Coeur d’Alene Mines Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The filing is by Coeur d’Alene Mines Corporation and subsidiaries, a multi-country silver and gold producer operating mines in the United States, Mexico, Bolivia, Argentina and Australia. Financial statements are unaudited.
Key financial and operating metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Metal sales | $254.4 million | $231.1 million | $459.0 million | $430.7 million |
| Gross profit | $61.6 million | $96.3 million | $121.0 million | $153.5 million |
| Gross margin | 24.2% | 41.7% | 26.4% | 35.6% |
| Operating income | $41.6 million | $79.3 million | $85.8 million | $117.9 million |
| Net income | $23.0 million | $38.6 million | $26.9 million | $51.1 million |
| Diluted EPS | $0.26 | $0.43 | $0.30 | $0.57 |
| Operating cash flow | $113.2 million | $111.1 million | $130.2 million | $146.9 million |
| Capital expenditures | $32.2 million | $25.8 million | $63.9 million | $41.7 million |
- Q2 silver production rose 2.8% to 4.9 million ounces; gold production increased 3.9% to 63,047 ounces. For the first half, silver production rose to 9.8 million ounces, while gold production declined to 106,947 ounces from 113,786.
- Q2 realized silver price was $29.28/oz, down from $39.11; realized gold price was $1,610/oz, up from $1,504. Six-month realized prices were $30.72/oz for silver and $1,646/oz for gold.
- At June 30, cash and cash equivalents were $199.4 million; cash plus short-term investments totaled $200.3 million. Working capital was $201.5 million and the current ratio was 1.75:1. Total assets were $3.23 billion.
- Debt and capital leases on the balance sheet totaled $136.7 million, including $82.7 million current and $54.0 million non-current. The filing separately cites approximately $350.5 million of total indebtedness when including estimated future Palmarejo royalty payments of $213.8 million.
- Cash provided by operations was $130.2 million for the first half, versus $146.9 million a year earlier; investing used $49.9 million and financing used $55.9 million. Cash increased $24.4 million from year-end to $199.4 million.
Material changes versus the prior comparable period
- Q2 sales increased 10.1%, but production costs applicable to sales rose 71.0% to $131.8 million. Management attributed cost pressure to higher ounces sold, consumables at San Bartolomé, Palmarejo maintenance and Rochester’s resumed mining.
- Despite higher sales, Q2 gross profit fell 36.1% and net income fell 40.5%. The first-half net income decline was 47.2%, with lower gross profit and lower operating income.
- Q2 results included a $16.0 million net fair-value gain, compared with a $12.4 million loss in Q2 2011; first-half fair-value adjustments were a $7.1 million loss versus a $17.7 million loss. These largely reflect changes in the estimated Palmarejo royalty derivative value and are non-cash.
- Q2 production costs at Rochester increased as mining resumed; Rochester silver production was 0.7 million ounces versus 0.3 million a year earlier. Kensington returned to full production on April 26 after a period of reduced processing, though Q2 gold output was lower year over year.
- The company recorded a $4.8 million impairment at the Martha mine due to high operating costs and its short remaining expected mine life. Q2 exploration expense also increased to $6.3 million from $4.1 million.
- First-half capital spending rose to $63.9 million from $41.7 million, primarily at Palmarejo, Kensington and San Bartolomé. Debt and capital lease balances declined from year-end, but $46.8 million of convertible notes was reclassified as current because holders may require repurchase in March 2013.
Outlook, risks, contingencies and unusual items
- The filing provides no specific full-year production, revenue or earnings guidance. Management described priorities as maximizing cash flow from operations, controlling costs and capital spending, and pursuing exploration and mine development. Results are expressly not necessarily indicative of full-year results.
- On August 1, 2012, subsidiaries entered an agreement for a four-year senior secured revolving facility of up to $100 million, with potential commitments up to $150 million. It was subject to conditions, including repayment and termination of the Kensington term facility; the company expected effectiveness around August 16. The facility carries financial covenants and security over substantially all company and domestic-subsidiary assets.
- At June 30, the company was not in compliance with the Kensington facility’s debt-service-ratio covenant; the lender waived the requirement for the year ending December 31, 2012. The company subsequently gave notice to repay and terminate that facility.
- The Palmarejo gold royalty covers 50% of life-of-mine gold production and retains a minimum-ounce payment obligation; 224,710 ounces remained under the minimum obligation. The royalty’s embedded derivative was a $146.7 million liability at June 30, and gold-price movements can materially affect reported earnings and the liability.
- Bolivian restrictions on mining above 4,400 meters remain partly in place and could constrain San Bartolomé production; COMIBOL could challenge mining in areas currently worked under cooperative interpretations. A revised Bolivian mining law was expected, with effects uncertain.
- Rochester faces a dispute over 447 unpatented claims and an administrative appeal challenging approval of its operating-plan amendment. Operations continued, but adverse outcomes could constrain expansion or require permit changes. Asarco also sued Callahan Mining Corporation for contribution related to a $3.5 million settlement at the Van Stone site; the company disputed liability.
- Other risks include volatile precious-metal and input prices, foreign-exchange and political exposure, permitting and environmental obligations, mine safety and operating hazards, labor disruption, reserve-estimation uncertainty, smelter/customer concentration, and the ability to refinance or raise capital. The May Palmarejo work stoppage temporarily halted operations for about five days.
- The company announced a share repurchase program of up to $100 million in June. Subsequent events also included an agreement to invest an additional $2 million in Huldra Silver.
Most important facts for investors to verify
- Whether the new revolving credit facility became effective, the Kensington facility was repaid, and the company met the new facility’s covenants.
- Repurchase, conversion or refinancing plans for the $48.7 million principal amount of convertible notes with a March 2013 holder put right.
- Production and unit-cost trends at Kensington, Rochester, San Bartolomé and Palmarejo, including the impact of maintenance, ramp-up and local restrictions.
- Cash generation after capital spending and royalty payments, and the continuing impact of the Palmarejo royalty on cash flows and reported earnings.
- Developments in the Bolivian mining restrictions, Rochester claims and permitting matters, and the Asarco litigation.
- Exposure to silver and gold price movements, foreign exchange, taxes and derivative mark-to-market volatility; the filing states that results may vary materially with these factors.