Coeur Mining, Inc. quarterly report, Q2 FY2016

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Business context and reporting period

Coeur Mining, Inc. is a gold and silver producer operating mines in the United States, Mexico and Bolivia, with additional royalty and streaming interests. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are to the same 2015 periods unless otherwise stated. Dollar amounts are in millions unless noted.

Financial and operating performance

  • Second quarter: Revenue was $182.0 million, including metal sales of $180.2 million, up 9% from $166.3 million of revenue and $164.5 million of metal sales. Net income was $14.5 million, or $0.09 per diluted share, versus a $16.7 million loss, or $0.12 per share. Adjusted net income, a non-GAAP measure, was $17.3 million, or $0.11 per share.
  • First half: Revenue was $330.4 million, up 3% from $319.2 million. Net loss narrowed to $5.9 million, or $0.04 per share, from $50.0 million, or $0.42 per share. Adjusted net income was $6.2 million, or $0.04 per share, compared with an adjusted loss of $42.5 million.
  • Margins and production costs: Q2 costs applicable to sales (CAS) were $10.82 per silver-equivalent ounce, down from $12.84; all-in sustaining costs (AISC) were $14.92 per ounce, down from $16.80. For the first half, CAS was $11.53 per ounce versus $13.59 and AISC was $15.56 versus $17.18. CAS and AISC are non-GAAP measures. Q2 silver-equivalent production increased to 9.6 million ounces from 9.1 million; silver production declined while gold production increased. First-half production was 17.7 million silver-equivalent ounces versus 17.1 million.
  • Cash flow and investment: Operating cash flow was $45.9 million in Q2 and $52.6 million in the first half, compared with $37.0 million and $33.6 million, respectively, in 2015. First-half capital expenditures were $45.5 million. Cash and cash equivalents were $257.6 million at June 30, up from $200.7 million at year-end 2015.
  • Debt and liquidity: Reported current and non-current debt totaled $511.1 million at June 30, including $373.96 million of 7.875% senior notes, a $94.55 million term loan and capital lease obligations. The term loan bore interest at 9.0% and 10.5% on its respective principal portions. San Bartolomé had $27 million of available, undrawn credit lines. Current assets were $509.5 million and current liabilities $222.9 million.
  • Other metrics: Q2 realized prices were $17.38 per silver ounce and $1,255 per gold ounce, compared with $16.23 and $1,179. First-half realized prices were $16.34 per silver ounce and $1,218 per gold ounce, compared with $16.50 and $1,191.

Material changes versus prior periods

  • Q2 earnings improved mainly with higher realized metal prices, more gold sold, lower unit costs and reduced general and administrative expense; lower silver production and adverse fair-value adjustments partly offset those gains.
  • First-half loss narrowed as gold production and realized gold prices increased and unit costs, exploration and general and administrative expenses declined. Lower silver production and prices, and larger fair-value losses, were offsets.
  • Metal mix shifted toward gold: gold represented 62% of first-half sales versus 58% in 2015. Q2 metal sales rose 10%, while first-half metal sales rose 4%.
  • First-half fair-value adjustments were a $12.3 million loss versus a $2.1 million loss in 2015, primarily reflecting changes in metal-price assumptions affecting royalty obligations. The company also recorded $4.4 million of write-downs, mainly tied to the Endeavor silver stream and anticipated sale of the El Gallo royalty.
  • The company raised $73.1 million net through a $75 million at-the-market stock offering, issuing 9.25 million shares at an average $8.11 per share.

Outlook, management commentary, risks and unusual items

  • Management said liquidity and capital resources were adequate for operations and corporate activities. The filing provides no specific production, earnings or cost guidance for future periods.
  • Management highlighted development at Palmarejo and Kensington, and regulatory approval to construct an additional 120 million tons of leach capacity at Rochester. Q2 capital spending was primarily for Palmarejo underground development and Kensington’s Jualin deposit.
  • Endeavor’s operator significantly curtailed production because of low lead and zinc prices; Coeur recorded a $2.5 million first-quarter write-down of the associated stream interest. This creates exposure to a mine operated by a third party.
  • In the first half, Coeur sold several non-core royalty or mining assets. The filing reports $11.3 million of proceeds from asset sales in cash-flow investing activities; certain consideration also included shares or contingent payments. Reported gains included $5.3 million on the Martha assets and gains on royalty sales.
  • Subsequent events: On July 15, 2016, Coeur repaid the term loan for $103.4 million, including a $4.4 million prepayment premium. It redeemed the remaining $0.7 million of convertible notes on July 25 and completed the sale of its Correnso royalty that day for $5.2 million, including contingent consideration. On July 26, the remaining Palmarejo minimum royalty obligation was paid and the royalty agreement terminated.
  • Risks include metal-price and foreign-exchange volatility, mine development and permitting uncertainty, operating and political risks in foreign jurisdictions, community relations, labor disruption, environmental obligations and the ability to service or refinance debt. Bolivia’s restriction on mining above 4,400 meters had expired, but Coeur continued to suspend mining in some areas for community-relations and political concerns; renewed restrictions could affect reserves and asset values.
  • Other exposures include VAT and income-tax refund collection, uncertain tax positions, and legacy environmental matters associated with former Callahan sites. Gross unrecognized tax benefits were $23.0 million and accrued tax-related interest and penalties were $14.7 million at June 30. The filing does not provide a clear estimate of potential total losses for the described legacy-site matters.

Important facts for investors to verify

  • Whether lower CAS and AISC, and improved operating cash flow, are sustainable as production, grades, recoveries and metal prices vary.
  • How the July term-loan repayment and related premium affect subsequent-period cash, debt, interest expense and liquidity; the filing separately states approximately $420.6 million of indebtedness as of July 26.
  • The operational and valuation consequences of Endeavor’s production curtailment and the continuing uncertainty around mining above 4,400 meters at San Bartolomé.
  • The timing and recoverability of VAT and income-tax receivables, and developments in unrecognized tax benefits and related interest and penalties.
  • The cash-flow and dilution effects of the share offering, asset sales and contingent sale consideration; non-GAAP adjusted earnings, CAS and AISC should be assessed alongside GAAP results.