Coeur Mining, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Results are unaudited. Coeur operates precious-metal mines in the United States, Mexico, Bolivia and Argentina, and holds a silver stream interest in Australia. The April acquisition of Orko Silver added the La Preciosa development project in Mexico.
Financial performance and position
- Q2 revenue: Metal sales were $204.5 million, down 19.6% from $254.4 million. Gross profit fell to $3.9 million from $61.6 million; gross margin was approximately 1.9%, versus 24.2%.
- Q2 earnings: Operating loss was $51.0 million, compared with operating income of $41.6 million a year earlier. Net loss was $35.0 million, or $0.35 per share, versus net income of $23.0 million, or $0.26 per share. Results included a $32.0 million Rochester claims settlement charge and a $17.2 million impairment of marketable securities, partly offset by $66.8 million of net fair-value gains.
- First-half results: Sales were $376.3 million, down 18.0%; operating loss was $40.1 million versus income of $85.8 million; net loss was $22.8 million versus net income of $26.9 million. First-half gross profit was $36.5 million, down from $121.0 million.
- Production and prices: Q2 silver production declined 5.4% to 4.63 million ounces and gold production declined 3.6% to 60,757 ounces. Silver and gold realized prices fell to $22.86 and $1,416 per ounce, respectively, from $29.28 and $1,610. Silver cash operating cost rose to $8.86 per ounce from $6.41; Kensington gold cost improved to $1,115 per ounce from $1,348. These cash-cost figures are non-GAAP measures.
- Cash flow: Q2 operating cash flow under GAAP was $63.3 million, down from $113.2 million. The company’s non-GAAP operating cash flow measure, excluding working-capital changes, was $14.4 million versus $88.4 million. First-half GAAP operating cash flow was $76.3 million versus $130.2 million. First-half capital expenditures were $40.0 million versus $63.9 million.
- Liquidity: Cash was $249.5 million at June 30, up from $125.4 million at year-end; working capital was $360.6 million versus $167.9 million, and the current ratio was 3.37 versus 1.70. The company reported $124.1 million of cash growth in the first half.
- Debt and obligations: Debt and capital leases totaled approximately $312.1 million, including $300 million of 7.875% senior notes due 2021 and $5.3 million of convertible notes. No amounts were drawn on the $100 million revolving facility. The company also reported royalty obligations, including the Palmarejo gold production royalty.
Material changes and unusual items
- Coeur issued $300 million of 7.875% senior notes in January, repurchased $43.3 million of its convertible notes, and completed the Orko acquisition in April. Acquisition consideration included approximately $99.1 million cash, 11.6 million Coeur shares and warrants; La Preciosa mineral interests were recorded at $408.4 million.
- The Rochester claims settlement resolved the dispute through a $10 million cash payment, a 3.4% net smelter returns royalty on up to 39.4 million silver-equivalent ounces beginning in 2014, and transfer of the Blue Bird claim. The settlement generated the $32.0 million Q2 charge.
- Net fair-value gains were driven mainly by a lower estimated fair value of the Palmarejo royalty embedded derivative as forward gold prices declined. This non-cash, price-sensitive gain materially affected reported earnings.
- A $17.2 million other-than-temporary impairment was recorded on marketable securities. General and administrative expense rose 74.8% in Q2, primarily from legal, finance, consulting and recruiting costs, including headquarters-relocation costs.
Outlook, commentary and risks
- Management expected to generate net free cash flow in the second half of 2013 and was pursuing lower operating and non-operating costs and capital spending. It also planned to reduce exploration spending by approximately $3 million, or 17%, for the remainder of 2013, with another $3 million redirected to La Preciosa. The filing gives no specific full-year production or earnings guidance.
- Management cited falling precious-metal prices as a threat to cash flow and noted that sustained lower prices could require financing for discretionary investment, mine-plan changes or asset impairment. August 7 closing prices were $19.58 per ounce for silver and $1,283 for gold.
- La Preciosa’s July 2013 preliminary economic assessment was not a pre-feasibility or feasibility study and relied partly on speculative mineralized material; Coeur planned a feasibility study over the following 12 months. Development, permitting, costs and reserves remain uncertain.
- Mining above 4,400 meters at San Bartolomé remained restricted in Bolivia, with uncertainty over whether COMIBOL might also challenge mining at Huacajchi and Huacajchi Sur. Rochester operations were proceeding, but an administrative appeal challenged the mine-plan approval; the filing says the outcome and operational impact could not be predicted.
- Other key exposures include volatile metal and input prices, foreign-exchange and derivative valuation risk, mine operating and recovery variability, foreign-country regulatory and political risks, and environmental and legacy-site claims. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check production, ore grades, recoveries and unit costs by mine, especially Palmarejo’s lower grades and Rochester’s higher silver cost.
- Separate recurring operating performance and cash generation from the Rochester settlement, securities impairment, and non-cash fair-value gains tied to gold prices.
- Review liquidity and debt-service capacity against the new 7.875% notes, royalty payments, planned capital spending and management’s second-half free-cash-flow expectation.
- Verify La Preciosa feasibility, permitting, capital requirements and reserve status; the PEA alone does not establish economic viability or proven and probable reserves.
- Monitor the Bolivian mining restriction and Rochester administrative appeal, including any effects on production, asset values or royalty obligations.