Endeavour Silver Corporation

Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver Third Quarter 2020 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Galina Mellinger, Director, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to the Endeavor Silver 2020 Third Quarter Financial Results Conference Call. With me on the line today, we have the company's Chief Executive Officer, Bradford Cook, our Chief Financial Officer, Dan Dixon, our Chief Operating Officer, Don Gray, and and our President, Godfrey Walton. Before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavor's anticipated performance in 2020 and future years, including revenue and cost figures, silver and gold production, grades and recoveries, and the timing and measures required to develop new silver mines and mineralized zones. while we do not intend to and do not assume any obligation to update such forward-looking information other than as required by applicable law. On behalf of Endeavor Silver, I'd like to thank you again for joining our call, and I will now turn it over to our CEO, Brad Cook.

Thank you very much, Galina, and again, welcome everybody to this conference call on our third quarter financial results. I think first of all, I'd like to welcome Don Gray to the group. This is his first earnings call as our new COO. And I'd also especially like to recognize Godfrey Walton, who was with me when we went to Mexico in 2003 looking for an asset we could build a company around. This was Godfrey's last earnings call, and so kudos, Godfrey. It was a great run. Moving on to our press release this morning, I'd just like to open with a comment on the quarter. It was our best quarter in 18 months. In fact, our best quarter in a long time when you consider the changes of revenue, cash flow, and earnings, all sharply higher this year compared to the same quarter last year. Our cash costs and all unsustaining costs were significantly lower year on year. And this improved operating performance combined with higher precious metal prices generated a significant return to profitability, again, for the first time in six quarters. As a result, our cash and working capital positions also increased substantially during the third quarter. So let's drill down a little bit into the numbers. Our revenues were up 29% to just shy of $36 million in the quarter. And our cash flow, jumped almost 400% to $10.3 million year-on-year. Net income or earnings came in at a positive half a million dollars compared to an almost $7 million loss a year ago. And I should point out that we did carry a significant increased metal inventory through the quarter end, largely because of the summer run-up in metal prices and then the significant correction at the end of September. So we chose not to sell amount of silver and gold at the end of the quarter. We carried it in inventory, and the cost of that inventory is about $6 million, but the mark-to-market of that inventory at the end of September was in the order of $15 million. What that implies is that if we had sold that metal, our earnings would actually be in the $10 million range, not the half-million-dollar range. Production on the quarter was just shy of a million ounces of silver and 10,000 ounces of gold for 1.8 million ounces of silver equivalents. And I mentioned already our balance sheet cash was up 47% to just shy of $45 million. The working cap is up in the $54 million range, up 21% year-on-year. Moving to the operations, Guantanamo City continued to outperform with both silver and gold grades well above planned. We were affected by significant rainfall in the rain season in Q3, and as a result, throughput was only 911 tons per day in the quarter, with a 1,200-ton plant. That implies that as we bounce back here, exiting the rain season in Q4, there's actually more production and lower costs in our future at Guanicevique. I should point out, however, that the improved grades are accompanied by higher royalty payments. We're mining a property at Guanista V where there are very significant royalties paid. So our costs will slowly rise as the middle price rises just due to the royalties. Bolonitos continued to improve. It's not quite on plan yet, but we achieved 1,075 tons per day into a 1,200-ton plant, again, implying that there's still room for improvement on throughputs. Gold grades were on plan, silver grades remained below plan, but costs were fine. And all three assets generated free cash flow in the quarter. Last but not least, Dell Compass is pretty much on plan, throughput steady, gold grades on plan, silver grades below plan, but we're doing fine there and making a little bit of money. It's our smallest mine. One of the, our largest mine has by far the biggest impact on our financial performance. So I think on that note, operator, let's wrap up my comments and open it up for Q&A.

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. Our first question is from Heiko Ehle with HC Wainwright. Please go ahead.

Hey, Brad. Thanks for taking my question. Congratulations on a very, very good quarter here. Thank you. Hey, just going through the financials here, I'm looking at the – your deferred income tax asset has gone from $7.14 million at the beginning of the year to $5.3 million today. Going through that segment disclosures chart on page 15 of your financials, it looks like the improvement was almost exclusively related to Bolonitos. Should we expect further improvements for the company there? I mean, because that's, I don't want to say free money, but it's certainly good cash flow if it actually, you know, if you get paid back there.

Dan Dixon here. Thanks for the question. You did touch on our deferred tax actually went from $7 million to $5 million. Basically, we're actually using up that deferred tax asset, which is a non-cash item. And what's happening, and we've made significant profits in Bolonetos this year, but we've been offsetting those profits against previous year's losses. So we have lost carry-fors that we've used, and ultimately that reduces the value of that deferred income tax asset. So We are benefiting. We will see more profits in Q4, likely from Bolognese and Guana City. Guana City, we also have lost carry forwards there, so I don't expect to have a current income tax expense in Q4 other than for special mining duty, but we'll see us grind away from that asset and have an expense on a non-cash basis.

Got it. Perfect. Thank you. And then a completely different question. Can you just sort of walk us through how your plans in Mexico have changed since you restarted operations with safety related to COVID? Have there been meaningful changes? Are people adhering to the safety precautions properly? I mean, it seems like your safety record there is pretty good. So just if you could provide some more color, that'd be great. Thank you.

Well, let me give you a very high level comment, then I'll turn it over to Godfrey and Don. We fortunately were able to move very quickly to put our COVID precautions in place, both our prevention plan and our emergency response plan. And then by and large, it's served us very well stopping COVID at the gates of the operations, our actual workforce that is mine and plant that had minimal impacts from COVID. We've had some office workers impacted by COVID all eventually returned to work, but maybe I'll ask Godfrey and Bob to give you a little more color on our plans since the first and second quarters.

Hi, this is Godfrey. Yeah, we actually have a pretty intense protocol to make sure that we do stop COVID at the gate, as Brad mentioned. We make sure that every worker, as they come in, their temperature is checked, they're sprayed down, everybody's wearing a mask 100% of the time, and You're sprayed down body-wide, not from front and back. And your vehicles are sprayed down as you come in. So it's pretty intense. And unless you're actually there, Don and I went to Over the last month or so, we've been in and out of the different operations, and it's, to me, very, very good. I was very impressed with how thorough we're being. Yes, we've had a few cases, but typically we've got about 11 to 15 active cases at any one time. Nobody seriously... but it has been done very effectively, I think. Don, do you have anything else to add to that?

I think I'll just add that the screening is pretty comprehensive. with temperature checks and checking symptoms and that kind of thing. So when there is somebody, when there is somebody detected that could be coming in, we do send them right out for testing and the testing at our operations, we can turn that around very quickly. So if we do identify somebody that does test positive, we take the proper precautions for quarantining and then also our medical response has been quite good. And so we have really good response. Probably the response is just as good or better as you get just about anywhere in the world. It actually is really good. So I think from that perspective, we're taking all the proper precautions and measures to take care of our people as well as make sure that the operation can maintain continuity.

Very helpful, very informative.

I'll just add one thing, Heiko. We have doctors in all our operations, and we've increased the number of doctors just to help out with the screening and evaluation of people. So I would say we've probably tripled the number of doctors we have on staff now. just during this COVID, just because it does take up quite a bit of time for them when shift change is on. So if you've got a couple hundred people coming through the gate, it takes quite a bit to get them all checked out and evaluated.

Very good. It's nice to hear the whole team chime in on an answer to a singular question. That's actually really cool how you guys play off of one another. Thanks for taking my questions. I'll get back in queue. Thanks, Aiko.

The next question is from Craig Hutchison with TD Bank. Please go ahead.

Good morning, good afternoon. I was wondering if you could give me some more clarity in terms of grades and how we should think about Q4 here, in particular, if you want us to be – should we assume similar grades to Q3, which are obviously very high?

Again, high level, short answer, yes. Godfrey?

Hi, Craig. This is Godfrey. Yeah, I think you're going to see grades continue at Guadalajara. A lot of the grade that we're getting is coming from a property called Ocampo, but we do pay a high royalty on, so the grade needs to be good. And it's also coming from third-party ore that we're buying, which is part of our sort of social license to continue operating at Guanacete. So I think the grades you're seeing at Guanacete, Compass, and at Bolognitas are going to be similar in Q4 as they were in Q3.

Okay, thank you. And maybe just in terms of the accounting question, depreciation was fairly high in the quarter. Should we expect similar levels in Q4 as well?

Yeah, Craig, Dan here. I mean, ultimately our depreciation is high. We're very conservative in that standpoint. We depreciate on proven and probable. So I would expect very similar depletion and depreciation here in Q4.

Okay, thanks, guys.

Thank you for your question.

Pardon me. The next question is from Joseph Rieger with Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking the questions. Go ahead, Joel. So I guess first thing, Terra Nera, you know, what – Any update there on timeline to making a construction decision?

Well, of course, it's subject to the feasibility study, which is underway and expected next summer. But, Don, do you want to comment?

Yeah, we've just, as you know, awarded the feasibility study work to Wood Consultants, and they're starting up. So we'll be looking at the feasibility study report being completed sometime mid-next year, and then we'll be able to go to the board with the recommendation as to when to start construction. So right now, the timeline, it's what we have in the PFS, but subject to any additional work we do in the FS, so the feasibility study.

And the current pre-feasible construction schedule, once we break ground, is I believe 18 months to the start of commercial production. We've got lots of work to do, but we're finally into the final feasibility process.

Okay, fair enough. And then thinking about next year, I know it's a little early to provide guidance probably, but You know, from a modeling standpoint, should we be thinking about the, you know, Buena Sevilla and Bolognese kind of returning to normal operating rates near their, you know, planned capacity? Or should we be thinking about, you know, a certain percentage of planned capacity as a, you know, for the next 12 months?

Yeah, I think... Well, I don't think we're going to average 1,200 tons per day at either operation next year. We're certainly going to be bumping up against it on a regular basis. The reason why I'm cautious about talking about operating at full capacity is simply rain seasons are a bit unpredictable, and COVID is still out there. But, yes, it will be in our plan to operate close to capacity.

Okay. Thanks for that, Keller. I'll turn it over.

Thanks, Jill.

The next question is from Lucas Pipes with B. Reilly Securities. Please go ahead.

Hey, good day, everybody. I wanted to ask a question on the direct reduction costs per ton, and there's been a lot of noise in that metric between COVID and then some other challenges here today. And kind of looking at the third quarter, very nice performance kind of across the board, but it's still $110, over $110 per ton. And so do you think we can get below kind of $100 per ton figure, maybe back into the $80 to $90 range? We'd really appreciate your thoughts and the various puts and takes here on that. Thank you very much.

Yeah, Lucas, thanks for the question. Dan here again. Very good question, and it's hard to speak to it just on a consolidated basis, and getting below 100 on a consolidated basis for Q4 probably will be difficult only because a significant driver to all this is GuanaCity, and Godfrey touched on it. We've been buying a lot of tolled ore out of GuanaCity. It was almost 11% of our production in Q3, and ultimately when that ore comes to us at these high prices, We take it. It keeps ounces in the ground for us for another day. And ultimately, it's high-grade ore. So we pay a significant portion for it. We roughly make about 30% to 35% profit off that ore on a cash basis. And we expect that to continue because as prices go up, more of this told ore becomes available. And it's got a lot of benefits to us. A, we get to go find out where that ore is coming from and gives us a little bit of expiration opportunity or – And like I say, ultimately keeps it in the ground. The other aspect is the El Curso concessions that we lease from Ocampo. We pay a $12 processing fee per ton on that material. And then we also pay a royalty cost on that material. So we picked up the El Curso concessions effectively at no cost, but we do pay a very high royalty on it. And over $20, we pay 13% NSR on it. So effectively in Q3, we paid about... on across all our tons, we paid almost $28 of royalty per ton in there. So that's really driving up our cost per ton at Guantanamo City, and the reason why Guantanamo City sat at $146 for Q3, when ultimately we operated around $100 per ton on just basic mining, processing, and indirect costs. At Bolonitos, we're right in line with our cost per ton, in line with budgets, in line with historicals. At $68, if we hit this throughput tonnage, we should be around that, if not a little bit lower if we can get to 1,200 tons per day. And at Compass, it's just a high variability because of the size of the operation. So it's only 250 tons per day. And ultimately, we spent almost a million dollars, a little bit more than a million dollars this quarter than what we had planned. But because of such a low amount of throughput and scope of that operation, it really hits the cost per ton. It doesn't have a huge impact consolidated. But obviously, on an operations level, we get big variability there. We do expect to come down. We put in a lot of training. A real safety program has been there trying to increase our level of safety commitment at Compass. We hope it's going to come down in Q4. We're monitoring it. We want to make sure that those costs come down and improve the free cash flow there. I don't see it coming under $100 consolidated. I hope we get into 100 to 105 for Q4.

That's very helpful. I appreciate that color. And then as a second question, just checking in on Chile, can you update us on where you're spending your time there and what are some of the milestones that investors should be looking forward to over the coming, call it next to two or three quarters. Thank you.

Who wants to take that one?

Jeffrey? Sure, I can take that one. In Chile, we are currently drilling at the Paloma property. And we're sort of following up on some intersection that we got last year in our first hole. So, you know, we've completed a couple holes now. We have not got any assays at this point. But we expect to continue drilling until Christmas. And then the season will pretty much close down because we're up at about 5,000 meters. Once we have our results early next year, we'll be able to put those out. And so we're encouraged with what we see in the core, but we don't have any numbers yet, and we won't until Q1 next year is going to be the time for that. On into the rest of the year, because Chile is sort of in the southern hemisphere, most of the activity is happening now. or in the fall. So, you know, we're busy right now looking at other properties and evaluating what's happening up at Sierra Marques and talking to a variety of people about that property. And then it'll go quiet during our summer and become active again in the fall and through Christmas. Okay.

And just to chip in for the rest of our listeners, the context of our portfolio in Chile is that these are all high-impact, world-class targets. For instance, Paloma, we consider to be a multi-million-ounce gold target. And we're just getting into the drilling now. So we're going to be patient. It's a big area to drill. But like Godfrey said, we're seeing all of the things that we want to see in the core, vogie silica, hydrothermal brecciates, sulfides, and other related geological factors that indicate the presence of gold, but we don't have the assays yet.

Got it. Gentlemen, thank you very much for the information, and best of luck. Thank you.

Once again, if you have a question, please press star then one. Our next question is from Joseph Rieger with Roth Capital Partners. Please go ahead.

Hey guys, I just had one more. At El Cubo, any update there? I mean, with higher prices, is there some, let's call it mineralized material that was outside the release force that might come in? Or have you been able to get any further in talks for neighboring projects Just any color you can give us.

Well, the good news is that at these low prices, we're getting a lot of inbound inquiries about a possible sale. The bad news is that it doesn't really change. The higher prices don't really change the amount of ounces in the ground. And our decision to close was because we exhausted reserves and the remaining resources we felt were just too small for us to restart a 1500-ton plant. We have been, as you know, actively scouring the district for opportunities and continue to do so. But there's no decisions been made whether to buy something and restart or just sell the whole thing yet. Okay, thanks. Thanks, Joe.

The next question is from Chris Thompson with PI Financial. Please go ahead.

Good morning, guys. Brad, I think this is probably a question for you. It's a little bit maybe just broad. Obviously, with higher margins we're experiencing right now on the back of good metal prices and obviously your reduced costs, that speaks to higher cash flow. I wonder if you could just give us a sense of how you would apportion this cash flow by way of preparation for Terra Nera, on to what's happening with Peral, and maybe the need for mine life expansion through drilling and discovery at your operating assets.

Good point and good question, Chris. Thanks for your question. Obviously, with a rising cash balance, and we've really only had one quarter of that, it gives us a lot more flexibility in what to do We've always historically balanced our capital spending from our cash flow model each year. And we spend, at least at the three mines, only out of our cash flow. Now that we've got lots of free cash flow, it opens up other possibilities. So, for instance, we took two years off from drilling Terra Nera while we focused on our economic studies. As of September, we've resumed drilling on a number of very interesting projects undrilled vein Terranera to try and continue boosting the resources there. Same thing at Peral. We took a one-year break from drilling Peral, which is intended to follow Terranera in our development pipeline. But I think it's safe to assume that there will be aggressive drilling programs on both Terranera and Peral next year. In terms of allocating some of our free cash flow, there's two projects. We'll continue with our brownfields exploration around Guanacife and Bolonitos. And they're not going to grow. Those programs aren't going to grow or shrink. They're just a steady on. Chile, you know, we're drilling Paloma now, and we hope to be drilling Aida next year as well. So there's a kind of discretionary expiration expense that we'll consider. And then, of course, just building up our cash for the equity component of the $100 million capex to build Terranera. So those are our considerations. No decisions made yet. We typically do year-end planning, but just to give you an idea of what we would do.

Great. Thanks, Brad. I'm going to ask another quick question. I'll sneak one in. Obviously, higher metal prices, both gold and silver. Can you speak to the effect that this on resource base at, I guess, you know, Juan de Sevilla and Bolonitos, if any?

Because the veins have clean walls and these are not disseminated bodies with low-grade halos, I don't think there's much change in our approach. We're going to mine the veins. The cut-off grades can drop a bit. In such high-grade at both operational and certainly at 1SV, that had zero impact. At Bolonitos, we'll look at whether or not we can bring some of the lower-grade resources into the mine plant. But that's probably the only impact.

Great, Brad. Thanks a lot. Thank you.

Thank you.

This concludes the question and answer session. I'd like to turn the conference back over to Bradford Cook for any closing remarks.

Well, thank you all for tuning in for our third quarter call on our financial results. It's been a great quarter. We expect bigger and better as we go forward. And we've got, I think, one of the best outlooks in the sector with leverage to cash flow, not only from higher metal prices, but falling costs. Leverage to production growth through our own organic growth profile with not one, but two projects awaiting development, Terra Nero, which is largely permitted, and Peral, which even though it's an advanced exploration project, Looks like it has the potential to be a new mine down the road. And last but not least, leverage to new discoveries, potentially world class with three drill-ready targets in Chile. So very exciting times for us. So we're a catalyst-rich time for the company. And we've come through that transition phase where we undertook in the last six quarters operational turnarounds to try and get out of the the doldrums during the bear market, and we've succeeded. So lots of catalysts to drive value for the shareholders over the next year. Thank you very much.

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