Eyeing Miner Coeur d'Alene to Profit From the Silver Bull

by: Mark Thomas

If you want profit from the bull in silver, we at silver-short-squeeze suggest three simple things:

  1. Own some physical silver. Bars, coins, etc.
  2. Own an ETF that gives you exposure to Physical Silver like Physical Silver Shares Trust (NYSEARCA:SIVR)
  3. You must also own some mining stocks that have a majority of revenue from Silver, not gold. Of the potential silver mining stocks to own, the one with the most compelling upside and highest reward to risk ratio is Coeur d’Alene Mines (NYSE:CDE).

One thing you will learn about us is that we are flexible. Because we are active traders, if the market offers us good opportunities, we buy, sell and then buy again. This is an example where we pounded the table for Coeur d’Alene making it by far our largest mining positions at $26.90 just a couple of trading days before the company reported earnings Monday February 28th. Then on Monday March 7 on the open, we sold them at $35.40 for a 31.44% gain. That was our biggest score in the short history of this newsletter. I will be honest with you, I can’t remember the last time I had a 30% gain in a week. I’m usually too conservative to be in stocks that move like that.

Monday night we went back and looked at the earnings transcript for the second time and reviewed our prior research on the company. I’m telling you this company has the best combination of assets, capital structure and leverage to silver prices except for Silver Wheaton (NYSE:SLW). Silver Wheaton trades at nineteen times 2011 revenue, which is a valuation I have only seen in technology and concept stocks before. I’m not saying you can’t own Silver Wheaton but it is like a Porsche compared to a Ford pickup truck for Coeur d’Alene. You just have to know what you own and what you prefer as an investor, so you’re prepared for the unexpected. In fact even though we’re embarrassed for selling it and now trying to buy it back only 4.5% lower one day later, that is what we are going to do.

There is one silver and gold mining stock that even after an incredible surge of 24% Y.T.D is still a must own if you want exposure to silver and precious metals mining in general. It is considered one of the large caps in the silver sector with a total enterprise value (market cap + debt) of $3.2 billion. That is still a mid-cap stock market cap wise and with so few stocks in the sector it makes it very attractive along with Silver Wheaton to institutional investors who need some liquidity before they decide to enter a stock. It is a stock that continues to be undervalued because the quality of its current assets still aren’t being fully recognized, much less some future growth. You combine that with the fact that the company has a history of disappointing investors and even with stellar results reported February 28th; the stock is a buy on any pullbacks if you’re an investor with a 6-12 month time horizon.

We sold the stock March 7, 2011, for a 31.44% gain in just one week. However it closed that same day 4.57% off its intraday high of $35.66 so we are looking to buy the stock on any pullbacks. We are going to make the stock our largest position again with 24% of our portfolio in the stock. For the first time since our inception we will only be 25% exposed to physical silver and 75% to silver miners. Within that 75% exposure to miners; 24% is in the larger cap established miners like Coeur d’Alene, 21.5 % in smaller cap but undervalued miner like US Silver. The remaining 30% is in two small cap exploration miners like Fortuna Silver (FVITF) and Avino silver and Gold Mines (ASGMF).

Coeur d’ Alene is still definitely our favorite miner in the sector. Remember Silver Wheaton is my favorite stock in the silver sector it is a silver royalty stream company, which is a different business model in that it doesn't own any mines, just the right to production in exchange for upfront payment. What we really like about Coeur is they remained aggressive during the recession and weren’t afraid and went forward with big investments when labor and materials were cheaper when others in the industry were scared to be so bold. Now because it has three long-life sustainable projects that are all hitting their stride at the right time as metal prices are surging, revenue growth is strong but operational leverage and profit growth is powerful. Its Kensington Alaska mine, which is primarily gold, is new, very efficient and a nice revenue booster. Its Palmerjo mine in Mexico also is a very comprehensive, sophisticated operation.

Even after the stock surged 25% in the last few weeks, because its fundamentals are so much better now the stock’s valuation is still not expensive relative to its peers in the sector that are much smaller and not as well established. Coeur now should have 2011 revenue of $860 million and earn about $2.70. That means it trades at a relatively low 3.8 times 2011 revenue. I think five times revenue should be the maximum valuation in the sector. That would make this stock worth about $45 or 32% higher over the next 6-9 months.

We estimate Coeur can earn $2.70 per share in 2011, which makes the stock just 12.6 times earnings. You pay less than a market multiple (15 times earnings) for a mining company with assets of millions of ounces of gold and silver, some nice new plant and equipment, incredible cash flow leveraged to rising metals prices at a discount to the market, what an incredible bargain! Even at these levels this stock over the next twelve months will still be one of the best stocks to own, not just in this sector but in the market overall. If the stock got to $45 that would still be only 16.6 times this year’s earnings, which in this sector is achievable. We think the company will earn $3.10 in 2012, so that means it’s currently priced at ten times my 2012 estimate. Once again very reasonable valuation, strong fundamentals and institutional investors scrambling to get exposure to the sector can just send this stock flying higher in the next 6-12 months, just like it did in the last two weeks.

We like to look at the possible reward to risk ratio in a stock to justify a purchase. In this case Coeur could fall back to about $31- or about 8.8% lower than its current price - but the stock could go up to $49 for a 45% gain. Therefore the reward to risk ratio is almost 5 to 1, which is very rare. We prefer at least two to one and this high of reward to risk is very unusual. In fact this stock isn’t in the mid-cap S&P 400 yet and we think Standard and Poor’s will be looking to add basic materials and mining companies as they are back in vogue again.

When we do reenter CDE it will not be a short-term trade like most of our positions recently. We have such high confidence in this one we are going to build our position over a number of days and we won’t allow the swings up and down in the market to affect our emotions. Obviously after such a big run you need conviction to back into this stock and purchase it again. So we suggest you do some quick homework. Read the earnings call transcript or listen to a replay, and look at some presentations.

Our service is designed to do your homework for you and then inform you of all trades that we make. You can choose to follow our lead or not based on your individual preferences. In this case we want you to have maximum investment conviction so the market doesn’t whip you around, so we suggest you do some homework. Of course we have laid out exactly what you need to do so it won’t even take 20 minutes on your part.

See the full earnings call transcript.

Quarterly presentation (pdf)

CEO interview on CNBC

Presentation on Exploration (pdf)

Presentation on new Kensington Alaska Gold Mine (pdf)

Some of the past knocks against Coeur stock surrounded its high debt levels but debt now stands at just $214 million, or less than 10% of equity and 26% of annual revenue. With its large cash investments now over and with the company producing both revenue and earnings the cash flow is rising along with metals prices. This company can now start paying down debt and possibly initiating a small dividend. In fact long-term, this stock offers the most upside in the silver mining group. This is a $34 stock that could be worth $49 in the next six to nine months for a possible 44% gain. So what we will be building our position over four days beginning Tuesday on the open. We will buy a 6% position on the open each day finishing up Friday to average our cost.

Disclosure: I am long SIVR, CDE.