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Thank you for standing by. This is the conference operator. Welcome to the Endeavour Silver 2019 Second Quarter Financial Results Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Galina Meleger, Director, Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to the Endeavour Silver Corp. 2019 Second Quarter Financial Results Conference Call. With me on the line today, we have the company's CEO, Bradford Cooke; as well as our President and Chief Operating Officer, Godfrey Walton; and our Chief Financial Officer, Dan Dickson.Before we get started today, I'm required to remind you that certain statements on this call will contain forward-looking information within the meaning of applicable securities laws. These may include statements regarding Endeavour's anticipated performance in 2019 and future years, including revenue and cost forecasts, silver and gold production, grades and recoveries and the timing and expenditures required to develop new silver mines in mineralized zones. We do not intend to and do not assume any obligation to update such forward-looking information other than as required by applicable law. So with that, and on behalf of Endeavour Silver, I'd like to thank you again for joining our call today. And I'll now turn it over to our CEO, Bradford Cooke.
Thank you, Galina, and welcome, everybody, to this conference call on our second quarter financials. As usual, I'll start off with a high-level overview of our second quarter performance, and then we'll take a brief look ahead to the rest of the year and open it up for Q&A. So as per our news release this morning, we pointed out that we had yet another challenging quarter, both in operations and financially, but really just a continuation of the issues that we identified in Q1. As a result of that company-wide review of how to improve our operations, we initiated quite a number of changes at each of the mines, and 2 of the 4 mines have already responded -- started responding to those changes. So coming back to the highlights of the second quarter. Our financial performance was generally lower year-on-year, largely due to lower production and higher unit costs. Specifically, our revenue was down 24% to $29.4 million. That drove mine operating cash flow before taxes of $2.6 million. We recorded about $1 million loss in cash flow from operations, and the net loss came in at about $10.1 million. Cash costs were up during the quarter to $13.67, all-in sustaining costs up to $20.90 per ounce, net of the gold credits. We do maintain a strong balance sheet, so notwithstanding the operating issues during the second quarter, we finished the quarter with a strong working capital position of $46.6 million and a cash position of $23.1 million. So I think, looking forward, the main questions are how fast can we move to get the operations back in the black and what about our growth projects. So let me touch briefly on those. I think -- by the way, before I go into that, we obviously did also revise our guidance based on the soft first half of the year. We previously, in July, revised our production guidance to the kind of 4.5 million ounce silver, 40,000 ounce gold range, that's about 7.4 million to 8.2 million ounces of silver equivalents. Because of that obviously, we've now, in this news release today, revised our cost guidance. So our consolidated cash costs, we revised to $10 or $11 per ounce, net of the gold credit. That does imply $8 to $9 in the second half. And our all-in sustaining costs were revised to $17 or $18, implying about $15 or $16 in the second half. In terms of how to get the operations back on track, we acted very quickly in Q2 with some fairly sweeping changes, changes in site leadership and management, reductions in the workforce, new equipment and other changes to help turn around the performance, primarily at Guanaceví and secondarily at the other operations. The good news is that Guanaceví has responded, and it continues to respond through the development of 2 newer higher-grade orebodies at Milache, and at Santa Cruz Sur, we're seeing both the tonnes and the grades starting to drift higher. Recoveries were higher. And at El Compas, we did declare, at the end of the first quarter, commercial production, and through the second quarter, we saw continued improvement of throughput rates and recoveries. There's still work to do on recoveries at Compas, but it's now performing pretty close to plan. And Guanaceví, we would want to see it back on the revised plan here by the end of the third quarter. And Bolañitos, we only made changes in June, July, so the bulk of the performance turnaround at Bolañitos is not forecast until end of Q3/Q4. And Cubo is just tracking along as planned. So that's kind of the brief overview of where we are at in the operations. We recognized we had problems. We made a number of changes. We're seeing the benefits of those changes. We'll need the rest of the year to see those operations back in the black. In terms of our growth outlook, Compas was the first of 3 new mines that are in our growth pipeline. And now that it's performing at commercial production, our attention is obviously turning to Terronera and Parral. Terronera, as a reminder, is proposed to be the next core asset of the company, with a pre-feasibility study last year forecasting 5.2 million ounces of annual silver equivalent production for 9.5 years. Since the publication of that PFS, we've made significant strides with better economic performance, longer mine life, larger reserves and resources and revised mine plans. We have commissioned internally a couple of optimizations to the previously published PFS, and we expect to go public with the final PFS here in the third quarter. So Terronera is basically ready. We see the final government permit to build the Terronera operation in June, and so we're now, in addition to the final engineering and final PFS, turning our attention to the financing package, debt-equity package to build Terronera, and we ideally would like to have that in place this quarter. And last, but not least, Parral. There will be some news on it next week, but basically, it's been our biggest drill program this year. We see significant opportunities at Parral. We expect it to become mine #6 in the group, but there might be a way to accelerate that. So that's my overview looking forward for the second half of the year, with a forecast of improved operating performance, improved financial performance quarter-on-quarter and with the attention now turning back to our growth projects. I think I'd like to stop there, operator. And why don't we open this up for Q&A? We've got our COO, Godfrey Walton, here for operating questions and our CFO, Dan Dickson, for financial questions.
[Operator Instructions] Our first question comes from Chris Thompson with PI Financial.
A couple of quick questions here. We'll start off with Guanaceví. Obviously, a lot happening with the assets. What's your expectation as far as unit costs, i.e., dollar per tonne milled here once you bring Milache on?
Yes, Chris, it's Dan here. Thanks for the question. Unit costs on a consolidated basis we expect to get down right now to $145. You'll recall, historically, we had an average between $85 and $90 per tonne. We don't think we can get back down to $80 and $90 right now, but as we come out of the Santa Cruz mine, where we're pumping, we're quite low, and it's quite narrow actually at the depths of that. As we come out of there and increase the production coming out of Milache, so about 1/3 of our production actually in Q2 came from Milache, and that's going to rise to closer to 50%. And then we're going to have additional production come out of that new orebody at Santa Cruz Sur, which has actually got wider veins than what we're seeing at Santa Cruz. That will help us get down from a cost per tonne standpoint. So we're expecting the back half of 2019 to be about $105 to $108.
It is actually -- Chris, it's Brad here. There's a third area of potential production in the second half. If you recall, we announced in early July the acquisition of exploration and exploitation rights to some grounds immediately adjacent to Milache and Porvenir Cuatro and in fact, the Porvenir Cuatro mine working stop at the property boundaries. So we are aggressively exploring and developing that boundary area of Porvenir Cuatro here in the third quarter, and we maybe even see some first increment of production from that area, if we're successful.
Great. Just I guess moving on Bolañitos. Obviously, the intention is to return throughput to 1,000 tonne a day. You say the second half. Any sense of whether this should be fourth quarter-weighted?
Hi, Chris. This is Godfrey. We are actually pushing forward, and we're seeing some changes happening in Bolañitos. So the production is picking up. But it's probably going to be late Q3, early Q4 before we see some -- getting back to filling the plant.
And again, Chris, if I could chip in. We've just moved the general manager from Compas back to Bolañitos, where he came from, Jorge Coss. You met Jorge on the last mine he did there.
Yes.
He's been there for years. And I think that Bolañitos suffered in his absence. It's not the only issue at Bolañitos, but bringing him back, we think, is a good part of the resolution of what's going on there.
Okay. Great. And I guess a general question. I mean obviously, tough, tough metal prices for silver producers. I would imagine that you've, I'm not going to say, starved the assets from a sustaining capital perspective, but the other metal prices look like they are with us now, hopefully going higher. What would be the right -- what are you looking for by way of a good run rate, annual run rate for the assets on a sustaining capital basis?
Yes, Chris. I mean that's always an easier question when -- after a time. And historically, at Guanaceví, we spent basically $10 million to $12 million. Now that we're getting into new orebodies, with Milache and Santa Cruz, and you're right, we did starve the -- especially Guanaceví and Bolañitos, were starved in 2016 and '17, with prices down. I think that caught up to us this year a little bit or it potentially has and even in the last 2 years at Guanaceví. But we've put significant investment in last year to try to catch up and get advanced. And if you recall, we've always historically ran kind of an 18-month cycle of mine development ahead of stopes. And that had gone down to under a year. And so to get back up there, our plan this year of $10 million is actually at Guanaceví, would be the run rate to maintain that, and we're pushing ahead a little bit at Guanaceví and we're actually starting to get ahead of ourselves there. And at Bolañitos, historically, it's actually been $4 million to $5 million. I don't see that any changing. We've been pushing both those operations in the last handful of years.Cubo has always been a different beast. We have never had more than a year ahead of us there. And this year, we actually haven't spent much capital. It's been going into operating costs. And so what you'll see from a Cubo standpoint is whether we can increase reserves at the end of the year. Arguably, it would be about $4 million to $5 million of sustaining capital there for Cubo going ahead. And Compas, it's small. You're talking about less than $1 million.
And Chris, it's Brad again. I just wanted to turn our attention to the ability to fill the plants is really one of the keys to cost of cash flow. We've fallen below plant capacities in all 3 mines in recent years. And with the new orebodies at Guanaceví, there's absolutely no reason why we can't go back to the 1,200 tonne plant capacity, which is one of the keys to profitability at Guanaceví.We can do better than we're doing at Bolañitos, maybe not the 1,600 tonne plant capacity yet, but certainly, 1,200 tonnes is doable, once we fix the issues, the operating issues, primarily people issues at Bolañitos. Cubo has got a mine life problem, which we can only deal with through exploration. And so we're not going to forecast plant capacity there this year, but we'll take another look at that year-end. And Compas is already at plant capacity. So I think throughput is definitely a key to Guanaceví and to a certain extent, Bolañitos.
Okay. Great. And then, guys, a final question. Obviously, you guys are tasked with, I'm not going to say, I don't want to say these things, but righting the ship or shoring the ship up at your operating base at the moment as well as potentially building another asset here. Can you do both?
Yes, we can and we have to. We actually built a company on fixing other people's problems. And it's kind of ironic that we now have to fix our own problems in order to get the operations back up where they should be. And to be honest, if we take a step back and look at the last 3 years, the main area that's come back to bite us at Guanaceví, Bolañitos and El Cubo is like site management. That's the area that we've had the biggest challenge, in finding the right people. We've gone through a number of people at those positions, and that's primarily the housecleaning that we've done at Guanaceví and Bolañitos, is site leadership. And not just production leadership, but safety leadership and security leadership, all of it goes together. So I think that it's being addressed now, and that's what bit us in the first and second quarters. So that's why we feel we can do both the operational turnaround and get back to building new projects.
Right. A quick question, a final question. Labor, severance, unions, any issues?
Chris, it's Dan again. Out of Cubo, as -- we incurred $1 million severance in Q1, basically the downsizing and running 800 tonnes per day. We haven't had any issues, knock on wood, since that. I mean we always have our daily discussions back and forth with the union out of Cubo. At Guanaceví, we incurred [indiscernible] and that was laying off 80 employees and reducing contractors by over 100. In Q2, that's sitting in our cost of sales. Bolañitos subsequent to quarter end, we did another $300,000. Again, to what we've actually seen from these cuts at Guanaceví and Bolañitos is we've actually seen production improve, and ultimately, it's changing the culture and getting people back to work and working hard.But from a labor negotiation or labor relationship standpoint, it's actually been relatively positive since those cuts. Now you have special circumstances with various individuals that happen from time to time. But in general, from a macro standpoint, it's been positive at Guanaceví and Bolañitos since those severances.
Our next question is from Joseph Reagor with Roth Capital Partners.
Just -- so 2 items. I guess, first one, Terronera, all right? I mean it's a big part of the future of the company. Assuming you arranged your financing package during Q3, what does the development time line look like for you guys, maybe with some details as far as how things will roll out?
Yes, maybe, Godfrey, you want to address that?
Thanks, Joe, for the question. Yes, so assuming that we can arrange financing in Q3, we -- the schedule that we are currently looking at is actually building the camp this year and starting on ground development in January, February next year. With the PFS' that we've put out so far, suggest a 15-month to 18-month schedule for construction for the plant and about a 12-month schedule for the mine. So we will be looking at really starting production in Q1 2021 or Q2 2021. But we are looking at ways to be able to produce from one of the veins earlier and actually proposed that start in one of our plants. So there's an opportunity there to actually get some production from Terronera while we actually have that operating on site.
Okay. And so if I get all that correct, a fair thing for us to assume is a ramp-up during 2021 towards full production rate?
Yes. When the plant is ready, the mine will be able to produce 1,500 tonnes a day. But we can probably produce -- so rather ramp up actually during 2020 as we are -- as we access both veins and are able to stockpile some material before the plant starts up. I mean in some cases, the higher-grade material, we'll actually look at moving out to either Bolañitos or Cubo.
Okay. And then switching gears a bit. At El Compas, the costs, when you look at it on a percent revenue basis, are still very elevated. What more can be done there to get cost down? Is it just a matter of getting production up and the fixed cost become a smaller component? Any other color you can give would be great.
Yes. Sure, Joe. It's Dan here. There's actually a couple of things inside the MD&A as you get through today. Our PA had a plan of about $110 cost per tonne. What's flowing through $138 that you're seeing or $130 that you're seeing for the year, is NRV. So we have to take a write-down on our stockpile, which is the early stockpile as we ramped up the mine. Our cost per tonne were higher because we weren't hitting our outputs. If you pull out the NRV, the cash costs on that, which is about $500,000, we're actually moving that tonne through the plant through royalties for $111. So right on plan, and we expect that to come through. So what also has happened, we've seen the grades come up, so unlike what happened with NRV, and then since quarter end, we got back into the Orito vein, and are processing that Orito vein and we've seen our recoveries come up to plan. So right now, in our recoveries through the first 6 months, it was just under 78%, and I think it was about 76%, and plan was 85%. Since the end of June, we've been up into the 80%. Also, if we can hold that with our cost per tonne being at $110, we should be hitting plan of what we expected and then ultimately having that cost per ounce come down. And using the silver byproduct basis, with gold as a byproduct, which effectively El Compas is really a gold mine, so that puts it into the native cash costs of where we expect. So El Compas is actually trending exactly where we expect it to trend. It just takes a little bit of time to ramp up. And as you know, we hit commercial production in March 15. So 3.5 months, and hopefully here, Q3, Q4, performs from a cost standpoint. Like I say, it's trending in that way.
Okay. So it would be fair to say free cash flow positive by year-end?
Yes. Not a large amount of free cash flow because it's such a small operation, but we should be positive free cash flow.
Our next question comes from Mark Reichman with NOBLE Capital Markets.
When I look at the cost, it looks like in the second half of the year, those in terms of cash costs and all-in sustaining costs are expected to be pretty much in the range of your original guidance. And Brad, you talked about the goal of filling the plants. When you look ahead, I mean, do you see more improvements into 2020? And kind of what's -- is this -- is the latter half of the year just you're kind of -- it's going to be more around your original expectations? Are there some additional items in there that -- or actions that you've taken to get those costs down?
So in -- thanks for your question, Mark. In general, yes. Clearly, tonnes and grades drive profits, and we've had a pretty crappy start to the year and just getting back to not only our original plan, but with the new production area on the adjacent ground being explored and developed now, 2020 should actually be a good year of full production. And so yes, because of anticipation for higher tonnes per day in 2020 and higher grades from the 3 orebodies, we should actually have a good year next year.
And then secondarily, Dan, because your comments last quarter were so helpful, I thought maybe you might want to just address a little bit about the liquidity position and capital expenditures and exploration going forward because I know you've kind of cut back on some of the exploration and in kind of how you're managing your balance sheet.
Yes. I mean Brad touched on we had working capital of $46.8 million at the end of June, and we did have our ATM raise $7.5 million. We want to make sure we protect our balance sheet. We have very little as far as debt on the liability side of the balance sheet. We have picked up a loan related to equipment. So we've had equipment availability issue at Bolañitos that goes hand-in-hand with the culture and the change that we need from a personnel standpoint to make sure that we're taking care of our equipment and maintaining it properly and going through those proper preventative maintenance programs, and we -- I mean, since quarter end, we picked up more equipment through loans. So in general, I'd say our balance sheet is very strong. We're in position, and we want to be in a position that we could add some debt to build out Terronera. Going forward, we feel like we have good liquidity, we do have that potential to be able to continue to touch the ATM with $18 million left as of June 30 on it. And ultimately, it comes down to the long-term growth of the company. We have Terronera there. We also -- we're doing significant exploration still at Parral. And Parral has been positive and we're going to have news on that in the coming weeks. But it's still -- it's not about next year or the year after. It comes down to the long-term profitability of the company and one of the things we have pipelines in. And we do have an exploration program for $10 million in the year, and we slowed that down. But we do have exploration commitments that need to be spent in Chile. 2 projects that Brad's previously spoken to publicly, Paloma and Cerro Marquez, will probably still go forward and as we see a dip in silver price or gold price, which we don't anticipate. Additionally, what we don't have in our future cash flow stream and the cost profile is our cash costs were projected using $12.75 gold as a byproduct. Clearly, we're well above $12.75. We also projected our cash flows using $15.50 silver. Clearly, we're well above that $15.50, at $17. So we think despite what we put into our press release, and we like to be considerate, there's an opportunity there that it will be a bit more positive cash flow. As far as capital expenditures in the back half of this year, they should be less than the front end of the year, including that capital that we've loaned and leased, so basically, cash payments on those loans that are over 4 years. So we expect to add that. And the way, Mark, this company's been growing is with the drill bit and exploration success with the drill bit. We're excited about what we have in Chile and ultimately, hopefully, we have good news that comes out there in the back half of the year. And we just sat through management meetings of potentials on all the mapping and the geochems and the geophysic work that we've done on those properties, and dropping in a little bit of cash for the drill holes, we expect to have success on the other side of it. So that's going to continue. Our exploration dollars for the year will be about $8 million to $9 million, which is a little bit lower than what the original profile was. Capital was basically in line with the 2019 projection or guidance that we had out there. So all in all, I know it's a long-winded answer, our balance sheet is strong and everything will change once we have a Terronera decision.
[Operator Instructions] Our next question comes from Heiko Ihle with H.C. Wainwright.
This is Tyler Bisset calling in for Heiko. In your MD&A, you stated that direct operating costs are estimated to be in the range of $90 to $100 per tonne and achieving operating cost is predicated on the ability to meet mine output. In the second half of the sentence, is that a placeholder? Or are there real specific factors that management is worried about? And if the latter, can you maybe provide some additional color on the not-so-obvious factors the firm is currently grappling with?
Yes. Sure, Tyler. I mean is it a placeholder, I mean, I guess it partly is a placeholder. At the end of the day, in our MD&A and in our AIF, we have standard risk factors. In mining, as much as we've got experience in dealing with our operations, we've been in Guanaceví for almost 15 years and Bolañitos for 12 years. There's always things that come up that change. And when we put out our guidance, we take into everything that we consider, but everything is an estimate, and ultimately, tomorrow we could wake up and additional rainfall in the Guanajuato area during rainy season can impact those costs or a labor issue arises and that impacts those costs. We hit a rock [ fault ], and unfortunately in -- at the end of June, we had a fatality, and that impacts our output in any given month. So you kind of want to put that placeholder in there because, quite frankly, we open up ourselves to a shareholder discontent if we miss on our guidance. And guidance is a difficult thing to put out, and it puts a target for us and we have that. But as much as you can estimate, there's one thing that you can sure to be about an estimate is that it's going to be wrong. So much more comes up.
That makes sense. And your IVA receivables are still sitting there at about $14.2 million, and this breaks down into $4.7 million for El Cubo and $6.5 million for Guanaceví, which gives us $11.2 million. So 2 questions there. Is the remainder just considered to be nonrecoverable? And if so, how much longer will it stay on the balance sheet? And on the same token, given that the balance sheet is mostly unchanged in the end of the year, when total IVA balance was $15.4 million, at what point do you think the government will actually start sending meaningful refunds to you? And one would think that in the current geopolitical climate, they would want to be seen as friendly as possible to the mining industry.
Yes. IVA has always been -- the ebbs and flows of IVA change, depending on if Mexico has the cash flow to pay it back. And you're right to look at our segment disclosure to see for those that, even seen in Compas' IVA, that it's growing the most on a percentage basis, and that's a function of we haven't collected a lot from the Zacatecas state government. And sometimes, it's just educating the bureaucracy of what mining does and building that relationship. And we submitted all our IVA claims in Zacatecas for about $3.5 million, and we've spent 6 months providing support for it. And ultimately, we expect to receive that IVA. If we don't deem it to be collectible, and there are instances in the past where we've written off $600,000 of IVA or $100,000 of IVA, we've taken that approach. But we believe all this is collectible and we have legal means that allows us to go through the course to collect that. And in Guanaceví's case, where you noticed that we have $6.5 million, $5 million of that relates to 2015. So we've actually collected the IVA from 2017 and 2018 and part of 2019 still remaining. But that's all relatively current. We have about $4.5 million that was denied by the Mexican government, what we believe is unfavorably denied because they deem some not to be collectible or just didn't understand the mining, and we've won those in court. The government has 6 months to pay it back, and I think we're about month 3 or 4 of that. So we actually should see an inflow from Guanaceví of about $4 million. But for the 12 years that I've been in with Endeavour and working in Mexico, we've seen that ebb and flow. So if you look back, we actually peaked at $22 million of IVA last year, and we've actually driven that down to $14 million. The run rate that should be there should be about $8 million to $10 million, give or take.
Per year.
Give or take at any given time.
Right. Okay.
So basically, we're paying out our value-added tax and we should collect it, but that balance will sit at about $8 million to $10 million, which is just the 3, 4 months of time line it takes to turn that over.
And just maybe I could add to Dan's answer that we do receive IVA refunds every year. And it's not like they're just stuck there forever. This is not a static account balance. It turns over every year. It's just that because you do filings every month, every quarter, some filings are readily accepted, and you get the money back quickly. Some filings are not readily accepted, and you have to fight for them. And so I think Dan's point that we took the account balance from $22 million down to $14 million in the last year is actually -- shows that we're making headway and that the normal balance would be like $10 million. So we're about $4 million offside on where we think we should be. And it's not such a bad thing in the context of where Mexico's at with the new administration and all the new people in the tax collection group and the need of mining companies to educate these new appointees on how the system works.
This concludes the question-and-answer session. I would like to turn the conference back over to Bradford Cooke for any closing remarks.
Well, thank you, operator, and thanks all for listening. It's not easy to report a crappy quarter like we did for Q2, but at least it's improving our Q1 and we see significant improvements quarter-on-quarter moving forward. I think we're going to come into more fun and more profits in our near future. So stay tuned for our next quarterly call in, Galina, late October?
Early November.
Early November. All right. Thanks all.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.