Coeur d'Alene Mines Corporation (CDE)Wall Street Analyst...

Coeur d'Alene Mines Corporation (CDE)
Wall Street Analyst Forum
February 14, 2007 10:30 am ET

Executives

James Sabala - EVP and CFO

Presentation

James Sabala

Good morning and thanks for your interest. What I would like to do today is go through and give you just a quick snapshot of the Company and then spend most of the time talking about our big project in Bolivia, which is the subject of a lot of investor interest these days.

Just a quick snapshot of silver market for those of you who aren't familiar with it. I think the punch line basically is that the silver market right now is very good. We had price highs -- 25-year highs in 2006, and recent price levels have been up around $14 an ounce.

Very strong demand for silver and the structure of the market is interesting, and the mine supply consistently lags world demand for silver by something 200 million ounces. The balance is made up through recycling and above ground stocks. But it's a very interesting structure to this market. And as I say, mine supplies is just not adequate to meet full world demand.

On top of that, you have had some interesting developments with the recently implemented Exchange Traded Fund in 2006. That's represented another increment of demand for silver as well. So anyway, we think, it's a very robust market. We think good market conditions are likely to continue through this year and on into next.

Again, just kind of a quick look at the Company. Five operating mines. Two big projects under development. Our revenue profile is about two-thirds silver, one-third gold. As of the prior year, January 1 of 2006, we had 221 million ounces of silver and 1 million ounces of gold. And those are both proven-probable category reserves.

Very strong balance sheet. We have had record level financial performance through the first nine months of 2006. And we have a very good liquidity in the stock average volume, typically around 6 or 7 million shares, which is disproportionate to our market cap.

I might also say the caveat here. We haven't reported our 2006 financial results yet. So I have to my comments on financials to the first nine months of 2006. So bare with me on that.

Four-part strategy for growth, basically. Running our existing facility as efficiently as possible, and you can see there on a upper right-hand side that we had silver production up 16% and cash cost down 14% during the first nine months of 2006. So we think we are making progress in that area.

Number two, complete our development projects. And these are the two projects I alluded to earlier -- one big gold project in Alaska, and one big sliver project in Bolivia. Number three, increase our mineral reserves. We have a very aggressive exploration program and a very savvy group of explanation people. And you are going to see some interesting things coming out of the Company when we talk about what we are doing in 2007 in this regard.

Number four, complete strategic acquisitions. We continue to have an eye peeled for opportunities where we might add to our sliver production. We did two very nice acquisitions in 2005 of Australian interest, and we continue to be on a look out for more deals like that.

So anyway, the two major development projects, big sliver project in Bolivia and a big gold project in Alaska. Since most of the presentation is focused on Bolivia, let me just take a minute here and talk a bit about Kensington upfront. Very good gold project up in Alaska. It's about 45 miles North of Juno.

We are fairly well advanced in construction there -- about, I'd say, maybe two-thirds of the way complete. We hope to get this done by the end of the calendar year 2007 and begin production immediately after that -- 100,000 ounces of annual gold production, 1 million ounces of reserves. And when we do our updated 2006 financial report, I think, we will be able to update the reserve and resource categories for Kensington.

It's a very good project. I've been up there several times. We've won an award from the Bureau of Land Management in 2006 for some of the things we are doing with that mine. But we do face a legal challenge by a small environmental group based in Juno. And right now, we are in the Ninth Circuit Court in San Francisco, awaiting for a decision about one of our permits.

We do believe the permit is valid, and we will continue to defend it vigorously. But as of today, it's in court pending a challenge. And I will tell you that this permit has been repeatedly upheld through the previous administrative and agency level appeals and it was also upheld through a federal district court challenge in Alaska.

So we feel very good about the engineering and the science that underlie this permit, and it's important to note that we do have the permit. It's not an issue whether the environmental group is trying to prevent the issuance of the permit. We already have it. They are just challenging it.

So we feel pretty good about that, and we are continuing to build. And if things go according to plan and we get a favorable ruling, as we expect and hope, this thing should be done by the end of the calendar year.

Again, now, turning to Bolivia, this is a huge growth project for us, 8 million ounces of annual production, probably 9 million ounces of production in the first year and that's a big increment relative to where we have been running at around 14 million ounces a year. It's a huge portion of our reserve base, 152 million ounces. And we think based on what we know that this will be largest pure silver mine in the world. As you probably know a lot of silver comes from base metal mines as a byproduct, but this would be what we understand is the largest pure silver mine in the world.

This one too is under construction. It's located near the town of Potosi in Bolivia. Again, if everything goes according to plan, we should complete this one -- complete construction I think by the end of the calendar year or early '08 and began production immediately after that. Very solid economics on this one. The original feasibility study that we did assumed silver prices $6.50 an ounce. So with today's prices in the $13 to $14 range we think the economics are very, very robust and certainly much more robust than they were when we did the original study.

Again, we are going to be releasing year-end financial results within the next couple of weeks or so and we will have an additional update on particular economic aspects of San Bartolome at that time.

I think we feel pretty good about our relationship in the country with the cooperatives, with Comibol, which is the state mining agency and with the indigenous community and I will talk a little bit about those further in the presentation.

Potosi, for those of you who don't know, is a fascinating area, very rich in history. The Spanish were in there in 1500s, discovered silver and they have been mining in that area since the 1500. So it's a fascinating area, a lot of history, a lot of silver production that's come out of there. I don't have the number of the top of my head, but it's many, many, many millions of ounces of silver that have come out of that place over the years.

We acquired our interest in this property in 1999 and you see the name there Manquiri. This is the Bolivian subsidiary essentially and we acquired 100% ownership of that in 1999. We did some work after that on some various feasibility study, really gave this the green light in 2004 with an updated feasibility study and commenced building later that year.

In 2005, we slowed down just a bit, took a more measured pace so to speak in advance of the elections that were going on in the country. We wanted to see how that would sort out. And then in 2006 we pressed the accelerator again and we are going full bore on construction here.

I am not a geologist and you may not be either, but just to give you kind of a quick look at this ore body. The interesting thing about it is that it's relatively close to the surface, in fact much of it is right on the surface and we don't need to do much digging, blasting or tunneling here. I think the depth of the ore body is only about 15 meters average and so you know it's relatively easy to get out and should be relatively low cost once we get it going.

Couple of maps just to help you get your bearings here, on the left you see Potosi in relation to La Paz, it's about a 6 or 7 hour drive. On the right hand side, you see several Cerro Rico mountains down in the lower right hand corner and then the three ore bodies, Wichita -- I'm sorry, Huacajchi, Santa Rita and Diablo are the three main ore bodies. And you see those, they're sort of on the flanks of this mountain.

And I have another photograph here. Here is the mountain actually, Cerro Rico. You see it's ringed by roads. There has been mining there in the past and some small mining, individual mining operations that go on today owned by the Bolivians. Here is one of the ore body, Huacajchi there on the right. And again, it's mostly at the surface. And the ore bodies are located essentially around the flanks of this mountain. The peak of that mountain is about 15,000 feet. So that makes for some interesting challenges with oxygen level when you get there, but most people do fine.

Here is again a cross-section of the Cerro Rico Mountain. And the thing I wanted to point out here was, essentially, this illustration down at the bottom you see the depth of the ore bodies in perspective to the height of the mountain. Again, relatively easy to get to this stuff.

Key players in Bolivia. COMIBOL is the state mining company, the national mining company. They own the mineral rights for San Bartolome. And I know that -- you know, we periodically see headlines about the Bolivian government, they might want to nationalize this or they might want to expropriate that when they talk about different sectors of foreign-owned business in the country.

When it comes to San Bartolome, the government already owns the mineral rights. There is not much for them to nationalize per se in thinking about the San Bartolome project. And we really did not think that that's a significant risk for us. Again, the headlines pop up and people see them and get, perhaps, a little anti about them. That's understandable. But the risk of expropriation is not something that we lose sleep over.

The mining cooperatives in Potosi and throughout Bolivia are relatively powerful organizations. They're -- they represent workers' interests and we have their support very strongly in the Potosi region. They participate with us through some joint venture agreements, meaning in essence that we lease some of our mineral rights from them and they represent workers in the region. And when we get to the point where we're actually operating the mines and hiring permanent employees, we'll work COMIBOL to bring those people into our facility.

You may -- again, speaking of headlines out of Bolivia, you may have seen a story within the past week that the cooperatives were staging a protest in La Paz. They were stating their opposition to increases in mining taxes. The government has talked about increases in mining taxes.

They are a powerful voice in the country and they are opposed to mining taxes, because they think that might be contrary to the interest of the mining companies. But they're certainly on our side, the mining cooperatives. We've had a couple of those folks up to visit our offices in Coeur d'Alene, meet with our management team. And I would say it's a very good relationship with the cooperatives in Potosi.

Here is a little diagram that, basically, just gives you the structure of how we hold our ownership there. Again, COMIBOL on the lower left is the state-owned mining company. They lease a lot of our -- re-lease a lot of our mineral rights and property packages directly from them and re-lease some of our packages through the cooperatives and you see COMIBOL to the cooperatives to Manquiri.

In turn, once Manquiri goes into production, it will pay a royalty back down to COMIBOL and the cooperatives. I will split that. It's roughly 4%. There are a number of ways to look at that royalty with offsets and credits against the income tax. But as a placeholder, you can think of 4%.

So you can see here too, as the cooperatives have vested interest in making sure the San Bartolome goes forward. So where are we with the project? We do have all our operating permits in hand. We are working with Fluor Chile as the EPCM on this project.

The Tailings facility is under construction. The side prep for the mill is nearly complete. Most of the major contracts have been awarded, and we should be pouring concrete reasonably soon on the foundation for the mill.

And again, on this timeline, we hope to get this thing moved on pretty quickly during the year. We will begin equipment testing in third quarter of 2007 and hope to complete construction by the end of calendar year.

Again, I am not an engineer, but here is essentially what we are going to do in terms of the processing and milling. It will be a reasonably compact operation. We will produce dore onsite and then ship that overseas to refiners. The -- you know, again, that's one thing that the Bolivians like about this project that we are producing dore rather than a concentrate, which is what might -- you might think of as a more intermediate product.

They like to keep as much of the process in the country and generate as much value added in country as possible. So that's one of the things they like about the project. Again being so close to the town of Potosi, the infrastructure is good. The power is available. The road systems are good. There is an airport nearby. It's a good location.

Here is a view. I showed you earlier a picture of the mountain. Here is a view from up on the mountain looking down. And I don't know if this just helps give you some sense of the scale or the scope of this place, but -- what you see labeled there is the Plahipo offices on the left. That's where we have our engineers and construction people, some of the construction people, some of the management people.

The near foreground oval there is where the actual plant will be, the Tailings site beyond that and then the ICE Camp. That's the Bolivian contractor who is looking on the Tailings facility.

So current state employment is around 200, fluctuates 200-250, something in that neighborhood. We will get to a 1,000 at peak construction and about 250 workers once we begin operating. We are making a concerted effort to hire Bolivian contractors and Bolivian construction workers and crews. And I think we are predominantly using Bolivian workers right now.

We are doing some things in the community that you would expect, I think, us to do. We are preparing to set up a company-sponsored foundation to promote tourism, silversmithing and that sort of thing in Potosi. We worked very closely with the indigenous community to build good strong relationships there.

And I might just mention in the site I was in Bolivia in January and I had -- you know it was just for two, it was the timing that I was there in and on a Saturday when we were being honored or Manquiri was being honored by three separate villages near Potosi. These are outlying communities.

They have never had electricity before and we paid fairly nominal amount and we paid to extend electric utility lines into these communities. And so we were honored or recognize at ceremonies in each of these villages. And they were very interesting ceremonies, very heartfelt and there was lot of emotions and you could tell that the local indigenous people in these communities really appreciated what we have done.

Some -- one gentleman said to me, "You know, we have seen mining companies here for a longtime that never did anything like this even after they have been operating for years, and you guys are in here doing this stuff, doing this kind of thing upfront." So you know if that's an anecdotal of a piece of information that kind of attests to our support in the local community there, I think it's certainly indicative of what I heard from our folks down there as well.

The project is environmentally sound, we are probably just stating the obvious, but the interesting thing here too is that because Potosi has been home to silver mining for so many years, you know, you might expect over the years that not everybody in the past was conducting a pristine operation, but in due course we come in and do our mining, we will actually be as a matter of course just remeditaing some of this historical residue. If you want to call that material that has just been sitting there and so the community recognizes that and appreciates that as well.

Here are just some shots to give you a flavor for what its like down there. The three photos, the two top and the lower left are from 2005 the grand opening, with grand kickoff ceremony when we began construction. In the lower right here is a photograph from this electrification ceremony, one of the electrification ceremony that I just mentioned in a significant theory you see the light bulb above Jim Duff's head because we've never had light bulbs in this building before. And Jim Duff is the President of our South American Operations and he is warmly embraced wherever he goes and Potosi is senior Duff.

Government relations, again, if one pays attention only to the headlines coming out of the Bolivia one might think that things our perhaps more unsettled there then they are. In our case we do have strong support from the government. The mining minister and the head of COMIBOL both have continued to make statements to support what we are doing. We meet with the government on a fairly regular basis and our CEO Dennis Wheeler was down there last week I know talking to the government as well.

At the provincial and local level, we think we have strong support as well with the US embassy also. And again, with the mining cooperatives and again their voices are heard by the government and they are very big supporters in San Bartolome. The current tax and royalty structure in Bolivia and the one on which we based the feasibility study was roughly 25% tax and 4% royalty.

Now, again, the government has made statements that they would like to increase taxes in the mining sector. We have not seen a formal proposal in this regard. We do not know when they might put a proposal forward or exactly what it might be. But again, when we ran the economics it was 25% and 4% at $6.5 silver price and today the silver prices between $13 and $14. So we think the project is very robust and you know, we are talking to the government and as soon as we know anything more about taxes we will certainly do our best to communicate that.

Our CapEx to-date, the project, the published figure for the project is a $135 million, again, we will update that number when we do our fourth quarter financials. But to-date, I think the CapEx will probably amount to less than 3 million cumulative '04 to '06 with the balance of that targeted for spending in 2007.

Very important to remember that we do have an insurance policy that covers our capital investment in Bolivia. It's a face value of $155 million on that policy covers 85% or up to 85% of our invested capital and it covers loss of capital that maybe associated with expropriation or similar kinds of events. And like most insurance companies, we hope and trust that we will not leave this one. But it's good to have it as the safety then.

So in summary, I think Coeur has a very good position in the Silver industry, silver sector, not only do we have a good reserve position. But we operate five relatively low cost mines and we have two very exciting development projects.

Granted there is a question mark about the legal challenge on Kensington and granted there is a question mark about taxes on Bolivia. But if we can move forward with these projects as we planned and execute as planned, I think they represent terrific upside, great incremental production levels and low cost production levels for Coeur d'Alene.

With that I think I would be happy to take questions. Yes.

Question-And-Answer-Session

Unidentified Audience Member

[Question Inaudible]

James Sabala

You know I know that I am necessarily in a position to confirm the names of the people he met with, but I would say that he met with senior people in the government and they were good meetings. I think he would describe them as being good meetings.

I am sorry I need to -- I am sorry I need to repeat the question. The question was -- who did Dennis meet with when he was in Bolivia?

Unidentified Audience Member

[Question Inaudible]

James Sabala

Well, the question is what was the topic of discussion? I think the topic was I there were number of topics, one making sure the people understand where we are in our production cycle or our construction cycle and then feeling government out to try to find out what they are thinking in terms of the timing or the magnitude the taxes. I think those were the two orders of the day.

Unidentified Audience Member

[Question Inaudible]

James Sabala

Question is status of financing and time lines on San Bartolome? I think you can look at our balance sheet, end of third quarter 2006 we had what most people would say as adequate cash to get both Kensington and San Bartolome completed we had something like $360 million or so.

There was a secondary offering in 2006 in March or April of 2006 and since then I think our balance sheet has been in good shape and I think we do have plenty of cash to get these projects done.

Unidentified Audience Member

[Question Inaudible]

James Sabala

The question is what happens if we loss it to Ninth Circuit Court?

We will have to take a look at the situation, there is speaking generically about how the process works at the Ninth Circuit there is I know an additional avenue of appeal in that court, that one can pursue. I can't sit here today and tell you exactly what we would do. I will tell you that, you know, again I am not a lawyer and I am not an engineer.

But I've read these court filings. I have read our briefs. I have read all of the -- not all but many of the documents with the core engineers. The EPA put together to support this permit in the first place. And you know, to my way of thinking, the facts are just overwhelmingly in favor of what we're trying to do.

And all of the Federal agencies, all of the state agencies are in favor of what we're trying to do. So we are confident in our position and that's why we have continued. We had a session in December where arguments – where attorneys for both sides presented oral arguments in the Ninth Circuit.

And my understanding is that, you know, the judges take these matters under advisement and it can be a matter of months, before you get a decision. So we're coming up on the two month mark. We don't know when the court will issue its ruling. But I think you can count on the fact that when we hear something, we'll get an announcement out there very quickly. So our investors know about it.

Unidentified Audience Member

[Question Inaudible]

James Sabala

The question is, are there any stays in effect while this is in court?

We did have a temporary junction that restricts our construction activity at the Tailings facility. Everything else is going full bow ahead. And we have something like 400 workers at Coeur Alaska. There is lot of underground work, these is an underground gold mine.

So there is lot of underground work that's continuing with the tunneling activity and a lot of work that's going on to complete the new buildings. But separate and apart from that, in the Tailings area, we are right now constrained from any construction activity.

Any other questions?

Okay. Thank you.