Coeur d'Alene Mines (CDE) is a US-based mining company focused on silver. The company operates three silver mines (USA, Argentina, and Bolivia) and receives silver output from two lead-zinc mines in Australia. Attributable 2008 silver production was 12 million ounces (and minor gold). Coeur has two mines under construction in Mexico (silver-gold), and Alaska (gold). (Source: RBC Capital Markets.)
Coeur d’Alene’s production growth profile is driven mainly by the ramp up at San Bartolome, the start-up at Palmarejo (H1/09), and contributions from Kensington (late 2010). The Company has been actively carrying out debt-to-equity exchanges to de-leverage its balance sheet, which has been a major concern for investors. Although a large portion of the convertible debt remains to be addressed, Coeur is showing that it is being proactive. I believe that the Company will generate cash from operations in 2009 and our estimates remain conservative during the Palmarejo commissioning and start-up period.
Coeur d’Alene reported Q1/09 net income of $6.1 MM or $0.01 per share. After adjusting for a $15.7 MM unrealized gain on debt extinguishments and a $(9.2) MM unrealized loss on derivatives, EPS was $0.00, in line with analyst estimates and slightly better than the consensus estimate of $(0.01). Operating cash flow of $6.8 MM was lower than analyst forecasts of $10.3 MM (approx). The Company produced 3.92 MMoz silver, slightly lower than our forecast of 4.15 MMoz. Lower production at San Bartolome and Rochester were partially offset by better production at Martha and Broken Hill. Total cash costs of $6.61/oz were broadly in line with estimates of $6.68/oz. Although the Company produced 3.92 MMoz silver, it reported silver sales of 3.61 MMoz. This negatively affected earnings and cash flow.
Silver production is currently being forecast by analysts at 19.3 MMoz with silver total cash costs of $5.64/oz in 2009, growing to 24.1 MMoz at $4.84/oz in 2010. Silver production growth is mainly attributed to the start-up of Palmarejo.
Total cash costs are expected to decline due to increasing production contributions from Palmarejo, which is expected to be a lower-cost producer. Another key assumption is the inclusion of gold production from Kensington in the forecasts for CDE, assuming they commence at the end of 2010.
Once a decision is made on a tailings facility, we could see capital and operating cost estimate updates. Analysts are currently forecasting 2009 diluted CFPS of $0.13, growing to $0.25 in 2010. With respect to its balance sheet, the Company continues to de-leverage itself by continuing with its debt-to-equity exchange program to decrease its convertible debt.
Coeur d’Alene has delivered on its commitment to commence production at Palmarejo in Q1/09, which is a positive indicator of the company’s progress in starting up the mine. The Company is confident that it can reach full production at Palmarejo in July 2009 (compared to June as previously stated) and it is important to keep adjusting one’s personal estimates for unperceived contingencies as very few operations, if any, have flawless start-ups. The market could remain cautious during commissioning and ramp up as the start up of San Bartolome in 2008 took much longer than originally expected.
The convertible debt has been an overhang on the stock and the Company continues to make progress in reducing this debt by carrying out debt for equity exchanges. Coeur d’Alene is currently trading at 1.4x our NAV (5% discount rate for operations, 10% for Kensington), 12.2x 2009E CFPS, and 6.3x 2010E CFPS. The current target multiple ranges in the 8.5x 2010 CFPS region the stock valuation is undergoing big changes (see reverse-split of May 27, 2009 as an analogous signal from management) in light of the commencement of the de-leveraging of the company’s balance sheet. The risks associated with the start-up of Palmarejo and the convertible debt totals on the balance sheet are also factored in, but regardless of this, I would consider CDE a good buy at current prices (split-adjusted), with a target (6-12 months) of approximately $21-25/share.
The company has a strong growth profile for the coming years, among which are the following:
- Is attractively valued as it is trading at a discount to precious metals peers (trading at approximately 10–15x 2010E CFPS);
- Is on track to deliver at Palmarejo and has met its commitment to commence production in Q1/09, a major milestone. This operation has the potential to exceed our expectations if commercial production is declared earlier than our assumptions (late Q2/09); and
- Is being proactive in reducing its convertible debt positions, which are put-able in 2011 and 2013, via the debt-to-equity exchanges. While further large reductions are required, it demonstrates management’s desire to be proactive without excessive dilution to shareholders.
Risk: above normal, but big reward is possible, given current share prices and heavy link to gold and silver commodity pricing.