This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good morning and welcome to the Core 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 zone. 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 Mitch Krebs, President, and CEO. Please go ahead.
spk06: 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 POA 11 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, so 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, Palmareo, and the Silvertip Project, which IFA 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 Crow 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 prescreens 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 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 de-levering 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 CORE in a great position to pursue other opportunities to further enhance the business. Finishing up with the highlights, I'm very pleased to welcome Jean Hull to CORE's Board of Directors. Jean brings over 35 years of engineering, operational, and leadership experience. Her unique background will be particularly valuable as the Rochester expansion progresses toward completion. Jean's work on advancing ESG initiatives also meshes very well with our commitment to be an industry leader in this area. The Corps' diverse, independent board is stronger with the addition of Jean and we'll continue to pursue opportunities to further enhance and refresh our board in the future. Shifting gears, I want to 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 want to 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.
spk01: 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 organisation. 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 ounce 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 2022. At 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 and what is likely a small part of a larger mineralising system and we firmly believe that 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.
spk02: 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 Core'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 advancing POE 11 and carefully managing Rochester's transition. Second, implementing business improvement initiatives that drive efficiency and productivity at our operations. And third and most importantly, focusing on the 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% quarter over quarter, while silver ounces produced increased 5%. Sons placed in the second quarter were impacted by the installation of the pre-screen pilot system, which was completed on July 22nd. 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 optimize PO11 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. TAS 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 experiences 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 the POE 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 Nevada 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, rough set of secondary conveyors, commencement of pre-screen installation, and the completion of the Merrill-Crow electrical systems, among many others. The mine and project teams are aligned and working well together, with over a 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 stoke development due to COVID impacts on the workforce in the first quarter. And we remain optimistic that Kensington is on track to achieve the 2022 production gains. Wrapping up with Wharf, we continue to place higher grade material, which led to a 15% increase in gold production versus the first quarter. Warp remains on track to achieve its 2022 production guidance range. 2022 Gold Cast guidance has been revised upwards to reflect higher anticipated diesel costs. With that, I'll pass the call over to Tom.
spk07: Thanks, Nick. I'll briefly run through our consolidated financial results that are highlighted on slide four. An 8% increase in revenue quarter over quarter 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 CORE'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. CORE consumes between 16 to 18 million gallons of diesel per year, and we are currently running approximately $1.50 per gallon 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 slides. 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 had put in place during the 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.
spk06: Thanks, Tom. Before moving on to the Q&A, I want to 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 CORE 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.
spk03: We will now begin the question and answer session. For the question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from Trevor Turnbull of Scotiabank. Please go ahead.
spk05: Thank you, Mitch. Thanks for letting me jump into the conference call. I was interested in the higher throughput scenarios that you mentioned for Silver Tip. I assume these are being driven by exploration success and 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?
spk06: Yeah. Hi, Trevor. Thanks for the question. There's no doubt Silvertip is a large system that continues to grow the more we drill. I know in Eva'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 compelling business case, which is okay. While that goes on, we'll continue to focus on getting Rochester's POA 11 completed and commissioned, generating positive free cash flows, de-levering the balance sheet. And so while we're doing those things, Silver Tip, the work there can continue. With that, Mick, do you want to talk a little bit more about sort of scenarios and size and how we're thinking about that?
spk02: Yeah, absolutely. The original idea was a fairly small site at Silver Tip, but since we continue to get this success with the exploration results, At Silver Tip, we had to have a rethink of that. And now we're looking at what is that right size. So 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. And as we continue to hit with the exploration program, then we'll reevaluate the size. But 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 the PUE11 project.
spk06: And 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?
spk01: I think it's at a really exciting stage right now and we've taken a bit of a step back to look at the larger mineralising 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 porphyry that provides the heat and fluids that move outwards and mineralise the surrounding rock in sort of a radial fashion so you get the hub and spoke effect. And from what we're seeing in the data, there's evidence that the resources outlined to date are on only one of, potentially, one of several potential spokes. And also in the geophysical data, there are indicators for the location of the porph resource. So what we want to do is step back a little bit this summer and test some additional spokes. And as the underground development gets closer to that potential hub, we plan to drill test that too.
spk05: Great. Well, sounds exciting and look forward to hearing what you come up with. Thanks again, Mitch, for letting me jump in.
spk06: Yeah, thanks, Trevor. Appreciate it.
spk03: The next question is from Mark Reichman of Noble Capital Markets. Please go ahead.
spk00: Thank you, and good morning. So I've got two questions, one question for Tom and then one for Mitch. So 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. And it seems like the NPV has also declined under the base case and discounting at 5%. So 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 you know, the technical report outcome and kind of where you stand today.
spk06: Thanks, Mark. Hi, good morning. Tom, feel free to take a crack at it. I'll 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. 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. And as Mick said, we're seeing some cost pressure coming back on the bids for some of that work, which after the last nine months shouldn't be a huge surprise. Nothing seems to be coming back lower than expected. than prior estimates. So 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. And as far as the comparison between the kind of the 400 to 600. You know, in my mind, there's kind of a bucket of inflation and a bucket of scope enhancements. About 50, if I had to say off the cuff, but Tom, do you want to go another layer?
spk07: Yeah, 100%. So 397 was the original amount. As we continued through detailed engineering, we found some other opportunities, whether it be to enhanced safety, enhanced throughput, led us to the 450, which we had guided at the end of the third quarter of 21. Then when this revised technical report came out, we had the two elements. We had the design change with the prescreen, as well as the inflationary pressures. To be honest, I think we've done a great job of managing On the procurement side, a lot of the key elements were ordered kind of pre the really heavy inflationary pressure. And that's why when you look back at where the ultimate capital is going to be, I think it's going to be a success given where we're at in terms of if it's now – Maybe it's 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. And just go back to the economics. It's pretty compelling. Still 17% IRR. Point out these technical reports are a point in time. And hopefully as we continue to advance and take all the learnings that we've had from from the existing stage four. It's going to be a compelling project in arguably the best mining jurisdiction in the world. So, I don't know, Mark.
spk00: 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, because clearly, you know, the original NAV was about $634 million. 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. And then the second question I had for Mitch was really just kind of long-term. I mean, the silver tip project seems to be getting more exciting, you know, by the quarter. The challenge is, is that I I've heard, you know, from some investors that, you know, kind of knock on core has been that they're always issuing equity. And, and 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. And 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, you know, completed, that the cash flow will be used to deliver the balance sheet and then embark on another big spending project in silver tips. So, I mean, will there be any room to return some, you know, to return some cash flow to shareholders in the form of buybacks?
spk06: It's a fair question, and we, I'd say, largely agree with the second part of your question around sort of sequence and timing, and this is an area where we've given it a lot of thought, and frankly, the growing size and scale and potential significance of Silver Tip 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 fund the POA 11 expansion, and generate positive free cash flow. Be a consistent generator of free cash flow as we advance Silver Tip along. And I think that's a bit of a change from where we were, say, nine months ago, where we were thinking more of transitioning sooner from POA 11 completion to Silver Tip. And I think within there lies that opportunity then to, de-levering won't take that long with the kind of free cash flow that we anticipate generating post POA 11 as to whether then we turn to returning capital to stockholders. We'll obviously, like we always do, we'll talk about that with our board and make decisions accordingly at that point in time. But I do think that getting back to positive free cash flow as a company and staying there for a while while Silver Tip comes along and being open to alternatives with Silver Tip 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 big strain on the company's balance sheet if and when we do move ahead with an expansion and restart. Is that? Sort of answer your question, Mark.
spk03: Mark, is your line muted?
spk00: No, that answered my question. That's very helpful. Thank you.
spk06: No, thanks for that feedback, Mark. Appreciate it.
spk03: Again, if you have a question, please press star, then 1. The next question is from Brian MacArthur of Raymond James. Please go ahead.
spk04: 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 committed, so I guess that's 250 to go. But when I look at your guidance on page nine, you sort of have 217 to 257 this year. If I take off the 73 that's spent at the low end and 143, then the low end next year is 131. So I'm kind of 275 versus that 250. 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. I'm trying to reconcile all that.
spk06: Yeah, no. An astute reader of our disclosures. I love it, Brian. Thanks for the question. And Tom, I'll let you go into a little bit more detail here in a second. But Brian, that really flags just what we're seeing in terms of timing of billings and payables. So between accrual and cash, capital going out the door, there's more than the 350 that we've incurred to date that needs to still be paid. And so that's been something that we've, obviously we're watching this like a hawk. And the timing of some of this cash in terms of peak capital at POA 11 will be more, 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. But 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 want to?
spk07: Yeah, sure. So just some big picture numbers, Brian. So 350 incurred, of which 297 of that's paid. So let's call it 300 has actually been you know, paid and cash gone out the door. So that kind of leaves 300 to go. You have to bear in mind some of that's going to be funded via some capital leases. But, you know, 300 is kind of the magical number that's remaining of cash to go. And we updated, as Mitch said, you know, just the timing of invoices, probably 155 of that or 150 or so is... is what's expected to go out here in the second half, and then the numbers for next year remain as is.
spk06: And then, 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. So you add all those up together and you compare that to what's left to go there at POA 11 and we feel good about where we sit and we know the levers we have and ones that we can pull if and when we need to.
spk04: Great. That is very, very helpful. I appreciate it because that's why I was trying to figure out how much 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, there's 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...
spk07: the 23 budgeting process where we're factoring in all the various ramp-up scenarios, you know, when's the Merrill Crowe done, et cetera, et cetera. So, you know, at this stage, we don't have anything further, but that 23 guidance will be very clear about expected timing, ranges of cash costs for next year, et cetera, et cetera.
spk06: On that second half commissioning, I'm imagining, you know, there's a pad buildup. but there's also, or on Freshliner as well. So 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.
spk04: Great, that's very helpful as well. And maybe just following up on the other question on Silvertip, because I sort of was looking at it the same way. I mean, at one time, maybe you were thinking 25, maybe 26, getting stuff in. It sounds to me like bigger project it's going to take some time to figure it all out um against that is obviously time value money if you keep pushing it back and back before developing and eventually that factors into it but should i sort of think about you know a 26 27 time frame is that sort of what you're thinking about now to get all the work done um for silver chip 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?
spk06: 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. Conceptually, that feels much more on target than, you know, a kind of swinging from the POA 11 vine and right onto the silver tip vine. And if you think of, you know, commissioning and ramping up POA 11 back half of 2023. That sets us up for a great 2024. If we want to generate some free cash flow and de-lever, 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 silver tip. So I don't know if that that kind of helps reflect our thinking as we sit here today. And, 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.
spk04: Sorry, and that was going to be my next one, and I'll give it up. That was my last question. So 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 spoke. How much of it would be like on areas that are already done? So as you said, it goes pretty quickly. And how much of it would you actually have to spend a fair bit of time permitting?
spk02: Yeah. Mick, do you want to? I can. So 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 going to 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. And as we progress that planning, then we'll share that. But as Mitch said, It's exciting. It's growing, and we'll have to plan that out and get this rate sized.
spk04: Thanks.
spk06: Does that help, Brian?
spk04: It does. Thank you very much for answering all my questions. I appreciate it.
spk06: Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Mitch Kretz for closing remarks.
spk06: Okay, thanks. Before wrapping up, I just want to 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 CORE into America's premier growing precious metals company. So 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.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer