Over the past few months the stocks in the silver and gold mining sector have fallen dramatically. This has provided an excellent opportunity to investigate companies in this sector for investment purposes. One company worth considering is Coeur d'Alene Mines Corporation (CDE). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze Coeur d'Alene Mines total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long term.
Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.
Coeur d'Alene Mines Corporation 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. Further production has commenced from a leach pad at Coeur's long-time Rochester silver-gold mine in Nevada. The Company also owns a non-operating interest in a silver-base metal mine, Endeavor, in Australia.
(click to enlarge)
Map sourced at (company website)
In the article below, I will calculate important ratios in understanding the amount of debt and liabilities the company has incurred. From this analysis we will understand more about the company's debt, liabilities and financial risk.
In an article I wrote last week, there was some discussion and comparisons between Coeur d'Alene, First Majestic Silver Corporation and Silver Standard Silver Standard Resouces (SSRI). So in the fairness of the discussion I decided to write a comparative article. If this summary is compared with other companies in the same sector such as First Majestic Silver Corporation (AG) or Silver Standard Silver Standard Resouces you will be able to see which company has the most debt, thus adding to the company and investor risk. If you would like a direct debt-side comparison to this one please read: First Majestic: Low Debt And A $21 Price Target.
1. Total Debt = Long-Term Debt + Short-Term Debt
Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.
- 2008 - $429 million + $15 million = $444 million
- 2009 - $314 million + $55 million = $369 million
- 2010 - $348 million + $117 million = $465 million
- 2011 - $318 million + $96 million = $414 million
- 2012 - $145 million + $122 million = $267 million
Coeur d'Alene's total debt has decreased over the past five years. In 2008 CDE posted a total debt of $444 million while in 2012 the company posted a total debt of $267 million. This signifies an decrease of 39.86%.
2. Total Liabilities
Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities are the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.
- 2008 - $1.187 billion
- 2009 - $1.061 billion
- 2010 - $1.117 billion
- 2011 - $1.128 billion
- 2012 - $1.023 billion
Just like the total debt the liabilities have also decreased over the past five years. In 2008, CDE reported liabilities at $1.187 billion while in 2012 CDE reported liabilities at $1.023 billion. This marks an decrease of 13.81%.
In analyzing Coeur d'Alene's total debt and liabilities, we can see that the company as of the end of 2012 had a total debt of $267 million and liabilities at $1.023 billion. On Wednesday February 20th, 2013 Coeur d'Alene released that the company was acquiring Orko Silver Corp. (OTC:OKOFF). According to the company's press release the total value of the acquisition was approximately CAD$350 million.
From the numbers above, we can see that over the past five years Coeur d'Alene's total debt has decreased by 39.86%, while the total liabilities have decreased by 13.81%. As the company's amount of debt and amount of liabilities have decreased, the next step will reveal if the company has the ability to pay them.
1. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
- 2010 - $465 million / $3.158 billion = .15
- 2011 - $414 million / $3.264 billion = .13
- 2012 - $267 million / $3.221 billion = .08
Coeur d'Alene currently has a total debt to total assets ratio of .08. The total debt to total assets ratio has significantly decreased over the past three years. As the total debt to total assets ratio has decreased, this indicates that since 2010, the company has decreased its total debt while maintaining its assets. As the number is currently well below 1, this indicates that the company has more assets than total debt. Because this number is very low, this metric indicates low financial risk to the company.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
- 2010 - $1.117 billion / $3.158 billion = .35
- 2011 - $1.128 billion / $3.264 billion = .35
- 2012 - $1.023 billion / $3.221 billion = .32
In looking at Coeur's total liabilities to total assets ratio over the past three years, we can see that this ratio has also decreased. The ratio has increased from .35 in 2011 to .35 in 2012. As the 2012 numbers are still below the 0.50 mark, this indicates that Coeur d"Alene has not financed the company's assets through debt. As the number has decreased, so is the risk to the company.
5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2010 - $1.117 billion / $2.041 billion = .55
- 2011 - $1.128 billion / $2.137 billion = .53
- 2012 - $1.023 billion / $2.198 billion = .47
Compared with 2010, Coeur's debt-to-equity ratio has decreased. The ratio has decreased from .55 to .47 over the past three years. As the ratio is currently below 1, this indicates that shareholders have more invested than suppliers, lenders, creditors and obligators. .47 indicates a low amount of risk for the company. As the ratio is below 1 and considered low, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2010 - $348 million / $2.389 billion = .15
- 2011 - $318 million / $2.455 billion = .13
- 2012 - $145 million / $2.343 billion = .06
Over the past three years, Coeur's capitalization ratio has decreased from .15 to .06. This is a significant decrease and this implies that Coeur d'Alene has decreased its long-term debt while maintaining shareholders' equity. As this is the case, the company has more equity to support its operations and add growth. As the ratio is decreasing, financially this implies a decrease of risk to the company.
7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2010 - $166 million / $465 million = 0.36
- 2011 - $416 million / $414 million = 1.00
- 2012 - $272 million / $267 million = 1.02
Over the past three years, the cash flow to total debt ratio has increased significantly. The ratio has increased from 0.36 in 2010 to 1.02 in 2012. Over the past two years the cash flow to total debt ratio has been above 1. As the ratio has been above 1, this implies that the company has the ability to cover its total debt with its yearly cash flow from operations.
Based on the five debt ratios listed above, we can see that Couer d'Alene's debts compared to assets and have been decreasing. This indicates a strengthening from a fundamental point of view. As all of the ratios listed above show financial strength the addition Orko Silver Corp. should prove to be a positive acquisition. As the price of gold and silver look to be range bound in 2013, the company should be able to make money on its assets and will not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.
Cost of Debt
The cost of debt is the effective rate that a company pays on its total debt.
As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing.
This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.
8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.
- 3.25% Convertible Senior Notes due March 2028 = 3.25%
- Current cost of Debt as of April 7th 2013 = 3.25%
9. Current tax rate
- 2011 - $114 million / $208 million = 54.80%
- 2012 - $69 million / $117 million = 58.97%
2011 - 2012 2-year average = 56.88%
In 2011 and 2012 Coeur d'Alene has averaged tax rate of 56.88%.
10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)
The effective rate that a company pays on its current debt after tax.
- .0325 x (1 - .5688) = Cost of debt after tax
The cost of debt after tax for Kinross Gold is 1.40%
Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.
- Risk Free Rate = U.S. 10-year bond = 1.71% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (MSN Money) Coeur's Beta = 1.83
Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
- 1.71 + 1.83 (7- 1.71)
- 1.71 + 1.83 x 5.29
- 1.71 + 9.68 = 11.39%
Currently, Coeur d'Alene has a Cost of Equity or R Equity of 11.39%, so investors should expect to get a return of 11.39% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.
(Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate, which is susceptible to daily change and Google Finance beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.
As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk.
By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.
For this calculation, you will need to know the following listed below:
Tax Rate = 56.88%
Cost of Debt (before tax) or R debt = 3.25%
Cost of Equity or R equity = 11.39%
Debt (Total Liabilities) for 2012 or D = $1.023 billion
Stock Price = $17.25 (April 7th, 2013)
Outstanding Shares = 89.91 million
Equity = Stock price x Outstanding Shares or E = $1.550 billion
Debt + Equity or D+E = $2.573 billion
WACC = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - .5688) x .0325 x ($1.023/$2.573) + .1139 ($1.550/$2.573)
.4312 x .0325 x .3976 + .1139 x .6024
.0056 + .0686
Based on the calculations above, we can conclude that Coeur d'Alene pays 7.24% on every dollar that it finances, or 7.24 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0724 plus the cost of the investment for the investment to be feasible for the company.
Debt Side Summary
All indications above reveal that Coeur d'Alene has decreased its financial risk when compared to 2010. Having stated that, these calculations are not considering the Orko Silver Corp acquisition in February. The above analysis does state that because the company has been lowering its debts while maintaining its assets, the company had put itself in a great position financially for an acquisition that would aid in the growth of the company in the future. If the Orko Silver Corp acquisition was the right acquisition for the company is yet to be determined.
2013 Operational Guidance
On January 17th, 2013, Coeur d'Alene released it operational guidance for 2013. In this press release the company stated they estimate that they will produce 18.0 - 19.5 million ounces of silver, while gold production is expected to increase significantly in 2013 compared to 2012 to 250,000 - 265,000 ounces due to higher production levels at the Company's Kensington and Rochester operations.
Over the next few years analysts at MSN Money are predicting Coeur to have an EPS of $1.95 for FY 2013 and an EPS of $2.35 for FY 2014. Analysts at Bloomberg are slightly less bullish on the company as they are estimating Coeur to have an EPS of $1.69 for FY 2013 and an EPS of $1.80 for FY 2014. On January 22nd, 2013, BMO Capital Markets gave Coeur a rating of "Market Perform" with a target price of $29.00 while Finviz has a stock price target price of $28.00 for the company.
Chart sourced by (FINVIZ)
The above analysis reveals that Coeur d'Alene Mines Corporation is a solid company on the debt side. The company has been decreasing its debt while maintaining its assets. On February 20th, 2013 the company acquired Orko Silver Corp. Based on the financial health of the company before the acquisition and the amount the company purchased the company for, Coeur should be able to maintain its financial health. Currently, analysts have a $28.00 to $29.00 price target on the stock with strong growth moving forward. Based on the chart above, the stock is currently on a downtrend. If patience is exercised and the stock price begins to form a bottom and break to the upside, it could prove be an excellent opportunity.