Seeking Alpha
Contrarian, arbitrage, commodities, gold & precious metals
Profile| Send Message|
( followers)  

Coeur d'Alene Mines Corporation (NYSE:CDE) is a very interesting silver play, which was on my list to buy. The company's properties are located primarily in the United States, Australia, and South America. The properties have 200 million ounces of silver ($US 6.6 billion) and 2.5 million ounces of gold ($US 4.3 billion) proven and probable reserves. This translates to 60% silver and 40% gold. So Coeur d'Alene Mines Corporation is essentially a silver play and that interests me because I'm bullish on silver.

Notable is that Sprott Asset Management significantly increased its position in Coeur d'Alene Mines Corporation in September of 2011. On 06/30/2011, Sprott Asset Management reported holding 65,500 shares with a market value of $1,589,030. This made up 0.21% of the total portfolio. On 09/30/2011, Sprott Asset Management reported holding 1,359,200 shares with a market value of $29,141,249, for 3.65% of the total portfolio. The net change in shares for this position over the two quarters is 1,293,700. Since Sprott Asset Management bought in last year, the share price hasn't moved at all, so there is still time to buy in. Let's investigate why Sprott Asset Management has increased its position so much.

1) Valuation

Book value is $US 2 billion (of which 95% are mining properties), market cap is $US 2.4 billion. Price-to-book value is a mere 1.2, so this is a perfect value play. It has little cash on hand (10% of equity), so prospects for further growth are low.

The cash flow has been increasing dramatically since 2009 because its three mines came into production: San Bartholomé in Bolivia (started production in April 2008), Palmarejo in Mexico (started production in April 2009) and Kensington in Alaska (started production in July 2010) (Chart 1). Growth in production is pretty impressive.

(Click to enlarge)

Chart 1: Operating Cash Flow - pdf

Although cash flow has been increasing rapidly, the net income isn't as rosy as it would seem (low net margins).

Due to fair value adjustments from the Franco-Nevada gold royalty obligation (January 2009) (higher gold prices = higher royalties to be paid) and put and call options (hedging premiums) the net income is significantly lower than cash flow (net income ~ $US 100 million):

  • $US 12 million (Q1 2011).
  • $US 37 million (Q2 2011).
  • $US 28 million (Q3 2011).
  • Q4 (reported on 23 February 2012).

This translates to a pretty high P/E of 24, which is not good. The royalty payments are pretty significant (around $US 60 million/year). The call and put options are another concern, the company needs to pay premiums for these options and can be seen as insurance during high volatility. If there isn't any volatility though, the company loses money, but in return you will get a very stable company.

2) Growth

  • Palmarejo in Mexico is by far the biggest revenue generator ($US 170 million revenue in Q3 2011), but loses 25% due to gold royalties. Its mine life is increased from 8 to 10+ with the Guadalupe exploration.
  • San Bartolomé is the second biggest revenue generator ($US 100 million revenue in Q3 2011) with 13 years of mine life.
  • Then comes Kensington ($US 44 million revenue in Q3 2011) with 12 years of mine life.
  • Rochester, Martha, Endeavour total $US 30 million revenue in Q3 2011.

These numbers aren't impressive compared with the market cap of the company. But their growth rate is massive! All mines at least doubled their revenue from 2010 to 2011 (Kensington grew tenfold). If they keep growing like this we could see low P/E ratios going forward.

Conclusion:

The company notes at book value, which makes it a value play on mining properties. The growth rate is impressive. The company is very stable in price due to call/put options. Due to the high P/E ratio of 24 I wouldn't count on huge increases in stock price unless the company delivers on high growth. Its net margins are low due to royalty payments. The cash on hand is low compared with equity.

I think Eric Sprott bought this company as a pure, stable, "non-risky" value play. I wouldn't buy it myself.

Source: Coeur d'Alene Mines Corporation: An Analysis