Coeur Mining downgraded on heightened balance sheet risk

Despite Coeur Mining (TSX: CDE) reporting June-quarter production and costs mainly in line with Bay Street estimates, at least one analyst has downgraded the issuer while flagging concern over perceived balance sheet risk over the coming 12 months.

Canaccord Genuity Capital Markets analyst Dalton Baretto has downgraded the issuer to ‘HOLD’ from ‘BUY’ and is modestly reducing his target price to US$3.50 per share from US$3.75.

His downgrade is underpinned by the limited implied return to his target price and the heightened technical and financial risks surrounding the company over the next 12 months through the completion of POA11 development at the Rochester mine in Nevada and the Silvertip asset in British Columbia’s continued languishing on care and maintenance despite some encouraging recent exploration results.

The miner, on August 3, reported its operating and financial results for the second quarter, posting a second-quarter loss of US$77.4 million after reporting a profit in the same period a year earlier. The Chicago-based company said it had a loss of US28¢ per share. On an adjusted per-share basis removing the non-recurring costs, the headline loss amounted to US5¢ per share.

As of June 30, Coeur had total liquidity of about US$$435 million. Baretto’s estimates indicate that the company will need to draw down its entire credit facility and source external funding of US$105 million, thought likely via liquidation of its equity stakes in Victoria Gold Corp. (TSX: VGCX), amongst others.

The analyst notes that this analysis assumes a US$1,790 per share gold price over the next 12 months; as such, Coeur’s balance sheet remains vulnerable to a downturn in precious metal pricing.

In the release of its results, Coeur indicated the POA11 development was at peak activity levels and reiterated the completion date of mid-2023.

As part of the project risk management process, an assessment of the remaining spending (particularly on the pre-screens) is underway. Management said they would not be surprised to see the US$600 million capex estimate increase by 5%, noted Baretto.

Further, the analyst noted the figure did not include costs associated with the commissioning and ramp-up; his estimates (including the cost of the ramp-up) remain at US$650 million. He notes that just US$300 million being spent to date implies another US$350 million left to spend.

Silvertip is one of the highest-grade silver mines in the world yet has been on care and maintenance since February 2020. “It remains a cash sink,” said Baretto.

Coeur had indicated that based on its geological model, the currently defined mineralization represents just one spoke of its carbonate replacement deposit hub and spoke model; as such, exploration efforts are being expanded to triangulate into the primary intrusive heat source as well as delineate other spokes.

Baretto agrees that this represents exciting potential. In addition, management is now evaluating a much larger project, up to 3,750 tonnes per day, or about double the previous design. That said, he estimates that as of the end of this year, management will have invested about US$560 million into Silvertip (including the US$225 million acquisition cost).

With a construction decision not expected likely until 2026, he expects this number to increase further, given US$20 million per annum in holding costs plus exploration and project development spending. He believes the project will be significantly challenged to recoup all these costs and still earn a return above the company’s hurdle rate.

Despite a recent updraft to US$3.22, Coeur’s New York-quoted equity is still trading about 54% lower over the 12-month frame, giving it a market capitalization of US$904.4 million.