Stock prices in the commodity sector are at almost unprecedented levels right now. While the U.S. stock market advances to 52-week highs, the commodity sector has been declining as money flows out of safe havens and into equities and the perceived safety of the U.S. dollar. Chasing alpha in Dow stocks that have already rallied 15% this year, precious metals investors have been selling their bullion and going on stock-picking sprees. Never before, and perhaps never again, will investors be able to purchase shares of the biggest mining stocks in the world trading at such staggering discounts. Many are trading at 50% off their valuation from even just a few months ago. This mining sell-off has created some incredible opportunities for investors, the best of which in my eyes is Coeur Mining (CDE), the largest U.S. silver producer with over 2,000 employees.
Previously named Coeur d'Alene Mines Corporation, Coeur Mining has radically restructured its operations to achieve the most streamlined and shareholder-friendly position possible for today's silver market. As profit margins have tightened with declining silver prices, Coeur Mining has completed top-down reviews of the firm, replacing the CEO, adding board members, optimizing staffing levels, completing share buybacks of over $32 million, moving corporate headquarters, completing a $300 million financing, achieving record cash flow, and reducing costs across the board. It has one of the strongest cash and cash flow positions in its industry: $332.8 million in cash equivalents and $12.9 million in cash flow for the first quarter. Almost unparalleled in the major mining industry, one-fourth of Coeur Mining's market capitalization is cash.
Coeur earned 8 cents per share in the first quarter of 2013, producing 3.8 and selling 3.1 million ounces of silver, and producing 56,913 and selling 51,926 ounces of gold. Full-year production guidance for the firm is 18-19.5 million ounces of silver and 250,000-265,000 ounces of gold.
Safest bet in the silver space
What makes Coeur particularly attractive is its geography and CEO Mitch Krebs re-iterating that their internal focus is on decreasing geopolitical risk by increased attention on domestic production, particularly at its signature Rochester mine in Nevada. It operates two of the top 10 largest primary silver mines in the world. Its international presence is concentrated in five of the top 10 silver producing countries, with a major focus on U.S. production.
Natural resource investors have learned the hard way that geopolitical risk is actually one of the most understated risks in the space. Recent failures by major mining companies illustrate how even "safe" stocks can shock investors with overnight disappointments.
- Barrick Gold (ABX) was forced to close a mine in Chile when the Copiapó Court of Appeal suspended all work due to environmental damage and assessed a $16 million fine. Barrick has lost over $20 billion in market capitalization over the last year.
- Just a few days ago, Kinross Gold (KGC) announced that it would not proceed with its Fruta del Norte project in Ecuador, one of the highest grading deposits in the country and likely requiring a $720 million write-off. Like Barrick, Kinross has lost billions in market capitalization since last year.
- In Peru, a JV project between Newmont Mining (NEM) and Compania de Minas Buenaventura (BVN) was rumored to be closing, and although the companies are pushing ahead despite weakening gold prices, 36% of Peruvians think the project should not proceed.
- In the natural gas market, Petrobras (PBR) recently pulled out of Peru as part of a $9 billion "shedding of assets" program due in no small part to the geopolitical risks of Peru. In one not-so-unrepresentative example, unfortunately, security officials recently fired tear gas and live rounds on protestors in a Peruvian copper mine. Deaths in Peruvian mines are double the number in neighboring Chile, and large protests for humanitarian, environmental, and economic reasons are becoming commonplace.
Focusing Domestically to Reduce Geopolitical Risk
Coeur Mining understands that mining abroad is riskier than anyone likes to believe, so it is focusing its efforts domestically. Its biggest growth came from its Rochester silver mine in Nevada- arguably the safest location to mine in the world. Silver production at Rochester rose 47% and gold production rose 65% for the first quarter of 2013 versus the same period in 2012, contributing 23% of the company's total operating cash flow.
Leading all projects on a percentage growth basis, Coeur Mining is responding with capital expansion to raise its Rochester mine's 2013 production by 35-50% versus last year to 4.5-4.9 million ounces of silver and 45,000 ounces of gold. It will expand the capacity of Rochester's primary crusher to 14 million tons from 9.0 million tons and the mine's heap leach capacity to 67 million tons, which will help keep production rates higher as it processes ore from historic stockpiles from the mine's 26 years of operation. Yes, a 26-year old silver mine in Nevada, and still one of the biggest and most reliable silver mines in the U.S.
With over 1/4 of its market capitalization in cash equivalents and its focus on safe production free of geopolitical risks, Coeur Mining is one of the best bargains in the major mining space today. Silver as an investment is attracting not only institutional but governmental interest at current prices. The metal has double-digit upside by itself, and Coeur Mining is particularly leveraged to the upside as the leading domestic producer. If investors are interested in companies trading for 50% off their valuation last year and limited in downside by raw assets, look no further than this cash-rich, major silver producer with minimal geopolitical risks and double-digit production growth.
The big potential risk with Coeur's new vision that they have discussed at length for the past six months is the potential hindrances they may have to their expansion plans at Rochester. The outstanding lawsuit with Rye Patch Gold, regarding claims at the south of Rochester around Coeur's Nevada Packard mine, could be an issue. Should this lawsuit not go as planned, Coeur might be somewhat more limited than they would like with their expansion plans at Rochester.
As a potential work around to this lawsuit, Coeur was smart to make a strategic investment in Pershing Gold. Pershing has quietly amassed a significant land position to the south of Rochester and could otherwise hinder Coeur's expansion plans to the south as well.
For a full list of risk factors as outlined by Coeur see here.