Coeur Mining: Is La Preciosa A Lemon?

Jul.31.13 | About: Coeur Mining, (CDE)

When Coeur Mining (NYSE:CDE) beat First Majestic Silver (NYSE:AG) to one of the largest undeveloped silver deposits in Mexico called La Preciosa earlier this year the $11.6M break fee seemed but a small consolation price for First Majestic to collect. Coeur ended up paying $100M in cash plus 11.6M new shares to Orko Silver share holders, the previous owners of the project.

A few months on and Coeur has just filed a PEA for an open pit mine at La Preciosa - and First Majestic share holders may just have the last chuckle in the matter.

The PEA assumes an open pit operation with a plant capable of processing 10,000 metric tonnes of ore per day. The flow sheet for the proposed plant shows a fairly standard process. Measured and indicated resources of 146.2M ounces of silver and 277,700 ounces of gold are documented in the PEA report plus inferred resources of 37.7M ounces of silver and 60,300 ounces of gold - a very large resources by anyone's yard stick. The measured and indicated component has a grade of 87.5 g/t silver plus 0.17 g/t gold. Reserves are yet to be determined for the project and economic considerations were made based on the documented resources leading to a projected 17 years mine life with the last three years of mill feed being sourced from stock piles. The proposed project includes the construction of 9.7km of new unpaved haul road, a 41 km power line and water sourced from a well field 15km to the south of the mine.

The base case described in the PEA shows an after tax NPV (5%) of $314M and a IRR of 16.8% with a payback period of 5.3 for the initial capital of $348M. Coeur Mining CEO described these numbers as "viable". We suggest that "marginal" would have been a better way of describing these results.

The base case for the PEA considers a gold price of $1500 per ounce and a silver price of $25 per ounce. These price assumptions will seem very optimistic in the light of the ongoing correction in the precious metal sector with prices hovering around $1330 and $19.80 per ounce of gold and silver respectively at the time of writing. The PEA also presents a sensitivity analysis which indicates a clearly negative outcome at current prices as shown below.

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We also noted that the PEA assumes 100% equity financing of the mine construction. At current prices this would mean a dilution of 25% just to build the mine which we hope is not only considered unrealistic by your humble scribe. If management concurs then financing costs will likely increase the upfront price tag.

Coeur has a dismal record of increasing market capitalization by diluting the share registry and share holders should beware of history repeating itself yet again in the context of the La Preciosa mine. Producing a lot of silver is one thing, but doing it profitably is quite another. Last year Coeur produced roughly 30M silver-equivalent ounces for revenues of $895M. The net income was a mere $49M or $0.54 per share. Compare this to First Majestic Silver who produced less than a third of the metals for net earnings of $0.80 per share.

In conclusion, we believe that La Preciosa will need a substantially higher price environment in order to be profitable, or alternatively Coeur will need to pull some impressive optimization ideas out of the hat for the upcoming feasibility study in order to reduce costs and increase margins. We will be watching with great interest when this study is released in mid-2014.

Disclosure: I am long AG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.