You can view the full report and the company's strategy on our website under the sustainability tab. With that, operator, I'm happy to open this up to questions. Please proceed to that session, operator.

Operator

Thank first question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Speaker 3

Hey, Dan and team. Thanks for taking my questions.

Speaker 2

No problem, Jake. Happy to take them.

Speaker 3

So just starting with the finished goods build during the quarter, I'm just curious, were ounces withheld for higher prices this quarter or is this just a function of timing?

Speaker 2

Just a timing function. I believe our last shipments kind of went out about 28. We didn't sell anything in advance. So and we obviously, because of where we are in the position of building Terra now, we're not holding back sales and don't expect hold back sales at this time.

Speaker 3

Okay. That's helpful. And then just on foreign exchange, I'm just curious, do you think the pesos weaken to a level where you might start putting in broader company hedges in place or do you want to see a bit more weakness there?

Speaker 2

I do think there's a little bit more weakness coming in the Mexican peso just based on policy of government, but it's always difficult to determine when that weakness will show up and then how long it will be persist for. At this time, we have no plans to enter into any more FX hedges. We were required to enter into FX hedges under our build, under the debt facility and we are required to enter into when we go into operations, some operational FX hedges, but we haven't made a determination when we'll put that in place. Again, I think we'll see some more weakness in the Mexican peso, but we'll see.

Speaker 3

Got it. Okay. That's all for me. Thanks again.

Speaker 2

Thanks for the questions, Jake.

Operator

The next question comes from Lucas Pipes with B. Riley.

Speaker 4

Dan, my first question is kind of higher level on the operating environment in Mexico. Obviously, there was an election. The the election in the rearview mirror, there's a bit more clarity as to the priorities from a regulatory standpoint on the incoming administration? Thank you very much.

Speaker 2

Yes, I mean, you're correct. On June 2, there was an election. The Moreno Party won and probably what was expected to be even better than better results for them than was originally expected. The new President, Claudia Sheinbaum, She is a successor to effectively AMLO and will be interesting over her 1st couple of years in office how closely she follows the platform, which is expected be relatively closely. She has privately and now kind of percolating out into the press that mining will should be more pro mining necessarily than ammo and she's definitely more pro business.

Speaker 2

But the reforms that were put in place that have been lost through a bunch of onparos, we're still waiting on the Supreme Court decision. There's been some chatter that those will be repealed, but re put in front of the legislature in the fall. So, there is still some uncertainty coming through the current government, how this changes, we'll probably be able to see that better in the next 6 months. I think when it comes to Mexico, there's been a lot of rhetoric coming out of ammo. I think that's going to dissipate.

Speaker 2

But ultimately, it's still one of the best jurisdictions in the world to operate from a mining standpoint. Again, I don't think that some of the compliance requirements that are being put in or ultimately in those mine requirements will impact Endeavour significantly just because we have departments that can handle that. But again, until that comes through and actually gets properly approved or properly put through legislation, it's difficult to comment on.

Speaker 4

Really appreciate your perspective. That's helpful. You note the additional $45,000,000 available at Terronera in the second half of twenty twenty four. And I wondered if there are any specific project milestones attached to that release? And if so, if you could maybe comment and elaborate on those?

Speaker 4

Thank you.

Speaker 2

No, there is no specific milestones required to it. The independent engineers that represent the banks, they do the reports and they look at our monthly reports and they'll go through that and we have the best stations to do, but everything remains on track and we think that will be available over the next, I could say, 6

Speaker 5

months.

Speaker 4

Terrific. Dan, really appreciate your comments to you and the team. All the best of luck.

Speaker 2

Thanks for the questions Lucas. Good to hear from you.

Operator

The next question comes from Craig Hutchinson with C. D. Cohen. Please go ahead.

Speaker 5

Hi, guys. Just wanted to know on the underground development rates, it looks like they did pick up nicely in the Q2. In the past, initially you had some underground geotechnical issues, but can you just probably comment in terms of how that's going? Are you tracking to plan ahead of time behind plans, any kind of of sense in terms of how the underground development work is going?

Speaker 2

Yes. No, it's a really good observation, Craig. Ultimately, we are tracking to plan now initially with any outset when you're starting at it. There's a little bit of a learning curve, just understanding ground conditions and water conditions. I think the ground conditions are with line, if not a bit better than expectations, what's our technical reports.

Speaker 2

Water and water management is right in line with expectations, if not a little bit less. So, things have been going relatively well. We have good days, we have bad days, but we're hitting our mark and expect to have the mine development complete, so we can kind of hit our tonnage expectations for 2025.

Speaker 5

And just in terms of the overall progress, 65% complete kind of year to date, but can you give us some kind of sense of how you guys arrive at that number? I imagine it's a combination of dollars spent versus your budget and kind of milestones. But just with sort of 3 or 4 months ahead of commissioning here, I just want to get a sense that achieving the remaining 35% is achievable really in the last 3, 4 months stretch here?

Speaker 2

Yes. And it's a very fair question. And just from a layman standpoint, if you look at, we are 53% at the end of the Q1 now or effectively 65%, so obviously a delta of 12%. If you apply that over the next two quarters, that takes you to 77% or from 65% to 77% and short to 90%. One of the items that's going to be non complete for while we're in commissioning, but probably complete slightly after ultimately will be our LNG and power generation plant.

Speaker 2

We had some delays of getting permits there. We are going to be on diesel generators for the start of commissioning and possibly into commercial production. So ultimately, we're not tracking to 100% for commissioning. As I say, there's some minor structures. One that comes to mind is a maintenance shop that will be still being built while we're in commissioning and our expectations is we'll still be being built while we're in there.

Speaker 2

So thinking of it as we're going to get to 100% complete prior to commissioning isn't the way to think about it, it's probably more between 85% 90% when we're there and even as we go into commercial production, it's not necessarily that will be 100% complete either.

Speaker 5

Okay. That's great. Thanks for that context. May last question for me. Just with regards to the commissioning by year end, do you anticipate producing sort of first concentrate at that point or is that more pushed out to sort of early Q1 next year?

Speaker 5

Thanks.

Speaker 2

Yes. I mean, that's getting into quite specifics. I think probably everybody would hope to hear that we expect to have some concentrate by the end of the year. And that's kind of our expectation, obviously, from commissioning to commercial production. It comes down to capacity and making sure we're hitting our capacity numbers to declare commercial production, but there'd be some corn that's produced during commissioning, of course.

Speaker 2

It's just it's a matter of how much and exactly when that timing hits.

Speaker 5

Okay, great. Well, thanks guys and good luck.

Speaker 2

Thanks for the questions, Craig.

Operator

The next question comes from Heiko Ihbe with H. C. Wainwright. Please go ahead.

Speaker 6

Hi, Zane. This is K. From H. C. Wainwright.

Speaker 6

Heiko is traveling right now and can't make it into the question line, but thank you for taking our questions.

Speaker 2

Happy to.

Speaker 6

For the Terronera drawdown of the remaining $45,000,000 would you be able to give us some insight to when you expect to take the remainder? I assume you at least some of it will be needed this quarter.

Speaker 1

Hi, this is Elizabeth Enoz. Yes, we do plan to draw down this quarter.

Speaker 6

And any idea how much? Or is it just play by ear?

Speaker 1

Yes. We'll see how the spend goes, but the majority of construction spend will be incurred this quarter that's remaining. So yes, that would be the expectation.

Speaker 6

Okay. Thank you very much. Just second question, last one, Dan, maybe a little bit of a philosophic question, but you guys have completed a good part of Terronera as of today, obviously. Would you be able to maybe give us some color on things that went better, maybe some things that got worse during the construction process, maybe any line items that made the team change anything related to construction in the middle of the process?

Speaker 2

Yes. I mean, that's a big question. I mean, every day there's things that feel like they go better and there's days that things feel like they go worse. And I think our operational team or our construction team has done a phenomenal job of always kind of finding Plan Bs if needed to or even Plan Cs and looking at alternatives, because obviously nothing is linear and nothing goes exactly as planned. Nothing specifically comes to mind with regards to big changes.

Speaker 2

It's just timing of different things where we make adjustments either from a concrete standpoint. Obviously, the footprint that Terronera is on is very small and it takes a lot of planning with regards to when we bring equipment up because ultimately we have a lay down yard down in Puerto Vallarta and things are typically don't lay down up at Carronera for longer than 48 hours. So, we call it just in time building and some of that stuff, some of the great engineering that we've done, obviously timing, we got some releases down on the tailings facility which later expected just through some archaeological work that had to be done, geotechnical work. I think every day there's things that guys make decisions on that are slightly different than what plan is. And I got to commend Don Gray and his team on and how well that's gone.

Speaker 2

I even think about the mine plan and different iterations of the mine plan, how we could be more efficient on that and come up with 7 different distinct mine plans and that will continue to change because even as we get into the Terronera, we're getting into what's our reserve for the 96,000,000 ounces and the plumb of that reserve at the base, which is where we're trying to target and that's about 20 meters thick. It's not that the ore body ends there, it's just that's where our estimates end based on our confidence with drilling. As we get into that, we're going to hopefully drill out and we find more depth and that will change our mine plans again. So, I think our team has done a phenomenal job being flexible and making adjustments on the run, but it all lines up and again we're tracking for commissioning in the Q4.

Speaker 6

Awesome. Thank you very much. That was a great answer. Appreciate

Speaker 4

it. No problem.

Speaker 2

Thanks, Kees.

Operator

The next question comes from Trevor Ward, Private Investor. Please go ahead.

Speaker 7

Hey, Dan. Good morning, everybody. Obviously, pretty shocking day as an individual investor. I'm a bit of a gambler, so I've got a lot of eggs in 1 basket with InBevda. So when you see your stock price tumble like it has today, I mean, I'm down personally almost 32,000 on paper in one day.

Speaker 7

Fortunately, since we last spoke, actually up overall since I've got my position. But I'm just curious as a layman, as somebody that's not well educated especially in the buying and selling of stocks, I decided to get into silver. But I had bought and sold things over time. And so if I manufacture something like I make surfboards and things like that, if I make a surfboard and let's say for instance with all my costs, it costs me $23 obviously that's not relative, but say it cost me $23 after all my costs and then I'll sell it for $29 I would say that I made dollars 6 So maybe you can explain to me in layman terms, why you don't make the adjustments whereby it's easier for us to understand how you lose money if your overall costs are way less than what you sold the store before? Can you explain that to me in layman terms and where these other interest costs come why the losses have been so huge in this quarter.

Speaker 7

I mean, the overall consensus for the market was that you would show a profit of $0.04 whereas while you're showing a loss of $0.06 I mean it's pretty devastating to investors. And then you said you're curious why the market has reacted the way it has. I mean I understand the whole market is down today, but maybe you can enlighten me a little bit more in layman's terms how it computes into such a big loss?

Speaker 2

Yes, it's a very fair question, Trevor. And I think part of it and one of the things in the mining space, we talk about cash costs, we talk about all in sustaining costs. So obviously, cash costs is kind of on an operating basis, all in sustaining costs takes into account G and A, which is our Vancouver costs, exploration dollars that we spend to increase and extend mine life, hopefully grow the mines, and then sustaining capital. And sustaining capital obviously from an income statement standpoint doesn't hit earnings. And we always try to have this one metric that solves or distinguishes the company and allows peer groups to kind of compare themselves relatively quickly.

Speaker 2

And I think as an accountant by trade, you need a balance sheet income statement and cash flow statement to fully understand what's actually happening with the company. And unfortunately, there is in the IFRS world or the accounting principles world, there has been a lot more noise that goes through an income statement now than there was before and makes it a lot more difficult for the layman's term to understand what's going through an income statement and ultimately our financial statements. In our case, for this quarter, we have a $9,000,000 loss related to derivatives. And under our credit facility for Terronera, we're required to hedge 68,000 ounces of gold that we locked in at $2,325 I believe on March 28. Obviously, gold appreciated during the quarter, which is a great thing, great for the long term benefit of Endeavor, but we do recognize a loss on those forward contract gold contracts amounting to about $75 per ounce this quarter.

Speaker 2

That translates into $7,500,000 loss in derivatives that's not impacting to our current operations and obviously out of our hands. And as I say, long term, it's probably a benefit, short term, it's a movement and it's a mark to market. Obviously, gold today is near around $2,450 Other times during the quarter, it got down to $23,000,000 $25,000,000 $2,350,000 and possibly at the end of Q3 when we go through this with gold below $2,400 we recognize a gain on that on those derivative contracts. We also have FX derivative contracts that go through our income statement. With all that, it makes noise and that's driving our $14,000,000 loss for the quarter.

Speaker 2

Again, we look at it as a management team from an adjusted things, things that we can operate on and our cost to produce at Guanacevi on an operating basis or at both our operations was $13.43 that excludes depreciation. I think depreciation needs to be considered in there and that's a total production cost per ounce and that's about $22 for us. But we do have other things that flow through our income statement and that's investing into the future of the company. We have our exploration properties, so we have exploration pizzeria as one of the things that come mainly to mind. It's one of the world's largest undeveloped silver deposits.

Speaker 2

We don't capitalize that work. We expense it through our income statement. Again, that creates noise, but we think that brings long term value to our shareholders in that fact that we want to bring Pithoria into production when Terronera is done and there's a lot of work left to be done there, but we think that will be beneficial long term to shareholders. So, of course, today's drop of about 20% is a lot higher than our peers, And that's what we find puzzling because we did put out our production numbers and the production numbers are in line with expectations. Our Terronera construction, which is a lot of what people are looking at for the future value of this company, is in line with expectations.

Speaker 2

The additional noise going through our income statement can be frustrating and that goes through it, but I never like to look at our share price on a one day basis. So even if we're up 20%, that's a great day, but it's meaningful not as meaningful if you can put that stack that together with 1 week, 1 month, 1 quarter, 1 year. So again, we wish it wasn't down 20% today, which is about 15% higher than our peers. I think that will grind back. So stick with us and I believe we'll be able to deliver on this going forward.

Speaker 7

Okay. Yes. So, what about in the future there, how many other derivatives, not that I really understand what derivatives are, but going forward, how much more of this are you still liable for that? I mean, how do we know that in the Q3 or the Q4 you haven't got all these other derivatives that are stacking up that are going to cause losses in future quarters?

Speaker 2

Yes. They'll be there. So the 68,000 ounce gold contracts that we're going to sell are going to effectively roll out in 20252026. So those are going to be there. If gold price continues to appreciate and we're looking at gold $200 I think you would agree that's positive for the company long term.

Speaker 2

Ultimately, if it goes down and then positive for the company long term, but ultimately it's going to create losses going through our income statement until those roll out. If it goes the other way, it's going to create gains to it. They're going to be there. I would again, from a layman standpoint, they're non cash items. It doesn't mean we're losing cash off our balance sheet.

Speaker 2

It means we are recognizing a decision that we have had to do through a credit facility that loss now or the future. Under IFRS, we're required to do that from a mark to market standpoint, and that's fine. Again, it rolls out over the next 2 years, and so I can't promise it won't be there.

Speaker 7

All right. Well, this all counts. Okay, thanks. All the best in class.

Speaker 2

Thanks for the questions, Trevor.

Speaker 3

Thanks,

Operator

The next question comes from Henry Westender, Private Investor. Please go ahead.

Speaker 5

Good morning. Very interesting call. We're all very excited about Terronera, but could you give us a few words on this year's progress on Pizzarela? Is there anything moving there or you kind of get that on the bench until you get to run our op and running?

Speaker 2

Yes, it is moving and we've got a $5,000,000 budget at Pitria for 2024. We are starting to drill at Pitria now. We have a one kilometer at it at the beginning of the year. We've extended that at it. It's kind of it's going to we expect it to go through some veins and a zone a Manto zone in the back half of this year.

Speaker 2

So we'll have results and a plan put together for the marketplace hopefully by the end of this year. We are excited about it. Obviously, it's one of the world's largest undeveloped silver deposits. It's got a resource defined close to 600,000,000 ounces of silver plus lead and zinc. We are looking at it from an underground standpoint.

Speaker 2

We are underground miners. I know piteria and a lot of people in the marketplace understand piteria is an open pit mine from a historical feasibility study that was done by Silver Standard or SSR Mining. Again, we're looking at it from an underground standpoint. I just our drilling to confirm some of the hypothesis that we have with regards to feeder structures and mantels and again expect to have the information out by the end of the year on that.

Operator

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

Speaker 2

Thank you, operator, and thank you for everybody listening today. I think Q3 in the back half of the year is going to be exciting time for Endeavour. We try to bring Terronera into commissioning and ultimately commercial production to significantly increase our production profile and ultimately cut our cost profile. So thank you again for listening and hope to talk to you guys soon.

Operator

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

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