Coeur Mining, Inc. (NYSE:CDE)
Barclays High Yield and Syndicated Loan Conference Call
May 22, 2013 10:30 am ET
Mitchell J. Krebs – President and Chief Executive Officer
Matthew Vittorioso – Barclays Capital, Inc.
Matthew Vittorioso – Barclays Capital, Inc.
All right. Good morning, everybody. Thanks for joining us this morning. I’m Matt Vittorioso, metals and mining analyst at Barclays. Very happy to have Coeur Mining here to present this morning, and we have Mitchell Krebs, CEO, and he is going to take it from here. Thanks, Michael?
Mitchell J. Krebs
Let’s see am I unmuted. Can you hear me okay?
Matthew Vittorioso – Barclays Capital, Inc.
Mitchell J. Krebs
Okay. Thanks for your time, everybody. I appreciate you sitting in here to get an update on Coeur Mining, and Matt, thanks for the invitation and the introduction. I joined this company actually 17 years ago. I was living in New York at the time. I was a junior analyst in an investment banking program and got staffed on a few pitch books and deals for a mining company with a weird name. And after two years of doing that, I found myself moving from New York to Coeur d’Alene, Idaho and other than a two years stop for business school, I’ve been with them this whole time. So I have a – I think a unique perspective on the business, on the industry on metals, and we have really taken on an extensive amount of overhaul of a company that’s been around for about 80 years. So I will tell you a little bit more about that, but that’s just a little of my background.
We are the countries largest producer of silver and we’re actually the countries second largest producer of gold. So we have a – we operate five mines in four countries, so we have a diversed asset base that this year should produce about 18 million ounces to 19.5 million ounces of silver, and about 250,000 ounces to 265,000 ounces of gold.
And that means our revenue split is about 55% silver, 45% gold this year, it’s typically and historically been more weighted towards silver and a little less weighted towards gold, but we’ve had some ramp up in more of our gold rich operations, which happened to be both U.S. based, which has pushed the gold proportion of our overall business higher and has pushed more of our business in the U.S. higher to about almost half of the revenue this year.
I know you guys probably look at a lot of different industries, and we’re all about precious metals and mining. But we do generate, I think relative to other industries very attractive margins. As a company, we range anywhere between 35% and 45% EBITDA margin. So it’s an attractive business, especially at higher prices. You’ve seen a lot probably in the media about gold and silver prices currently. Even at these prices, it’s still a healthy margin, high return opportunity business that we can succeed in at prices that are materially lower than where we are and obviously materially higher.
We have gone through a period of real rapid growth as a company. If you go back about five years, this company had revenue of about $125 million and operating cash flow company wide of $11.7 million or $11.9 million. Last year, that was – sales were about $900 million and operating cash flow was just short of $400 million, so we have really scaled up the business. So our big CapEx build out phase is behind us. We spent about $2 billion over that period of time to acquire and build this portfolio that we now have in place.
So we are not a mining company that you might be accustomed to see that has a big project somewhere that is a multi-billion dollar kind of company maker, company breaker type of project. What we have now is a very strong portfolio of operating assets that provide a lot of opportunity as far as optimizing and improving. There are a lot of ways to expand and extract more value out of that existing platform that we have in place, and now we are at a, I think, a unique inflection point in this industry, where we can and are taking a look at ways to grow further from here in incremental high return ways that do not make or break the company, but add incremental high return value that is well suited and well sized for business like ours.
Just a couple of comments on our primary products, which I said were silver and gold. We really like silver from the standpoint that it is very much of an industrial metal over half of total annual demand is made up of industrial demand most of which is in the electronics sectors. So, everything that we all carry around with us and use has a lot of silver or at least a little bit of silver in a lot different applications. It typically makes up a very small percentage of the total cost of the end product, which makes it fairly price inelastic as far as that end demand.
And there is sort of a western world emerging market, two elements to the demand side for silver. In the western world, it is an electronics driven, but also investment driven demand equation in the emerging economics of the world that’s it’s much more of a emerging middle class, more consumer oriented economies that are driving the overall industrial demand aspects of silver. And on the gold side, in the 17 years, I’ve been with this business with this company in watch gold, it’s hard to remember a time when it has been more – the sentiment has been more negative towards goal than it has been in the last two months. But yes, we’re sitting here at $1,400 gold prices, which is a great price, and we make a lot of money at $1,400 gold. We make a lot of money at $23, $24 silver.
So I think, you take a step back from the last eight weeks and you think about what has changed with the fundamental or underlying fundamentals of silver and gold, and nothing really has. I mean we still see very strain EU. We see a real rough fiscal situation in the U.S even if things look a little more positive right now.
Long-term and we still have a $16 trillion deficit in this country and growing. Currencies around the world continued to be debased, negative real interest rates. Those themes still remain intact for both gold and silver. So we feel like the future is very promising for our two metals. What we’ve been focused on here at the company really five key things that I think from – either from the credit side or the equity side are important to consider. One is, from that portfolio of mines that we have, we generate a significant amount of cash flow. Our EBITDA is on a run rate basis around $340 million or so.
This year we have CapEx of about $120 million, half of which is sustaining, half of which is growth. So you start doing the math of free cash flow there are a couple of other financing components, but the net after–tax cash flow that this company generates is significant and for us sustaining that production profile and that cash flow profile is really the engine that drives everything else with this business, and then how do we deploy that free cash flow. One of the biggest priorities we have is reinvesting in our existing assets. One of the ways we do that is through our exploration program, which last year and this year will be about $40 million in total, and when you can put money back into the ground on land that you control around your existing processing infrastructure and leverage that big investment that you’ve made, that is a great return on investment.
For every dollar we’ve put into the ground around exiting assets, we can generate about a 3x return on that dollar through that, what we can brownfields exploration. For example, last year on that $40 million investment in exploration, we added about a 110 million new silver equivalent ounces, so less than $0.40 an ounce. So by the time you find it for $0.40 a ounce, you prove it up, you get it into the mine plant, you mine it and you monetize it. That’s a great money making machine and we’re blessed to have a few assets like that in our portfolio where we can continue to deploy cash into exploration around that existing infrastructure.
We are also seeking and pursuing ways to expand existing either mining capacity or processing capacity that squeeze more cash flow, squeeze more value out of our existing assets. Those are the things that aren’t necessarily the sexiest or the splashiest, but are the things that generate the best returns and are good business, and again, we have a lot of opportunities like that within a fairly young stable of operations. There’s a lot of low hanging fruit in terms of optimization and enhancements that are existing assets.
We are allocating some of our free cash flow to, I’d say, to modest share repurchase program of a $100 million. We’ve completed $32.5 million of that. That was approved by our board last June. So we’ll keep sort of nimbly in a way at that repurchase program, as a way of sort of acknowledging our investors strong and speared head requests for some return of capital. We don’t see ourselves, being a dividend paying company with the size of company we are and with the number of opportunities that we see in our sector to generate mid-teen or higher rates of return.
We feel like, it’s our job to redeploy the cash into those opportunities once that list of opportunities shrinks and nothing then we should consider how to allocate that cash flow differently. But in the meantime, we will continue to deploy cash into opportunities that are return in excess of our cost of capital, which has been a concept this industry has not really draft over the last 10 or 20 years.
I had mentioned here a number for earlier, the U.S. is becoming a bigger part of our overall mix. We have a mine in Alaska called Kensington, which is a gold mine, which is ramping up its production after we took about a year and kind of strip that thing down to the frame and then put it back together again, to really create a sustainable long life operation and then we have a mine in Nevada called Rochester, which is also undergoing an expansion. And so those two U.S. assets are making up a bigger piece of our overall sales in production base. And then on the valuation side, I won’t talk much about that, but we’re trading very and expensively at about 3.5 times cash flow. So if you feel like putting some precious metal exposure in UPA, CDE might be worth checking out.
And just a quick snapshot, we have a very healthy balance sheet. We did our inaugural high yield issue with Barclays in January, so we’re sitting currently with total debt on the balance sheet of just little over $300 million. We have cash today of about $235 million. We used about $100 million of the cash balance that you see here on this slide to fund an acquisition that we just completed in April. So that leaves us with net debt of about $70 million on cash flow of EBITDA of about $337 million. We also have a $100 million revolver that remains undrawn.
Here is what we focus on as a company and I think from my comments you can already – you’ve heard some of these themes already. But these five priorities are really what we’ve been focusing on at this company in the first four are really built on top of the bottom, kind of foundation, which is the organizational structure of the business.
We grew so fast over the last five years that the organization has really – we’ve been playing a lot of catchup and I’ve been spending a lot of time on getting the organization and the technical and financial talent in place to really support and sustain the business that we’ve grown into, and then also ensure that we have an organization in place that’s scalable to add and manage additional growth. And without that that building block at the bottom, the top four are very difficult to achieve and just hitting our production guidance and performance targets that I’d mentioned, increasing our reserves and resources the way I mentioned, consistency and reliability at all of our operations as much of a people driven priority as it is an asset or technical priority.
Again, maximizing the cash flow, there are a lot of ways that we can squeeze more margin out of our existing assets and we are moving aggressively on those opportunities and as far as investing in new opportunities, this is a market where capital has kind of flowed out of precious metals and into other sectors. We have seen the non-producing portion of our industry, the companies that have a great project or late stage exploration opportunity, very starved for capital and a lot of those guys have great assets, but are just are hitting the wall from the liquidity standpoint. And so, there are, what we consider to be a lot of – there is a lot of dislocation in the market right now and so we’re being selective, but we’ll be opportunistic about ways we can grow the business in an incremental fashion taking advantage of those cash-trap junior companies.
Just a quick overview of our asset base, you can see we have a pretty diverse set of assets, running up and down the Americas. What you can see on this map are the blue boxes represent our existing operations. San Bartolomé down in Bolivia was started up in 2008. Palmarejo is Mexico was started up in 2009. Kensington up in Alaska was started up in 2010, and then we completed a major expansion project in Nevada at Rochester in 2011. So that’s where a lot of – that’s where all this growth has come from. The brown boxes represent some of these junior companies that I just mentioned where we have an ownership position anywhere from 5% to 15% of the shares of these companies.
Typically, their market caps are in the $50 million to $100 million range. They have projects that we think we ultimately would one day like to own, build and operate ourselves. And so taking most toehold positions has been something that has made up a piece of overall external growth strategy. It’s not our internal growth strategy, but it’s a piece of it, and we have some real interesting opportunities there we think. The red box over on the right La Preciosa is our newest asset, I’ll talk about that in a second. We just completed an acquisition in April that brought us that asset in Mexico.
So we have I think a healthy mix now of producing assets, new projects, and earlier stage opportunities in the brown boxes that are underpinned by a significant number of ounces of silver and gold. About 800 million ounces of silver and about 5.5 million ounces of gold, so that what that implies is very long mine lives for these assets
Just a quick update on our four key operations, which can’t quite see all of this bullet points, I apologize on the slide there. But I mentioned the Kensington gold mine just working from north to south that’s a 100% gold. It’s an underground operation that has now been ramping up quite significantly. Costs have been declining on a run rate basis. Kensington will produce about a 115,000 ounces of gold a year. Cost range somewhere in the $900 to $950 an ounce area. So for us Kensington is a nice cash flow asset for us.
In Nevada, I mentioned Rochester that’s actually our oldest mine. It has been running for 25 years. If you ask me which asset of ours I’m most excited about? I would say, Rochester, even though it has been around that long. What we are now finding is that, the highest return opportunities we have within our portfolio and really looking outside at the industry in a larger sense, Rochester represents some great high return growth for us.
Over the last 25 years in lower price environment, a lot of material that was mined was considered waste, because it wasn’t economic at lower prices. So those make up what you call waste jobs well. At prices in the 20s actually anywhere really above $12 or $13 an ounce for silver. Those waste dumps become economic to reprocess in mine. And so the future of Rochester now is really transitioning from an open pit operation to one where we are reprocessing an existing economic stock piles which is great business, because it’s already crushed, it’s already been mined. It’s already sitting on the surface, we just need to reprocess and get it out on to leach pads and under leach. And that will produce a lot of silver and gold over a lot of years. We have an annual capacity – processing capacity at Rochester of around 15 million tons of ore a year. And we have about 150 million tons of stockpile material.
So just looking at the stock pile, there is a real healthy future there. And that excludes or doesn’t take into account the existing reserve and resources that we have at Rochester which exceed 300 million tons of material. So there is a lot to do at Rochester and growing our business in Nevada even further is something that we find really attractive and exciting. Palmarejo that’s our biggest operation, it’s a silver and gold mine.
It has an open pit and an underground component sitting in the state of Chihuahua in Mexico. It had a rough end to 2012, where we got a real off plans grades with lower tons, we’re lower. But I’m happy to be able to say that with March and April and May results being very strong. We feel real confident about the full-year outlook for Palmarejo, which should be around $8 million ounces of silver and around 100,000 ounces of gold, which makes it one of the top five silver mines in the world and one of the largest in Mexico, which is a big deal, because Mexico is the world’s largest silver producing country.
And there is so much upside at Palmarejo. I mean we have owned that thing since 2007, but we haven’t set foot on about 80% of the ground that we control. We’ve been so focused on getting the mine built and started up and running efficiently that we’re only now really starting to fund that what I consider to be an appropriate exploration program and we will continue to see new ounces of silver and gold added there into the resource categories and then ultimately into the reserves and into the mine plants. So I think the outlook for Palmarejo is really exciting.
San Bartolomé down in Bolivia, that’s our surface, 100% silver mine that has probably, because it’s been the mine that has been operating the longest since 2008, it’s really hit at straight as far as consistent operations. About 5.5 million ounces of silver production a year costs around $13 an ounce, and we’re investing about $17 million this year and expanding the processing capacity of San Bartolomé, so that production can go up, cost will come down. And that investment, for example, has less than a two-year pay back and will allow us to produce over 6 million ounces there into the – annually into the foreseeable future.
A lot gets talked about as far as Bolivia goes, just a few things on that. One is Bolivia is becoming less and less a part of our business. If you look at our first quarter cash flow, you can see here San Bartolomé made up 18% of our overall operating cash flow, which puts it, I guess fourth among these four mines. It used to be that San Bartolomé was a real key part of our business. But that’s going to continue to decline. We have some very unique and strong relationships in Bolivia with the government, with the local community. The way we own or the way we hold our mining rights there is very unique, and in effect puts us in partnership with the state owned mining company.
So you see a lot of headlines come out of Bolivia. But I don’t lose a lot of sleep about nationalization or anything major taking place in Bolivia because of those relationships we have and then also the type of operation that San Bartolomé is.
Bolivia has a very long and rich mining history of over 500 years, entirely made up of underground narrow vein silver and gold – silver, lead, and zinc operations. What San Bartolomé is, it essentially we are mining surface, deposits that have accumulated over the last 500 years from underground mining that have accumulated around the circumference and kind of the base of a big mountain.
So it’s almost like a big [gravo] operation. So it’s very low grade, high tonnage and in lot of ways, it’s an environmental clean up project that we’ve got going there. And of course, the local community really likes that, the government really likes that. And so, the processing that we undertake there and the type of processing infrastructure we have there is unlike any other operation in Bolivia. So it sort of stands out as a different operation compared to the typical mines you’ve seen in Bolivia.
So it continues to be a good cash flow operator, not a country where we see ourselves investing more capital, but generates a lot of cash flow for us. It just shows the ramp up in production that I mentioned earlier. We have really on the gold side, ramped things up, I think, by a factor of almost six since 2008 in this portfolio. We’ll continue to generate these kinds of levels of production looking out into the future.
I mentioned the acquisition we closed in April. It’s a $280 million deal to acquire a company Orko Silver, which owned the La Preciosa asset in the state of Durango in Mexico. It’s one of the world’s largest undeveloped silver projects. We are currently working on a preliminary economic assessment that we’ll have done by the end of June. It’s a size of acquisition and a size of capital that fits well for a company our size and we are not interested in taking on a multi-billion dollar project in a difficult location. This is right off of paved highway, 75 miles outside of the City of Durango, great infrastructure.
The CapEx should be somewhere in the $300 to $500 million range, which is something when you look at the cash flow this business is generating and the cash we have on hand, is not a stretch. It’s not a company maker or breaker. We see this being the kind of asset that will generate around 7 million to 10 million ounces of silver a year. Cost should be in the $10 an ounce range, and it should have about a 20-year mine life based on the amount of mineralization known today, and we see a lot of opportunity to grow the resource space. So we think it’s going to be a cornerstone asset for us for a long time.
This is just an aerial shot of what the topography looks like and where we expect the main components of the asset to be located and the timetable there. I mentioned the PEA by the end of June. We’ll go into a feasibility study process then for about a year. First production would be expected late 2016. This just breaks up the CapEx that I mentioned earlier for the year between sustaining and growth. And we did a slide in here that just shows our balance sheet quarter-by-quarter for the last five quarters as well as quarterly EBITDA down there at the bottom, so you can see the strength of the overall cap structure and cash flow.
And the guidance that I mentioned earlier on production of 18 million ounces to 19.5 million ounces of silver and 250,000 ounces to 265,000 ounces of gold is broken out here by mine and compared them to 2012, which shows relatively flat production on the silver side and a good bump again on the gold side and at cost that are real attractive even at slightly lower metals prices like we are seeing currently.
So just as a quick wrap up and we are spending a lot of time here putting the pieces in place to retool this company and put it on real solid footing for the long-term, that’s something that has, it will never end, and it’s a process that takes time and it’s a lot easier to say and a lot harder to do, but it will be foundation really for the business over the long-term and we hope it will become a real sustainable competitive advantage for the business.
I think, we’re redeploying our cash flow in various smart ways. We’re trying to get our costs even lower and more efficient at our projects. We’re very focused on capital efficiency and we will continue to be opportunistic as we look at new ways of growing the business nothing big, but where we see value, we will take advantage of those situations. And like I said we feel like the equity here is really undervalued and are putting a lot of cash behind that view. So that’s a quick update of the business and don’t have a lot of time now, but I’d be happy to try to answer any questions that you might have.
Matthew Vittorioso – Barclays Capital, Inc.
Thanks, Mitchell. Maybe just on Orko, is this an asset that you guys knew very well going in, any surprises as you’ve gotten in there to really kick the tires? And then secondarily, as you think about additional M&A in some of these opportunities that you have in front of you, do you need to digest Orko and get some of that build out behind you before you move on to anything else? Thanks.
Mitchell J. Krebs
Yeah, we knew La Preciosa really well. We first set foot there in 2007. So we did – we’ve done a lot of diligence there. It’s a bit of a tweener as far as an ore body goes because it’s not plate high enough grade to be an underground mine and the way the ore body sits in the ground, it just doesn’t set itself up for efficient underground mining, and so what we’re going to do is take the whole thing as a big pit. So we did a lot of – spend a lot of time on, and our diligence was again, moving all of that waste material to get to that main ore body is that economic, does that makes sense, we think it does, and so we haven’t had any surprises.
We’re moving right now on the biggest priorities, which is land acquisition, water rights and then the [SPEA]. And as far as your second question, yeah, we won’t go out and buy any new standalone project for the foreseeable future to the extent that we can find bolt-on, tuck-on – tuck-in kind of things where we are not starting from scratch. I put those in a different category, but the organizational strain is significant when you put something like a La Preciosa in place. So that’s going be our big standalone growth project for the foreseeable future, but we will continue to look for ways of, really goes back to that philosophy of trying to leverage existing infrastructure whether it’s people or processing or reserve resource whatever we can to leverage our existing portfolio.
Matthew Vittorioso - Barclays Capital, Inc.
How do you guys think about hedging? And obviously you guys generate great cash flows at these prices. You’re not getting credit for it in the equity market at all.
Mitchell J. Krebs
Matthew Vittorioso - Barclays Capital, Inc.
As most of your competitors are, do you think hedging would help or is this just a, you mentioned sentiment is obviously at what might be all time lows, valuations are very low. So how do you think about hedging, locking in that cash flow? And secondly, there are other financial buyers who can certainly hedge over longer periods of time and lock in what are very attractive cash flows, have you seen any sort of private equity interest or other financial buyer interest in the sector at this point?
Mitchell J. Krebs
Yeah, I’ll answer the second one first. Have seen more private equity money looking at the space, which I think is healthy because I think this is an industry that has underperformed and is right for some real discipline, I think, that could be brought to the industry by private capital. So I kind of welcome that.
On hedging, if I was at an equity conference, I’d probably get stuff thrown at me for saying this, but hedging is not – doesn’t have to be a bad thing. I mean, it’s a dirty word in our industry, but we’re at this inflection point in this industry after years of underperformance, after years of companies not earning their cost of capital, I talk to so many equity investors, who say 10 years ago, they made the macro call that silver and gold prices were going to go up, so they decided to buy the equities of silver and gold producing companies and even though they got that macro call right, they have not benefitted from it.
And now, we’re in this new world of return, high returns, discipline, which should be just standard operating procedure. And so these equity guys are kind of at – they are kind of straddling the fence I think, because they are saying, generate returns that exceed your cost of capital, but don’t cap my upside, I want full exposure to the metals price and you can’t really have it both ways. I mean we can go out all along and get 20% rates of return, and but we need to use some hedging, and I’m not against that. I think, you can do it ways that, obviously protect the downside and still leave a little bit upside towards the equity.
And I think that’s the kind of thing that, this industry needs to embrace now that, I think the spot light is finely on this sector to run these companies like real businesses and not just like a leverage option on a metal. So those are my – that’s my $0.02 at least.
Okay. Well, I appreciate your time and the questions and thanks again for the invitation from Matt to present and have a good day.
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