Below is the Coeur Mining Inc (NYSE:CDE)’s Coeur Mining to Acquire Wharf Mine conference call transcript, held on January 13th, 2015 at 11:00 a.m. ET.
Coeur Mining Inc (NYSE:CDE) is the largest U.S.-based primary silver producer and a growing gold producer. The Company built and commenced production from three wholly-owned, long-lived mines between 2008 and 2010: the San Bartolomé silver mine in Bolivia, the Palmarejo silver-gold mine in Mexico and the Kensington gold mine in Alaska.
Corporate Executives
Bridget Freas, Director, Investor Relations
Mitchell J. Krebs, President and Chief Executive Officer
Peter C. Mitchell, Senior Vice President and Chief Financial Officer
Mike Harrison, Vice President, Corporate Development
Joe Phillips, Senior Vice President and Chief Development Officer
Analysts
Adam Graf, Cowen and Company
Andrew Kaip, BMO Capital Markets
Chris Thompson, Raymond James
Michael Dudas, Sterne Agee
Graeme Jennings, Conmark Securities
Jorge Beristain, Deutsche Bank
Brett Levy, Jefferies & Company
Garreth Nelson, BB&T Capital Markets
Operator
Good morning. My name is Howard, I’ll be your conference operator today. At this time, I’d like to welcome everyone at the Coeur Mining to Acquire Wharf Mine Conference Call. All lines have be been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a Question and Answer Session. If you’d like to ask a question during this time, simply press star and the number one in your telephone keypad. If you’d like to withdraw your question, press the pound key. And here, Ms. Freas, you may begin your conference.
Bridget Freas, Director, Investor Relations
Good morning and thanks everyone for joining us on short notice. There’s a slide deck on our website to accompany today’s remarks. Please review the cautionary statement on Slide 2 and the risk factors in our public filings for risk and uncertainties that could cause actual results to differ from any forward-looking statements we make on this call. Mitch, over to you.
Mitchell J. Krebs, President and Chief Executive Officer
Thanks Bridget. Good morning everybody. Thanks for dialing in. As you know, we issued a press release late yesterday announcing our acquisition of the Wharf Gold Mine from Goldcorp. For those of you who aren’t familiar, Wharf is an open-pit, heap leach gold mine located in Western South Dakota. It’s a pretty simple and efficient operation that has been in production for more than 30 years and has about 560,000 ounces of gold reserves according to Goldcorp’s filings. Our rationale for this acquisition is fairly straightforward. Wharf will add immediate free cash flow and growth from a second quartile cost asset located in the state’s jurisdiction. It’s the kind of operation that we know how to operate. We’ve been doing that at Rochester for the last 25 years and since it’s in the United States, we’ll be able to utilize our pool of Net Operating Losses (NOLs) to offset future taxable income. Probably the most importantly, the transaction is acretive for stockholders and we believe the $105 million purchase price will result in a mid to high-teens rate of return for our stockholders based on the current gold price.
Late yesterday, Goldcorp issued 2015 Guidance for worth of 85,000 to 90,000 ounces of gold production at an all-in sustaining cost range of $800 – $875 per ounce. Based on the current gold price, you can see that we expect to generate strong cash flow out of this new asset during the remainder of the year. With transitions to higher grades and lower costs that can contain in Palmarejo taking place over the next couple of years, this immediate bulk in free cash flow from Wharf will have a significant impact on the company and represents a very nice addition to our existing portfolio of mines. The details of this transaction are also fairly straightforward. It is an all-cash deal with a purchase price of $105 million with nearly $300 million in liquidity on the balance sheet as of the end of the third quarter, we have the ability to fund the transaction with cash-on-hand. However, maintaining financial flexibility is a priority for us so we are currently evaluating a senior secured line of credit for up to half of the purchase price, though financing is not a condition to closing this transaction. We expect to be able to close in the first quarter here in 2015.
So to sum it up, this is a modest-sized transaction that offers a lot of advantages for Coeur and our stockholders and we expect these benefits will be immediately visible in our operating and financial performance. It checks several important boxes for us. It provides an immediately cash flow bump, it provides quality low-risk immediate production growth, it reduces our overall unit costs, it reduces our company’s overall risk profile, and it meets our return and accretion criteria. We look forward to closing this transaction this quarter and welcoming the team at Wharf to Coeur Mining and ensuring a smooth transition and filing a new 43-101 Technical Report on Wharf by the end of the first quarter.
With that then we’ll go ahead and why don’t we take any questions.
Question and Answer Session
Operator
At this time, I’d like to remind everyone, in order to ask a question, press star and the number one in your telephone keypad. We’ll pause for a moment to compile a Q&A roster. Your first question comes from the line of Adam Graf from Cowen. Your line is open.
Adam Graf, Cowen and Company
Good morning guys.
Mitchell J. Krebs, President and Chief Executive Officer
Hey Adam!
Adam Graf
Congratulations on the acquisition.
Mitchell J. Krebs
Hey thanks!
Adam Graf
A question about the pool of Net Operating Losses that you can apply here against the taxes at Wharf. Could you maybe talk a little bit about how much, if any, you’re acquiring in the way of a pool with this acquisition? How much you already had and maybe when they would have expired had you not purchased Wharf or you couldn’t apply them to other operations?
Mitchell J. Krebs
Yeah, I’ll have Peter answer that.
Peter C. Mitchell, Senior Vice President and Chief Financial Officer
First of all, our existing — I would say Adam, $300 million that would have started to expire in 2019, so they will be fully applicable to Wharf taxable income going forward. In terms of existing tax losses at Wharf, we are going through the final tax planning on that but we will be doing a 330 External Action in Wharf and bumping the tax basis at tax depreciable assets in Wharf as well so the majority of those will be consumed in that election process. But I think that the condensed answer is that we got ample tax shelter for Wharf on a go-forward basis apart from the existing tax attributes at Wharf. And obviously, there is a large pool of NOLs that the core has come the end of the transaction.
Adam Graf
Peter, just to follow-up on that, in our models we can take that $300 million and apply it equally to their US operations as far as tax shelter.
Peter C. Mitchell
Correct.
Adam Graf
And just, again, a bit more specific on the 2019, that is when they would start to expire. Can you give us any feel on how that distribution — how they expire beyond 2019?
Peter C. Mitchell
I don’t have the schedule in front of me at this point Adam. I think it is fairly even on a go-forward basis from 2019 forward but it is going to be consumed such that sort of allocation for individual years is not a specific concern at this point.
Adam Graff
Can you give us any feel at what gold and silver price between your US operations now? You might be able to consume all of that before they expire or any kind of a price range there where we can get a feel for whether you will be able to use them completely or not?.
Peter C. Mitchell
It is a great question. I have not run the sensitivities of this point but certainly looking at prices, approximating spot at this point we have shelter basically for the projected mine life at this point from the tax perspective.
Adam Graf
Very good and maybe a question for somebody else, but what kind of upside potential do you guys see at Wharf from both the resource conversion and resource expansion?
Mitchell J. Krebs
It’s Mitch. I’ll take a crack at it. Joe, Hans, anybody else, Frank, jump in. I think it is fair to say Wharf hasn’t received a lot of exploration funding and attention over the last few years but there are a couple of targets adjoining areas of gold mineralization that we’d like to test in the near future. Probably the biggest area of opportunity as we see it coming in is just in this positive reconciliation trend that we note. We think that has the potential to lead us into further extensions in the mine life. Joe, Hans, or Joe or Frankie?
Adam Graf
Great, thanks guys.
Mitchell J. Krebs
Thanks Adam.
Operator
Your next question comes from the line of from Andrew Kaip from BMO Capital Markets. Your line is open.
Andrew Kaip, BMO Capital Markets
Good morning Mitch.
Mitchell J. Krebs
Hey Andrew, how’s it going?
Andrew Kaip
Pretty good. A couple of questions. Just on the acquisition. What type of conversion of the existing resource did you include to meet your criteria for acquisition?
Mitchell J. Krebs
We didn’t include anything other than just the existing reserve.
Andrew Kaip
Okay.
Mitchell J. Krebs
[inaudible]
Andrew Kaip
Yeah. Less what we expect last year, of course, right? Yeah. I guess the other question I have is the spread on the Owen’s is getting close to about $75 an ounce. Did you look at it from a more conservative standpoint of cost structure or did you look at it and feel that you can move those costs down to the $800 range?
Mitchell J. Krebs
Yeah, keep in mind that we’re starting off of a range that Goldcorp provided us. Though when you take a look at the capital in the 2015 number, $800 – $875, I think the capital is somewhere in the $5 million range in 2015, so that will be the one piece that we’ve taken a closer look at as far as what could be stripped out potentially here in 2015 and so we are going through that exercise right now. But the cash cost and all-in sustaining costs dealt at isn’t that great on this asset.
Andrew Kaip
Okay, and then I guess the other question I have is, Goldcorp is projecting that around 15,000 to 20,000 ounces will be attributable to Goldcorp in 2015. I am just wondering, we’ve seen the transfer of operation last year with Silver Standard and the second quarter, once the transaction was complete, there was an inventory delve at Marygold and I am wondering, we should be expecting the same trend in your forecast for what production you think you’ll be receiving attributable for 2015?
Joe Phillips
Yeah, Andrew, this is Joe Philips. We don’t predict any inventory filled out in the transition.
Andrew Kaip
Okay, you don’t.
Joe Philips
No.
Andrew Kaip
Alright.
Mitchell J. Krebs
I wonder. Does it have to do — because the off and on, on-off…
Joe Philips
Yeah, they do have an on/off leach method that shouldn’t impact the transaction at all.
Andrew Kaip
Okay, so their leaching facilities are on/off construction?
Joe Philips
Yes and they’re leaching their running of the AVR plant is continuous so there shouldn’t be any build-up.
Andrew Kaip
What’s the leach cycle, Joe?
Joe Philips
Leach cycle is between 9 and 12 months.
Andrew Kaip
Okay. Okay thanks very much.
Mitchell J. Krebs
Yeah thanks Andrew.
Operator
Your next question comes from the line of Chris Thompson from Raymond James. Your line is open.
Chris Thompson, Raymond James
Hi guys, congratulations on a good acquisition. Just a couple of quick questions. The first one is, do you see any capital commitments down the road, obviously capturing that five plus year mine life?
Mitchell J. Krebs
We don’t, no. It’s one of the attractive features is the low capital year-in and year-out. It’s been a — Goldcorp has done a nice job of running this operation. Just a fairly minimal sustaining level of CapEx unless we happen to — through our ongoing optimization work — identify opportunity to bump up the capital based on good justification.
Chris Thompson
So there is no path construction envisaged or anything like that? You can just run-off the existing paths?
Mitchell J. Krebs
That’s right. In the annual sustaining capital there’s soon be in there. The ongoing maintenance of that on/off process that is utilized there and that should be sufficient. Joe made a point to me here just on the side, the fleet, the Cat fleet is all leased, so there is no big capital outflows related to equipment, so it is pretty straightforward.
Chris Thompson
Okay, so if the mine produce 72,000 ounces this year and Goldcorp foreseeing 85,000 to 90,000 ounces over the last year, Goldcorp seeing 85,000 – 90,000 ounces this year, is that just on the back of more tonnes stacked or are we going see a difference in grade, maybe you can talk to that?
Mitchell J. Krebs
Yeah it is a year that they have been planning for. It is more driven by where in the mine plan they’ll be. They’ll be on some softer ores, some higher grade material that makes 2015 quite a bit better than the recent years.
Chris Thompson
Obviously a little too early to tell, I guess, but, you don’t produce a doré on site, so any thoughts as far as maybe putting a doré plant in? What is your first take at the moment on that?
Joe Philips
This is Joe Philips. They actually have all the equipment and facilities needed on-site to produce doré. They historically shipped out the sludge after processing outside for cost-savings reasons but it would not take a capital investment to produce doré ourselves.
Chris Thompson
Alright. Okay guys, I’ll be good at that. Congratulations.
Mitchell J. Krebs
Okay Chris, take care.
Operator
Your next question comes from Michael Dudas of Sterne Agee. Your line is open.
Michael Dudas, Sterne Agee
Hello gentlemen and Bridget.
Mitchell J. Krebs
Hi Mike.
Michael Dudas
You’ve been keeping Corporate Development pretty busy here lately, Mitch.
Mitchell J. Krebs
If you can see Mike here sitting next to me, he looks awful.
Michael Dudas
So just a little bit on how these types of opportunities maybe looking to the future relative to what your balance sheet is and how you are structuring this transaction. This is a very interesting opportunity for you to gather. Is there enough opportunity to do one of these a quarter or are the check marks on what you need to do — something of this size and this quality makes it a little bit more difficult as you look through the rubble that we have seen in the last 6 to 12 months in the market.
Mitchell J. Krebs
Now you just sent Mike off his chair here. He wants a quarter.
Mike Harrison, Vice President, Corporate Development
We have been saying for awhile that if we can add some immediate pre-cash from a quality asset that is a priority for us and if we had a choice, we probably would have picked a different time, just coming off what else we’ve been doing here. But I think now, from a bandwidth perspective, and just from a balance sheet management perspective, it is important that we execute on the moving parts here, I think we’ve demonstrated in 2014 an ability to manage our existing assets much better than historically and now we need to bring that same kind of discipline, same kind of execution to these new opportunities so that our stockholders can really see the pay-off in terms of rising free cash flow. And we always need to be looking at ways we can improve the portfolio assets that we have. I think we’ve done a really good job of doing just that recently but we do need to digest a little bit here and really focus on what we have and these new pieces and making sure that we work the way we think they should and will.
Michael Dudas
Your answers are appreciated Mitch. Thanks a lot.
Mitchell J. Krebs
Thanks Mike.
Operator
Your next question comes from the line of Graeme Jennings from Conmark Securities. Your line is open.
Graeme Jennings, Conmark Securities
Congratulations!
Mitchell J. Krebs
Thanks man!
Graeme Jennings
When you’re acquiring a mature asset like this but your reclamation liabilities I noticed there are certainly a strong social issues operating there.
Mitchell J. Krebs
Yeah, I think the ARO estimate is at $37 million which is what we factored into our evaluation of the opportunity. So, whether there are ways to optimize that,. that remains to be seen but that’s the estimate and how we factored it into the maps.
Graeme Jennings
Right. I noticed a large capital supply against plug-ins and projects. I was just wondering what is the tax rate there on the work plan?
Mike Harrison
I think the it will be 28% or 30% corporate rate plus state rate. I worked that up…
Graeme Jennings
Is there a levy on the NOLs?
Mike Harrison
Yeah, there is a state levy on the NOLs as well.
Mitchell J. Krebs
And then there are two existing royalties, one the Royal Gold and then another to a private party. The Royal Gold NSR is 2% and the other party is 3%.
Graeme Jennings
Alright thanks. And how is the skiing now on the hill?
Mitchell J. Krebs
Great. I understand there is a lot — no shortage of snow.
Graeme Jennings
Oh yeah that’s what I heard last year. Right, thanks Mitch.
Mitchell J. Krebs
Thanks Graeme. See you.
Operator
Your next question come from the line of Jorge Beristain from Deutsche Bank. Your line is open.
Jorge Beristain, Deutsche Bank
Hi good morning Mitch and everybody.
Mitchell J. Krebs
Hi Jorge.
Jorge Beristain
Hi. My question is a little bit on the guidance that you are saying for the 7-year mine life. That would assume 100% recovery and I just wanted to understand if we should not be more conservative modeling 80% to 90% which would imply a shorter mine life, or why should we not think about being more conservative on that? You’ve mentioned softer ore or higher grade, just wanted to understand, are you running a 100% recovery scenario?
Mitchell J. Krebs
Joe?
Joe Philips
Hi Jorge, this is Joe Philips. Our projections for the life of the mine pretty well parallel Goldcorps long-term mine plan which has shown historically a significant positive reconciliation after this model. So we are considering a significant conversion of resource to reserve during that period and factoring in that recovery to extend the mine life the way it should.
Jorge Beristain
Would there be any further upside there that you are aware of from tailings?
Joe Philips
We have not looked at an upside on tailings. It’s an on/off heap leach and that historically back the lead into the mine. Now there had been scenarios with increasing gold prices that have come back from being waste into ore, which is probably the reason for extending the mine life in the first place, so if gold prices increase dramatically, that would be a possibility again, I think.
Jorge Beristain
Okay, and a comment Mitch that made earlier about this acquisition lowering your cost. Do you mean from the point of view that it lowers your average gold cost as a company by sort of having this mine in the mix with Kensington? Or do you mean that you intend to use the gold output here as a by-product against your silver accounting? I am just trying to understand that comment.
Mitchell J. Krebs
I guess two points I was trying to make there. One is, this combined with Kensington, we will show as primary gold mines. This obviously will bring down the average of the two by quite a bit. But when you — as we report our costs on a silver equivalent basis, when we do an all-in sustaining cost for the company to come to one silver number in a per silver equivalent ounce number, we’ll take all the gold and convert it at a 60:1 ratio, to come up with a silver equivalent cost per ounce. And so on an all-in sustaining cost per silver equivalent ounce, this has a positive impact on that as well.
Jorge Beristain
Okay, got that. And then I guess maybe my last question is, from a management bandwidth point of view, do you think that you guys have all the people in place that you need to be able to now manage this, still keep an eye on the La Preciosa project in Mexico, possibly the Paramount deal, all the stuff that you’re doing down at Palmarejo, could you just kind of talk about where your bench strength is at this point?
Mitchell J. Krebs
That is a great question and one we’ve thought a lot about. If you take the two transactions that we’ve announced recently, Paramount is essentially a continuation of what we are doing already there at Guadalupe: leveraging the existing workforce and infrastructure development of an adjacent ore body. And that will continue and not affected then by what we will be doing here in the US. With Wharf, we have a — Latin American Operations Team and the North American Operations Team so obviously Whaft now will plug-in to that North America operations team. And because Goldcorp has ran a well, very efficient well-run, in a lot of very mature processes and procedures, this is a pretty established asset that I think we can integrate pretty quickly, pretty effectively and so, the two transactions do different things for us and then I’d say at the corporate level here — I’d been saying this for a couple of years now — with all the organizational change that we’ve made here, one of the words I’ve always used to describe it is that it is scalable and we are putting that notion now to the test. We won’t be needing to add any new parts. This will fit inside the company as it’s currently configured and from a corporate perspective, there will be no need to add anything.
Jorge Beristain
Okay, and sorry, last question. Could you just comment on these debt offers that you’ve had for financing. What kind of interest rates you’re looking at and what weighted average cost of capital you’re running your DCF on? I am assuming you’re doing this acquisition based on a 5% discount rate, but I just wanted to check that.
Mitchell J. Krebs
Okay, two things there. One, weighted average cost of capital that we run — 10 or 11% is what we run all of our NPVs at. In terms of term sheets, it is all kind of sub-5%, at least the ones that we’ve adapt and at least we intend to move forward with, especially interesting exercise of different proposals but sub-5 is a good number to assume.
Jorge Beristain
Right, thanks a lot guys.
Mitchell J. Krebs
Yeah thanks.
Operator
Your next question comes from the line of Brett Levy from Jeffries. Your line is open.
Brett Levy, Jefferies & Company
Hey guys. Do you have an estimated EBITDA for the acquired assets for 2015? I mean it says increase 2015 by over 30%. Is there a range or is the anything along those lines? And then also talk about CapEx as you see it, for your acquired assets in 2015.
Mitchell J. Krebs
Yeah. We haven’t put out — for our company at 2015 is a done number. Probably the best way to back into the magnitude of EBITDA from Wharf, I guess you could triangulate it two ways. One, on an LTM basis, our EBITDA through the twelve months ended September 30th was $90 some million, so if you think about a 30 plus percent increase on that, that kind of gets you in the ball park. The other way I’d go at it is just based on the guidance for 2015 from Goldcorp of 85,000 to 90,000 ounces, if you use just today’s spot price of gold, and deduct that all-in sustaining cost, that simple math gets you to a number about in the same ball park kind of 30-ish. And then capital — I think this year is like $4.5 million.
Joe Philips
The big components of that are the repair of the liner on one of the leach pad that has been recycled and there is a liners and materials for pressure rebuild and the crank.
Brett Levy
Is there going to be any covenant issues of anything else that sort of — did you need anyway originally to get this done?\
Mitchell J. Krebs
No.
Brett Levy
Okay thanks for the time guys.
Mitchell J. Krebs
Thanks Brett.
Operator
Your next question comes from the line of Garreth Nelson from BB&T Capital Markets. Your line is open.
Garreth Nelson, BB&T Capital Markets
Hi Mitch. Just a follow-up on that last question on the mine’s EBITDA. Looking at Goldcorp’s filings, it looks like the mine generated $23 million of EBITDA in the first nine months of 2014. Is that where you’re sharing?
Mitchell J. Krebs
First nine months, yeah that is probably a pretty good run-rate.
Garreth Nelson
Okay so about 30. So that is the $30 million run-rate that you are referencing?
Mitchell J. Krebs
Yeah that looks — last year, I think with $15 million. A little bump into the graded material, you’ll probably be — if you added it into that number.
Garreth Nelson
Okay, just wanted to make sure I understand that. Thanks a lot.
Mitchell J. Krebs
No problem.
Operator
Your last question comes from the line of Adam Graf from Cowen. Your line is open.
Adam Graf
Hey guys, just that quick follow-up question. Goldcorp never disclosed the silver production that came off as a by-product from Wharf and I am wondering if you guys can give us say, a number there on the estimated average historic silver recovery at Wharf?
Mitchell J. Krebs
Yeah silver recovery is like 15%.
Adam Graf
Yeah. That is what I would expect, 15 to 20. So thanks for that appropriate response.
Mitchell J. Krebs
Okay, I think that is all the questions?
Operator
There are no further questions at this time. I am turning the call back over to Mitchell Krebs.
Mitchell J. Krebs
Okay thanks everybody. We appreciate your interest and all your questions. If you think of anything else that you need, you know how to get a hold of us here. Obviously a lot of really good things happening here at the company and we are looking forward to a very exciting 2015. So thanks again. Have a good day.
Operator
This concludes our conference call. You many now disconnect.
