Coeur Mining Still Not Inspiring

About: Coeur Mining, Inc. (CDE)
by: Fun Trading

Coeur Mining posted revenue of $154.87 million with EBITDA of $14.26 million and cash flow from operating activities of minus $11.85 million. It was not inspiring.

Coeur Mining produced 78,336 Au Oz and 2.5M Ag Oz during the first quarter of 2019.

I believe the best course of action is to hold your position and wait until gold manages to reverse the negative momentum in which it has been caught lately.

Image: Palmerejo gold and silver complex in Mexico Source: Coeur Mining

Investment Thesis

The Chicago-based Coeur Mining (CDE) fits perfectly the profile of a gold/silver producer with a gold sale representing 69% and a silver sale of 29% of the total revenue this quarter.

The company operates five North American mines, with Palmerejo and Kensington mines as leading producers and Silvertip in a ramp-up phase.

As a reminder, Coeur Mining closed an important deal with Alio Gold (ALO) for the acquisition of the Lincoln Hill Project and other mineral assets. These assets are adjacent to the Rochester mine (the company produces and sells Lead and Zinc as well).

The investment thesis is a little more complicated than usual when it comes to Coeur Mining. The financials below present some definitive weaknesses accentuated by a continual weakening of the gold and silver prices. Worse, it is hard to imagine that the company can change this negative trend in 2019 as Moody's echoed my concerns.

The debt load is quite heavy despite a strong asset base, and the lack of free cash flow for the fifth quarter in a row is not helping. Thus, it is perhaps time to hold your position and wait for support before attempting to add.

I do not consider Coeur Mining as a strong contender for long-term investment, and I believe the only opportunity to profit from this company is to trade short term any weakness below $3.00 or even below $2.50.

Mitchell Krebs, the CEO, said in the conference call:

Each of our five North American based operations are positioned to deliver a higher production at lower costs throughout the remainder of the year and we remain confident in our ability to achieve our full-year production and cost guidance.

Source: CDE Presentation

Coeur Mining: Financials And Production In 1Q 2019

Coeur Mining 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Total Revenues in $ Million 149.5 159.9 214.6 163.3 170.0 148.8 143.9 154.9
Net Income in $ Million -11.0 -16.7 7.6 1.2 2.9 -53.0 0.5 -19.2
EBITDA $ Million 23.4 38.6 69.6 49.4 42.1 -12.3 7.9 14.3
Profit margin % (0 if loss) 0 0 3.6% 0.8% 1.7% 0 0.3% 0
EPS diluted in $/share -0.06 -0.09 0.04 0.01 0.02 -0.29 0.00 -0.09
Cash from operating activities in $ Million 29.3 29.4 94.5 12.9 -1.3 5.8 0.1 -11.8
Capital Expenditure in $ Million 37.5 29.7 45.8 42.3 41.2 39.5 17.8 27.4
Free Cash Flow in $ Million -8.2 -0.03 48.7 -29.5 -42.5 -33.7 -17.7 -39.3
Total Cash $ Million 250.0 236.2 192.0 159.6 123.5 104.7 115.1 69.0
Total Debt in $ Million 244.8 411.3 411.3 414.0 419.7 429.2 458.8 459.0
Shares outstanding (diluted) in Million 179.2 179.3 199.2 187.6 187.5 185.2 199.6 202.4

Source: Company filing and Morningstar/Ycharts

One traditional way to present Coeur Mining as a qualifying long-term investment candidate is to analyze the financials in detail and look at historical financial performance.

It is what I generally do in Seeking Alpha when I present and analyze a gold/silver or an oil company.

Trends And Charts: Revenues, Earnings Details, Free Cash Flow, Debt, And Production Details

1 - Revenues and trend

Coeur Mining posted revenue of $154.87 million with EBITDA of $14.257 million and cash flow from operating activities of minus $11.85 million. The company reported a net loss of $19.201 million or $0.09 per share. The results were short of the Street expectation.

2 - Free cash flow

Coeur Mining free cash flow for the first quarter of 2019 indicates a loss of $39.3 million and free cash flow for the year was a loss of $133.2 million. It was the fifth quarter in a row with negative free cash flow.

Coeur Mining is not passing the test of FCF.

3 - Available capital, no net debt, and ample liquidity

Coeur Mining has total liquidity of $184.0 million.

Source: CDE presentation

The company indicated that liquidity levels are expected to climb during the second half of 2019 due to higher anticipated production levels and lower unit costs.

On May 3, 2019, Moody's downgraded Coeur Mining debt, and it was not helping.

The downgrade reflects a meaningful deterioration in credit metrics and our expectations that metrics will remain weak in 2019 with improvement heavily contingent on operational execution over the next 12-18 months," said Botir Sharipov, Vice President and lead analyst for Coeur...

Moody's projects that Coeur's credit metrics will remain weak in 2019 but should begin strengthening toward the end of the year as the company benefits from higher production at Silvertip, better grades at Jualin deposit at Kensington and La Nación deposit at Palmarejo, normalized operating environment at Wharf and the start-up of the HPGR unit at Rochester. For 2019, using price sensitivities of $1,275 and $15 per ounce of gold and silver respectively, Moody's expects EBITDA to be around $150 million, adjusted debt/EBITDA to be around 3.5x by the year end, and for the company to remain free cash flow negative.

4 - Production in silver/gold equivalent ounce and details

SOE for 1Q'19 has been estimated using 1:83.75 ratio. The company has not indicated the SOE and AISC this quarter, or at least I could not find it.

Coeur Mining produced 78,336 Au Oz and sold 85,326 ounces of gold and 2.6 million ounces of silver during the quarter. Average realized gold and silver prices for the quarter were $1,251 and $15.22 per ounce. The gold average is lower since Coeur Mining sold 8,803 gold ounces for $800 per ounce according to Palmarejo's gold stream agreement.

At Palmerejo mine, the first quarter production was affected by a change in mine sequencing as the company completed maintenance on the Cemented Rock Fill plant. However, despite the shift in sequencing production, output was broadly in-line with the company expectations.

For the first quarter of 2019 at Rochester mine, gold production was 8,256 Oz. Despite challenging bad weather (record snowfall), the crusher enhancements at Rochester remain on track with commissioning activities underway.

At Kensington mine, production for the first quarter was ahead of the company internal expectations with approximately 10% of the ore feed coming from Jualin with an average grade of 0.41 ounce per ton.

At the Wharf mine, production for the first quarter of 2019 was 16,902 Oz.

And finally, at Silvertip mine, the company said in the conference call:

Silvertip has been a drag on the Company's results the past few quarters, we are expecting to see better recovery rates and concentrate grades as mill availability continues to improve and as we begin to mine and process material with grades more in line with our published reserve.

5 - Guidance 2019

Sustaining and developing CapEx for 2019 is expected to be $100-120 million. Production for 2019 is expected to be 334-372K Au Oz and 12.2-14.7M Ag Oz.

Below is the guidance per mine, with Silvertip continuing its ramp-up after being declared commercial on September 4, 2018.

Production outlook seems very conservative and may have disappointed the Street.

Source: CDE Presentation

Note: The total proved and probable reserves, as of Dec. 31, 2018, represent 171.3M Oz of silver and 2.8M Oz of gold.

Conclusion And Technical Analysis

Coeur Mining has not managed to create what the market needs to support the stock despite a volatile and weak price of gold. Yes, the miner offers excellent potential for growth with Palmarejo, Rochester mines, and Silvertip, but the balance sheet is quite too weak with a debt level elevated and a recurring negative free cash flow as Moody's explained above.

One crucial financial component is the free cash flow in 1Q'19, which show a steady and significant loss.

As I said in my precedent article, valuation is a concern with the price of gold unable to trade above $1,300 per ounce. Thus, the stock price is now drifting lower in search of a fair valuation.

I do not see CDE as a robust long-term contender as we speak and it is possible that the stock may further degrade below $3 if the gold price remains uninspiring.

I believe the best course of action is to hold your position and wait until gold manages to reverse the negative momentum in which it has been caught now. I will be attracted only if the stock reaches the $2.50 mark, assuming better results in H2 2019. Terry Smith said in the conference call:

we are anticipating strong results in the second half of 2019 from each of our operations. Delivering on these plans is the single most important thing we can do to return the company to positive free cash flow in 2019.

Technical Analysis

CDE experienced a negative breakout of its channel pattern in April, and since then, it is dropping steadily in search of elusive support.

Theoretically, $3.00 is long-term support, and it could make sense to add a little at this level. The line support is formed by the low in March-April 2017 and today's low. However, if this support cannot hold, CDE can eventually retest its all-time low at $1.75 (I recommend buying at this level).

The gold and silver prices are paramount in the direction of the stock.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.