Good morning, and welcome to the Coeur Mining Second Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your touchtone phone. To withdraw from the question queue, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Mitchell J. Krebs, President and CEO. Please go ahead.
Good morning, and thanks for joining our second quarter earnings call. With me today in Chicago are Mick Routledge, Tom Whelan, Aoife McGrath, along with 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. Our second quarter was marked by solid top-line growth and continued progress at the cornerstone Rochester POA11 expansion project. As highlighted on slide three in the earnings deck, three of our four operating mines delivered strong production growth compared to the first quarter. Solid metal sales, coupled with some positive changes in working capital, led to a strong rebound in quarterly operating cash flow as well. As we look toward the second half of the year, our operations remain on track to achieve our full year production guidance.
On the cost side, inflationary pressures continue to impact our results, especially from sharply higher diesel costs. We have made some minor adjustments to our 2022 cost guidance that Mick and Tom will review in more detail in a moment. We also modified our full year guidance to reflect our decision to invest an additional $11 million in exploration during the second half to follow up on recent positive drilling results at Kensington, Palmarejo, Silvertip project, which Aoife will talk more about shortly. Most importantly, the ongoing expansion at Rochester is now at peak levels of activity and remains on track to be completed mid-next year.
There are over 400 contractors going through the gate every day now, and several key milestones were achieved during the quarter, including the completion of major concrete pouring and the start of steel erection at the Merrill-Crowe facility and secondary crusher. Almost all components and equipment are now on-site. The photographs on slides 10 and 11 demonstrate the terrific progress being made. We reached an important milestone a couple of weeks ago with the successful installation of pre-screens at Rochester's existing crusher that Mick will talk more about in a few minutes. The balance sheet remains in solid shape with total adjusted liquidity of nearly $360 million, including the recent Victoria Gold Corp. share sale proceeds, with an additional $59 million of potential liquidity in the form of marketable securities.
With the completion of the Rochester expansion coming into view, we look forward to delevering the balance sheet with the strong cash flow we expect to generate. The next stage that awaits us post-expansion, higher production, lower costs, positive free cash flow, and reduced debt, will place Coeur in a great position to pursue other opportunities to further enhance the business. Finishing up with the highlights, I'm very pleased to welcome Jeane Hull to Coeur's board of directors. Jeane brings over 35 years of engineering, operational, and leadership experience. Her unique background will be particularly valuable as the Rochester expansion progresses toward completion. Jeane's work on advancing ESG initiatives also meshes very well with our commitment to be an industry leader in this area.
Coeur's diverse independent board is stronger with the addition of Jeane and will continue to pursue opportunities to further enhance and refresh our board in the future. Shifting gears, I wanna turn your attention to slide 17 that highlights some important progress we're making on the people side of the business. The ability to attract and retain the best talent remains a critical priority in our business, especially in the current tight labor market. We continue to address that opportunity head on through the creation of programs and training designed to maintain our reputation as a place where people wanna work and develop themselves and build rewarding careers. Before having Mick provide an overview of our operations, I'd like Aoife to provide an update on her first 90 days with the company and give some additional color on our second-half exploration priorities.
Thanks, Mitch. After three months in the new role, I've had an opportunity to visit all of the company's projects and meet the exploration teams across the organization. I've been very impressed both with the people and the potential of our assets. One thing that became quickly apparent to me was the near-term opportunity to invest additional exploration funds in the second half of the year to allow three sites to accelerate drilling on targets showing some excellent results. We look forward to reporting back at year-end on the impact of these programs. At Kensington, wide and high-grade results in the upper areas of the main Kensington deposit point to a very real potential for meaningful mine life extension from its current three year reserve life.
A key priority in the second half of 2022 will be to continue to target the lowest risk, potentially highest value earned additions by testing the southern extensions to Kensington, Elmira, and Johnson veins. At Palmarejo, recent drilling in the Hidalgo zone at the Independencia underground mine have returned some of the highest grade gold-silver intercepts the team has encountered this year, with drilling planned to continue for the remainder of Silvertip, which is at a very exciting stage right now, drilling continues to show the robustness of the deposit, with consistently impressive intercepts in the Discovery South, Southern Silver and Camp Creek zones. Drilling will continue to step out from and extend known deposits, but in addition, summer season programs are being expanded to include testing of the regional package with the aim of vectoring towards the mineralizing source.
We believe that the resource outlined to date has been defined on what is likely a small part of a larger mineralizing system, and we firmly Silvertip has the possibility to become a much larger resource and be a future source of high quality growth for the company. I will now turn the call over to Mick.
Thanks, Aoife. Before getting to the quarterly review, I want to add that the development and training programs Mitch touched on earlier have had a clear impact on our ability to effectively grow our people, align objectives and establish a safe working environment from the ground up. Slide 19 highlights the continuation of our multi-year downward trend in injury rates, and I strongly believe this investment in our people is a big reason for that success. Excellence in health, safety and environmental performance is the foundation of a world-class business. Looking back on Coeur's first half of 2022 from an operational perspective, our teams have worked hard to overcome considerable headwinds on costs and global supply chain disruptions. When we factor in the addition of a major expansion project at one of our four operations, our performance is even more impressive.
Our priority in the second half of the year is on maintaining that momentum by first, steadily POA 11 and carefully managing Rochester's transition. Second, implementing business improvement initiatives that drive efficiency and productivity at our operations. Third, and most importantly, focusing on safety and well-being of our people. Turning to our second quarter production summary on slide six, and beginning with Palmarejo, metallurgical recoveries improved due to ongoing blending optimization and metals grade remained consistent. We are confident in our ability to achieve production targets for the year. We have a good handle on unit costs at Palmarejo. Guidance has been adjusted largely to reflect an expected change in the allocation of costs on a core product basis. Moving to Rochester, gold and silver production benefited from strong ore placement rates in the first quarter.
Gold ounces produced increased 37% QoQ, while silver ounces produced increased 5%. Tons placed in the second quarter were impacted by the installation of the pre-screen pilot system, which was completed on July 22. Ramp-up of the pre-screen pilot system as well as optimization of the product size placed in the leach is now underway. These learnings should help us further de-risk and POA 11 as we move forward with that pre-screen system. Following a slower first half of the year, we remain confident that Rochester is on track to achieve 2022 production guidance for gold and silver. Cash guidance for 2022 has been revised upwards to reflect higher diesel, labor, and maintenance costs. As a general matter, we anticipate a period of elevated costs throughout Rochester's transition period as experience is gained and best practices are developed.
These learnings, we believe, will ultimately lead to a major reversal on costs as the scale and efficiencies of an expanded operation are fully realized. Staying with Rochester and POA 11 expansion for a moment, Mitch hit the key Q2 highlights. On July 29th, the transmission line and on-site substation was successfully energized by NV Energy as another example of the tangible progress taking place. The second half of the year will see the pace of activity continue with the start of the product conveyor installation along the crusher corridor, roof set of secondary conveyors, commencement of pre-screen installation, and the completion of the Merrill-Crowe electrical systems, among many others. The main and project teams are aligned and working well together with over 1 million hours without a lost time injury, zero on the project to date.
At quarter end, the project's estimated cost remained approximately $600 million. Roughly $523 million of the project capital has been committed, and we incurred $350 million of that estimated total through the end of the second quarter. Key Q3 updates on the final engineering and procurement of the pre-screen, along with an updated Monte Carlo analysis of the contingency, will be completed as part of our ongoing governance over the project. This work is not yet complete, but it is fair to say we continue to see some inflationary pressures and could see the final cost of the project end up around 5% higher than the current estimate.
Switching over to Kensington, production increased on the back of Kensington's highest ever quarterly throughput, driven by improved mining and mill efficiencies. The team continues to catch up on delayed stope development due to COVID impacts on the workforce in the first quarter. We remain optimistic that Kensington is on track to achieve the 2022 production guidance. Wrapping up with Wharf, we continue to place higher grade material, which led to a 15% increase in gold production versus the first quarter. Wharf remains on track to achieve its 2022 production guidance range. 2022 gold CAS guidance has been revised upwards to reflect higher anticipated diesel costs. With that, I'll pass the call over to Tom.
Thanks, Mick. I'll briefly run through our consolidated financial results that are highlighted on slide four. An 8% increase in revenue QoQ was driven by increased metal sales at each of our operating mines. This higher production, coupled with favorable changes in working capital, led to $23 million of operating cash flow during the quarter. We are positioned for a stronger second half of the year with 2022 production guidance reaffirmed. We remain focused on opportunities to contain industry-wide cost pressures. Slide five in the deck provides additional detail on four of Coeur's key costs and their impact on our business. As the slide demonstrates, cost increases other than diesel have moderated compared to the increases we experienced last quarter. Diesel, however, remains our largest line item in terms of cost exposure.
Coeur consumes between 16 million-18 million gals of diesel per year, and we are currently running approximately $1.50 million per gal over budget through the end of the second quarter. Accordingly, we have increased our cost guidance at Rochester, Kensington and Wharf, primarily related to diesel prices. Next, turning to slide 12 and looking at the balance sheet, we ended the quarter with $319 million of liquidity, including $74 million of cash and $245 million of availability under our revolving credit facility. Additionally, we had $99 million of strategic investments in equity securities, leaving us with $418 million of potential liquidity as shown on the slide. We monetized a portion of our position in Victoria Gold at quarter end and received proceeds of approximately $40 million in early July.
We're comfortable that the balance sheet remains well-positioned to fund the CapEx and exploration priorities that we've highlighted during the call. Lastly, I wanted to remind everyone of the downside protection that we have put in place POA 11 build. We have 108,500 ounces of gold hedges remaining in 2022 at an average forward price of $1,965 per ounce, and an additional 112,500 ounces hedged in 2023 at an average forward price of $1,982 per ounce, which is providing meaningful downside protection in this current market price environment. The fair value of the gold hedge book at quarter end was approximately $29 million. I'll now pass the call back to Mitch.
Thanks, Tom. Before moving on to the Q&A, I wanna quickly highlight slide 13 that summarizes our top priorities for the second half of the year. By delivering on these priorities, we remain confident that Coeur is well on its way to being a truly differentiated opportunity for investors seeking industry-leading organic growth from a U.S. company with a balanced portfolio of North American precious metals assets. With that, let's go ahead and open it up for questions.
We will now begin the question and answer session. To ask a question, you may press star one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from Trevor Turnbull of Scotiabank. Please go ahead.
Thank you, Mitch. Thanks for letting me jump into the conference call. I was interested in the higher throughput scenarios that you Silvertip. I assume these are being driven by exploration success. Just wondered if you could talk a little bit about maybe the framework around those scenarios. For example, are you weighing these expansions in terms of maintaining a minimum mine life, or are you looking at things that might be more scalable depending on exploration success?
Yeah. Hi, Trevor. Thanks for the question. There's Silvertip is a large system that continues to grow the more we drill. I know in Aoife's first 90 days, it's been a project that she's particularly enthusiastic about. As we continue to sort of pursue this much larger scenario, you know, that will obviously take some time to continue to do the drilling, the design and engineering, and develop a, you know, a compelling business case, which is okay, right? While that goes on, we'll continue to focus on POA 11 completed and commissioned, generating positive free cash flow, delevering the balance sheet. While we're doing Silvertip can, the work there can continue.
With that, Mick, do you wanna talk a little bit more about sort of expansion scenarios and size and how we're thinking about that?
Yeah, absolutely. You know, the original idea was a fairly small Silvertip. Since we continue to get this success with the exploration Silvertip, we have to have a rethink of that. Now we're looking at what is that right size. As you mentioned, we have to target a minimum mine life, which is then gonna make a successful capital project and effectively support that investment case. As we continue to hit
With the exploration program, then we'll reevaluate size. At the moment, we're going through that trade-off study to look at what that right size is for the asset as it stands today, with an expectation that we'll continue to explore while we finish off POA 11 project.
Just to put a fine point on that, Trevor, I think last year, a lot of the work that we did focused around a 1,750 ton a day scenario. We're sort of in the range of double that now, plus or minus, and we'll fine-tune that range as the work continues. Aoife, is there anything you want to jump in and say from your standpoint on Silvertip?
Yeah, I mean, it's at a really exciting stage right now, and we've taken a bit of a step back to look at the larger mineralizing system in the context of the hub-and-spoke CRD deposit model. Basically, what this means is that the hub is the intrusive source or a porphyry that provides the heat and fluids that move outwards and mineralize the surrounding rock in sort of a radial fashion, so you get the hub-and-spoke effect. From what we're seeing in the data, there's evidence that the resources outlined to date are on only one of potentially several potential spokes. Also in the geophysical data, there are indicators for the location of the porphyry source.
What we want to do is step back a little bit this summer and test some additional spokes. As the underground development gets closer to that potential hub, we would, we plan to drill test that too.
Great. Well, sounds exciting and look forward to hearing what you come up with. Thanks again, Mitch, for letting me jump in.
Yeah. Thanks, Trevor. Appreciate it.
The next question is from Mark Reichman of Noble Capital Markets. Please go ahead.
Thank you. Good morning. I've got two questions, one question for Tom and then one for Mitch. The first question for Tom is, you know, when the 2020 technical report on Rochester was completed, the capital cost was roughly $397 million, and now it's $600 million. It seems like the NPV has also declined under the base case and the discounting at 5%. I wanted to ask you, has the cost topped out? Is $600 million kind of the ceiling, and could you just kind of roughly walk through for investors kind of a comparison between the technical report outcome and kind of where you stand today?
Thanks, Mark. Hi, good morning. Tom, feel free to take a crack at it. I'll just start off with a couple of my own thoughts, if that's all right, Mark. The $600 million, obviously, as we get further along here, with nearly 90% committed, there's less and less uncertainty remaining. You know, the one piece that we're trying to pin down here in the third quarter are these pre-screens that will go into the new crusher. As Mick said, we're seeing some cost pressure coming back on the bids for some of that work, which, you know, after the last nine months shouldn't be a huge surprise. Nothing seems to be coming back lower than prior estimates.
We did put some language, I think Mick mentioned, a 5% sort of indication of potential increase above and beyond the $600 million, kind of our attempt to provide an indication to capture some of those potentials that may or may not arise between now and when we have this thing wrapped up, middle of next year. As far as the comparison between the $400 million-$600 million, you know, in my mind, there's kind of a bucket of inflation and a bucket of scope enhancements, about 50-50 if I had to say off the cuff. Tom, do you want to go another layer below that?
Yeah. 100%. $397 was the original amount. As we continued through detailed engineering, we found some other opportunities, whether it be to enhance safety, enhance throughput, led us to the $450, which we had guided at the end of the third quarter of 2021. When this revised technical report came out, we had the two elements. We had the design change with the pre-screen as well as the inflationary pressures. To be honest, I think we've done a great job of managing, you know, on the procurement side. A lot of the key elements were ordered kind of pre the really heavy inflationary pressure.
That's why when you look back at, you know, where the ultimate capital is gonna be, I think it's gonna be a success, given where we're at in terms of, you know, if it's now, it's maybe the top of the seventh inning for us versus some of our peers who are still in the top of the second or third inning in terms of the project.
Yeah.
Just go back to the economics. You know, it's pretty compelling.
Yeah.
Still 17% IRR. Point out these technical reports are a point in time, and you know, hopefully, as we continue to advance and take all the learnings that we've had from the existing stage four, it's gonna be a compelling project in arguably the best mining jurisdiction in the world. I don't know, Mark, I don't know if I did.
I think you've managed the project well, you know, given the difficult circumstances, the inflationary environment. I just wanted some assurance, you know, on the economics. You know, just clearly. You know, the original NAV was about $634 million, that now it's $348 million. But I mean, you're still expecting that $90 million of cash flow. So I was just kind of more interested in kind of economics. Then the second question I had for Mitch was really just kind of long term. I Silvertip project seems to be getting more exciting, you know, by the quarter. The challenge is that I've heard, you know, from some investors that, you know, kind of knock on Coeur has been that they're always issuing equity. I think that there's some concern.
I think there's some investors that would like to see, you know, kind of a halt in the spending. Then once Rochester's, you know, in place, that cash flow would be returned to shareholders in the form of buybacks. Whereas it kind of seems like that once Rochester's in, you know, completed, that the cash flow will be used to delever the balance sheet and then embark on another big spending Silvertip. I mean, will there be any room to return some cash flow to shareholders in the form of buybacks?
That's a fair question, and we, I'd say, largely agree with the second part of your question around sort of sequence and timing. This is an area where we've given it a lot of thought. Frankly, the growing size and scale and potential Silvertip, it kind of has helped guide us to a perspective that, look, get Rochester completed, generate free cash flow, initially use it to de-stress the balance sheet that we've been utilizing to help POA 11 expansion and generate positive free cash flow. You know, be a consistent generator of free cash flow as we Silvertip along.
I think, you know, that's a bit of a change from where we were, let's say nine months ago, where we were thinking more of, you know, Silvertip. I think, you know, within there lies that opportunity then to, you know, de-levering won't take that long with the kind of free cash flow that we anticipate POA 11. As to whether then we turn to returning capital to stockholders, you know, we'll obviously, like we always do, we'll talk about that with our board and make decisions accordingly at that point in time.
I do think that, you know, the getting back to positive free cash flow as a company and staying there for Silvertip comes along and being open to Silvertip in terms of, partnership models and other scenarios that could help to kind of share risk, reduce the capital required for a company our size so that it doesn't create, a future, you know, big strain on the company's balance sheet, if and when we do, you know, move ahead with a, an expansion and restart. Does that sort of answer your question, Mark?
Mark, is your line muted?
No. That answered my question. It's very helpful. Thank you.
Okay. No, thanks for that feedback, Mark. Appreciate it.
Again, if you have a question, please press star then one. The next question is from Brian MacArthur of Raymond James. Please go ahead.
Good morning, and thank you for taking my question. I just want to follow up a little bit on the remaining CapEx at Rochester. You know, you sort of say it's $600 million, $350 million committed, so I guess that's $250 million to go. When I look at your guidance on page nine, you sort of have $217 million-$257 million this year. If I take off the $73 million that's spent at the low end, then $143 million, then the low end next year is $131 million. I'm kind of $275 million versus that $250 million. Have you already built that 5% in or how should I think about that? Because I just can't. I'm just trying to figure out.
All I really care about is how much cash there is still to go out the door on Rochester, but I'm trying to reconcile all that.
Yeah, no. An astute reader of our disclosures. I love it, Brian. Thanks for the question. Tom, I'll let you go into a little bit more detail here in a second. Brian, that really flags just what we're seeing in terms of timing of billings and payables. Between you know CapEx accrual and cash CapEx going out the door, there's still more than the $350 that we've incurred to date that needs to still be paid. That's been something that obviously we're watching this like a hawk.
The timing of some of this cash in terms of peak POA 11 will be more, you know, slide more to this current third quarter and into the fourth quarter. We had previously anticipated a lot of that to come through the door and get paid out in the second quarter. That's now happening kind of in the second half of the year. That's I think one of the key distinction of what you've identified there. Tom, do you wanna?
Yeah, sure. Just some big picture numbers, Brian. $350 incurred, of which, $297 of that's paid. Let's call it $300 has actually been, you know, paid and, cash gone out the door. That kind of leaves $300 to go. You have to bear in mind some of that's gonna be funded via some capital leases. But, you know, $300's kind of the magical number that's remaining of cash to go. We updated, as Mitch said, you know, just the timing of invoices, probably $155 of that or $150 or so is what's expected to go out here in the second half.
The numbers for next year remain as is.
Brian, just to circle back, real quick. You know, the multiple levers, if there's $300 million or so to go, the same kind of levers we've been talking about still exist, right? There's the cash, there's the revolver capacity, there's the other equity investments, and then there's the free cash flow from our other operations which are underpinned with the gold hedges that Tom detailed. You know, you add all those up together and you compare that to what's left to go there POA 11 and we feel good about where we sit. You know, we know the levers we have and ones that we can pull if and when we need to.
Great. That is very, very helpful. I appreciate it, 'cause that's what I was trying to figure out, how much of it was timing and whether it was over budget index. Can I ask one more thing about it? The $600, normally, when these projects, you know, working capital is not always included. Do I need to worry about any timing on working capital on top of that? Obviously, it'll ramp up over time that you have to fund or anything. Do I need to think about anything on that front too?
We're in the middle of the 2023 budgeting process where we're factoring in all the various ramp up scenarios. You know, when's the Merrill-Crowe done, etc., etc.. I'd, you know, at this stage, we don't have anything further, but that 2023 guidance will be very clear about expected timing, ranges of cash costs for next year, etc., etc..
On that second half commissioning.
Yeah.
I'm imagining, you know, there's some pad build up, but there's also ore on fresh liner as well. There's a few things that we'll sort out as we go through our budgeting and then setting guidance, and we'll be sure to articulate that component, Brian.
Great. That's very helpful as well. Maybe just following up on the other Silvertip, 'cause I sort of was looking at it the same way. I mean, at one time maybe you were thinking 2025, maybe 2026, getting stuff in. It sounds to me like bigger project, gonna take some time to figure it all out. Against that is obviously time value of money. If you keep pushing it back and back before developing, and eventually that factors into it. Should I sort of think about, you know, a 2026-2027 timeframe? Is that sort of what you're thinking right now to get all the work done Silvertip, which would then, as you said, give you that gap to pay down debt and potentially return money to shareholders? Is that a fair way to think about things now?
Yeah. You know, I'd give you a specific answer if I had one. The truth is, none of us do as we sit here today. Just conceptually, that feels much more on target than, you know, it's kind of swinging from POA 11 vine and right Silvertip vine. If you think of, you know, commissioning and ramping POA 11 back half of 2023, that sets us up for a great 2024, you know. If we wanna generate some free cash flow and delever, you know, that starts to give you a sense of how many additional years potentially beyond that then that we would expect to not be incurring any potential capital at Silvertip.
I don't know if that kinda helps in reflecting our thinking as we sit here today. You know, bigger also obviously means a different sort of permitting approach, which, you know, will take some additional time as well during that window.
Sorry, that was gonna be my next and I'll give it up. That was my last question then. For all this, where this is all being discovered, is there a lot of new permitting that has to be done? Or, I mean, I get the intrusive and the hub and spokes. How much of it would be like on areas that are already done? As you said, it goes pretty quickly. How much of it would you actually have to spend, you know, a fair bit of time permitting?
Yeah. Mick, do you wanna?
I can. From an exploration perspective, we're in good shape, and we've got access to all those areas to be able to go and investigate. From an operational perspective, if we expect to put a plant in place that's twice the size or bigger, then we're gonna need an environmental assessment, and that takes some time. We've actually already started some of that work to understand what that looks like and the timelines for that. As we progress that planning, then we'll share that. As Mitch said, it's exciting, it's growing, and we'll have to plan that out and get this right sized.
Thanks.
Does that help, Brian?
It does. Thank you very much for answering all my questions. I appreciate it.
No, thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mitchell Krebs for closing remarks.
Okay, thanks. Before wrapping up, I just wanna quickly thank all of our employees and contractors for everybody's terrific work and dedication and resilience. I'm so proud of everyone's effort and seeing the impact you all are having as we continue to pursue a higher standard and turn Coeur into America's premier growing precious metals company. With that, thank you for joining the call today, and we'll speak again with you in early November to discuss our third quarter results. Have a good day. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.