Coeur d'Alene Mines: Some Risk, But Big Reward Is Possible

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.

Disclosure: I hold CDE long in my stock portfolio on kaching. The portfolio is available for anyone to view or follow.

Comments

[Mayascribe]

I would not own this stock or any mining company that has a mine in Bolivia, as does CDE. Nationalization is always a concern there.

If you want to own a mining stock, look into Jaguar Mining (JAG), based in geopolitcally safe Brazil. Jaguar Mining expects to raise production capacity by a whopping 600% by 2014.

This massive production increase combined with coming inflation pretty much eliminates any downside risk.

2009 May 31 03:32 PM

[Alan Young]

As commodity prices rise, so will the cost of production, which I don't see mentioned in your analysis.

Although there is some investment interest in silver as a commodity, its price also depends on industrial demand, which is another big question mark.

2009 May 31 04:42 PM

[Dneyd]

CDE has shown itself over the past six years as investor unfriendly. It used to be a $50(split adjusted) stock when silver was $5. Now is a $14 stock when silver is $14. The stock holders have been diluted consistently like a sheep being sheared with the seasons. The management has taken the vast majority of the booty and left the shareholders with peanuts. If you can't make your shareholders money when your underlying commodity triples, why should we expect any different going forward?

2009 May 31 05:31 PM

[The Hammer]

Agreed a few years ago invested in this company and complained to investor relations about the constant shareholder dilution MGT sucks and should be fired for constant mismanagement and stock dilution.

2009 May 31 09:05 PM

[ducat]

About 90% of the complaints I see about Coeur come from people who invested in the company when the share price was above $4.00 pre-reverse split. What they seem to not realize is that those prices were based on the "silver story" that indicated we should see moves up into the $50. level for silver. Those dreams didn't come true in 04, 05, 06 and by the time 07 rolled around it was apparent that bringing new mines on line was both difficult and expensive. Then, there was the credit crunch that slammed every body in need of financing (like new mines). This is a good article and those with a clean slate reading it should pay attention to the opportunity this company offers. Bad management does not bring on new mines and project a future company growth which is the envoy of the mining community.

2009 May 31 09:47 PM

[REBEL]

When did CDE buy a mine in Bolivia? MayaScribe, (above), is correct
- any mine in Bolivia is seriously subject to nationalization. Bolivia's Presidente - Morales is another Castroite and could very possibly follow Venezuala's example of nationalizing industry. I use to own Apex Mines when they owned San Cristobal -- supposedly the richest potential Silver mine on Earth. Then Morales was inaugurated wearing
a Coca leaf necklace and I got out at the first opportunity. Now Apex is worth Zero.

2009 May 31 10:26 PM

[one eye]

Circumstances have changed. The bottom line has changed as well. Costs are way down, operational Silver costs are below $7. Silver is moving back to $20 at a minimum. They will be producing 20 Million oz. annually. Ignore the Gold/Copper aspects, concentrate on Silver only.

They could clear $260 Million annually. The number of shares are 1/10th of what they were.

CDE is currently getting rid of the disenchanted and moving into stronger hands. This is a normal process.

You have your opinions, I have mine. I feel CDE will earn $4-5/shr in the next few years because of the reverse split. It will be above $50.

2009 May 31 11:10 PM

[Rich in Bpt.]

I took a 10 for 1 haircut; however, if you believe silver within the next four years will see at least $35.00 an oz. then CDE will be over $50.00 a share, within the same timeframe.

2009 Jun 01 01:05 AM

[Chancer]

I own only a few CDE shares which are "now" fewer still. I consider my original investment to be a mistake, and do not expect to breakeven. CDE has diluted in the past. I believe the major reason for the RS was so that CDE could continue diluting shareholders into the future, which is why I voted against the RS, as I almost always do on reverse splits. I would expect a significant dilution offerring within 6-12 months. The only reason that I have not sold is that I do not need the tax loss, and there is a chance (very slim) that the share price might increase somewhat.

Re. Bolivia, those who have spoken about the risk are correct. I have lived in Bolivia, and I understand the political and business climate there. Contracts and the rule of law are not respected. Bolivia is on a path to confiscate large ranches right now- especially in Santa Cruz province. They have nationalized private mining and energy properties in the past. Right now, Bolivia appears to be cooperating with mining companies (because the government is broke), but that could change overnight.

2009 Jun 01 03:35 PM

[Pitbullfrog]

The longtime,CEO, Dennis Wheeler, is also Chairman of the Board of Directors. This is an inherent conflict of interest which permits Mr. Wheeler to operate HIS company without any accountability.
Most other CEO's with Mr. Wheeler's dismal performance would have been forced out, but he remains because he has all the power.

2009 Jun 01 03:45 PM

[smarttogether]

Coeur outstanding shares were 750 million before the reverse split. After the 10 for 1, there should have been 75 million shares, but management chose to dilute the shares and there will now be up to 150 million shares outstanding. I got out before the split because of this - don't want my investment worth 1/2 of what it was. I agree that management treats it's own shareholders like crap.
It's too bad, because Coeur was severely undervalued - not so sure now.

2009 Jun 03 11:17 PM

[Whatsthebuzz]

This company executed a reverse split, then immediately started the dilution process all over again. I can only wonder if this is a recurring strategy for the this company. They claim to be paying off debt! I wonder who holds the notes? Board members, relatives? Hmmm, I wonder.
Sad very sad.

2009 Jun 09 02:24 PM

[Whatsthebuzz]

We are taking a haircut if they keep issuing new stock.


On Jun 01 12:51 PM Freya wrote:

> Rich: I believe silver will be in the $40 area within the Next 3
> Years. But you did not take a haircut, no one did. The total price
> valuation is exactly the same.
>
> What is not the same, Earnings of 10 cents will now be Earnings of
> $1.00. That makes a really big difference to Analysts.

2009 Jun 09 02:31 PM

[xpatriot]

I don't agree w/ everybody CDE does business w/ either...but Bolivia's coca-growing president certainly understands cash-up-front; at the same time he knows he could never gain the credibility to deal in the precious metals market. Just keep the hookers, stuffed envelopes & Fidel portraits flowing & I think we'll be fine. By the way, does the CIA only spy on and subvert america now? They cause recall elections against Chavez, all of which have turned into votes of confidence, that the man has a greater mandate than any american president since Washington.


On May 31 03:32 PM Mayascribe wrote:

> I would not own this stock or any mining company that has a mine
> in Bolivia, as does CDE. Nationalization is always a concern there.
>
>
> If you want to own a mining stock, look into Jaguar Mining (seekingalpha.com/symbo...),
> based in geopolitcally safe Brazil. Jaguar Mining expects to raise
> production capacity by a whopping 600% by 2014.
>
> This massive production increase combined with coming inflation pretty
> much eliminates any downside risk.

2009 Jun 12 06:11 AM

[User 422955]

There are so many silver mining companies. Agoracom.com offers links to dozens. Why buy one with lots of debt and a questionable management?

Disclosure: Long ECU Silver Mining; Energold Drilling

2009 Jun 12 08:44 PM