Coeur aims to fortifies cash position with senior note offering

VANCOUVER — It has not been a very hospitable market in the silver space over the past four months, with prices for the precious metal dropping from a high of US$37 per oz. in late February to a low of US$27 per oz. by late June. Though U.S.-based producer Coeur D’Alene Mines (CDM-T, CDE-N) has seen equity valuations struggle along with the rest of the sector, the miner could also look at the shrinking multiples amongst its junior counterparts as an opportunity to make a thrifty acquisition.

Coeur remained on track to meet its 2012 production guidance during the first quarter with silver production totalling 4.9 million oz. and gold production clocking in at 43,900 oz. — the company expects to produce between 18.5 million and 20 million oz. of silver at average costs around US$7 per oz., assuming a US$1500 per oz. gold by-product credit. Cash costs also remained within projected ranges, totalling US$6.29 per oz. silver, which marked a 25% year-on-year quarterly decrease.

Despite solid surface numbers over the first quarter, digging a little deeper unveils a few less-than-stellar performance metrics. Net cash provided by operating activities dropped from US$36 million in first-quarter 2011 to US$17 million over the same period in 2012, with the company attributing the fall to a significant tax payment in Bolivia and an increase in its inventories. Coeur’s quarterly earnings were negatively hit, with net income tumbling 68% to US$4 million or 4¢ per share — down from US$12.5 million or 14¢ per share last year.

Though cash costs dropped to record lows at Coeur’s flagship Palmarejo silver-gold mine in Mexico, the majority of the company’s other producing assets saw operating costs on the rise. By far the biggest culprit was Coeur’s Martha silver mine in Argentina’s Santa Cruz province. Martha produced roughly 123,000 oz. of silver over the first quarter as its cash costs jumped 90% to US$46.48 per oz.

Coeur announced in late June it would likely be facing an impairment charge during the second quarter on its assets in Argentina, citing rising production costs and a short remaining mine life. Coeur reported Martha’s asset valuation at US$24.2 million, with total company assets of US$3.2 billion at the end of March.

According to a corporate filing “the charge may result in future cash expenditures and may be significant to the company’s quarterly and annual results”. Coeur intends to cut operating costs and process more above-ground stockpile material in a bid to minimize losses at the mine.

Though the company is grappling with inflationary pressures — including safety issues and ramp-up delays at its Kensington gold mine in Alaska and labour disruptions in Mexico at Palmarejo — it remains in a strong liquidity position, reporting US$153 million in cash and equivalents to end March.  

Couer moved to supplement its cash position on June 26 when the company announced a senior notes offering to the tune of US$350 million, as well as its intension to enter into a US$100-million secured revolving credit facility. Coeur indicated the extra cash would be used to “fund internal and external growth initiatives”, suggesting the silver producer could be on the lookout for value acquisitions.

Bank of Montreal Capital Markets analyst Andrew Kaip maintains a $31.50 price target on the company with an “industry outperform” rating, and sees the jump to roughly US$500 million in cash and equivalents as an opportunity,

“The recent compression of multiples in the junior silver sector combined with the debt offering provides the company with the means to make a timely acquisition without diluting existing shareholders,” Kaip wrote in a June 25 research update.

Standard & Poor’s (S&P) Rating Services assigned Coeur a “B+” corporate credit rating along with an issue-level rating of “BB-” for its proposed senior note offering. The ratings agency cited the potential for deteriorating silver prices and questionable growth in metals demand given the state of the global economy,

“The stable rating outlook reflects our view that metals prices will remain high enough to support performance consistent with the rating despite high operating costs and price volatility,” noted S&P credit analysts. “Risks to our forecast include the company’s past operating difficulties and cost escalation throughout the industry. We believe the company’s cost position may challenge its ability to remain profitable should prices fall to historical levels.”

Coeur has fallen in tandem with the rest of the silver sector as precious metals prices have weakened during the second quarter. Company shares are down 36% or $10.10 since the beginning of March en route to a $17.51 presstime close. Coeur has 90 million shares outstanding for a $1.6 billion market capitalization.