Business context and reporting period
Coeur d’Alene Mines Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2010. The company was a silver producer with growing gold production, operating or holding interests in mines in the U.S., Mexico, Bolivia, Argentina and Australia. Kensington began commercial production on July 3, 2010, after quarter-end. Cerro Bayo was classified as held for sale; Broken Hill had been sold in 2009. Both are presented in discontinued operations for the periods shown.
Financial and operating performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Metal sales | $101.0 million | $67.9 million | $189.3 million | $111.2 million |
| Gross profit (loss) | $12.4 million | ($0.2 million) | $21.2 million | $11.0 million |
| Operating income (loss) | $1.9 million | ($8.8 million) | $1.0 million | ($8.5 million) |
| Net income (loss) | ($50.7 million) | $11.6 million | ($58.8 million) | $17.7 million |
| Operating cash flow | $32.5 million | $15.0 million | $23.2 million | $18.1 million |
| Capital expenditures | $45.5 million | $42.3 million | $92.7 million | $120.5 million |
Gross margin, calculated from reported sales and gross profit, was approximately 12.3% in Q2 2010 and 11.2% for the first half; comparable margins were approximately negative 0.3% and 9.9%, respectively. Q2 silver and gold production was 4.16 million ounces and 23,124 ounces; first-half output was 7.59 million ounces and 48,907 ounces. Q2 realized prices were $18.56 per silver ounce and $1,176 per gold ounce.
The net loss chiefly reflected $42.5 million of Q2 and $46.8 million of first-half net fair-value losses, driven largely by the Palmarejo gold royalty derivative and other derivatives. Debt-extinguishment losses were $4.1 million for Q2 and $11.9 million for the first half; the comparable 2009 periods included gains of $22.7 million and $38.4 million. The 2010 losses therefore contrast with prior-year reported profits despite improved sales and operating results.
Liquidity and debt
At June 30, cash and equivalents were $41.2 million, compared with $22.8 million at year-end 2009 and $56.0 million at March 31, 2010. Working capital was approximately $3.0 million, down from $10.7 million at year-end; the current ratio was 1.0 to 1.0. First-half investing cash use was $92.6 million and financing cash provided was $87.8 million. Management said liquidity and projected operating cash flows should meet obligations for at least the next 12 months, while noting that additional financing might be needed for acquisitions or new projects.
Balance-sheet current and long-term capital-lease and other debt obligations totaled approximately $218.8 million. This includes $83.3 million of Senior Term Notes, $40.8 million outstanding under the Kensington facility, and convertible notes; amounts include debt discounts and other obligations as presented. Separately, royalty obligations were $192.7 million current and non-current combined. The company issued shares to repay or exchange convertible debt and make Senior Term Note payments; common shares outstanding increased from 80.3 million at December 31, 2009 to 89.3 million at June 30, 2010.
Material changes and management commentary
- Sales rose 48.9% in Q2 and 70.2% in the first half, reflecting higher realized metal prices and increased gold production as Palmarejo operated at full capacity. Higher depreciation and production costs partly offset sales growth.
- Palmarejo’s Q2 silver and gold production increased substantially year over year, and management cited higher-grade underground ore, improved ore blending and a newly commissioned refining plant as potential supports for further improvement.
- San Bartolomé’s first-half silver output fell to 2.9 million ounces from 4.0 million, partly due to restrictions on mining above 4,400 meters at Cerro Rico. Access to the Huacajchi deposit was confirmed as exempt from the restriction, but the duration of restrictions on other areas remained uncertain.
- Martha produced less silver and had higher first-half cash costs per ounce; management expected active mining to cease in late 2010 unless additional mineralization is found and was pursuing strategic alternatives.
- Rochester continued residual leaching, expected to last through 2014. The company was pursuing permits to restart active mining in 2011; a study cited potential incremental annual production of 2.5 million ounces of silver and 30,000 ounces of gold through 2017.
- Kensington was expected to produce approximately 50,000 ounces of gold in its initial partial year. Management anticipated full capacity in Q4 2010 and average annual production of approximately 125,000 ounces over an initial 12.5-year mine life. The company expected to invest a further $41 million there during the remainder of 2010.
Outlook, risks and unusual items
The company agreed to sell Cerro Bayo to Mandalay Resources for $6.0 million cash, Mandalay shares valued at CAD$5.0 million, 125,000 ounces of silver delivered in installments, a 2.0% net smelter royalty above stated production thresholds, and certain Chilean tax recoveries. Mandalay would pay the first $6.0 million of reclamation costs at the nearby Furioso property, with excess costs shared equally. Coeur recorded an estimated $3.0 million sale loss and expected closing around August 9, 2010.
The filing identifies commodity-price volatility, mining and reserve-estimation uncertainty, permitting and regulatory delays, foreign-country risks, labor disruptions, environmental obligations, smelter dependence, and access to financing as material risks. It also notes elevated violence near Palmarejo in Chihuahua, Mexico. The company disclosed legacy Superfund-related inquiries and a Washington State notice concerning Callahan Mining; it said no cleanup-cost claim had been made against the company or Callahan as of the filing. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Cerro Bayo’s sale closed as expected, the value realized for non-cash consideration, and Coeur’s final reclamation exposure.
- Kensington’s production ramp, costs, remaining capital needs and compliance with facility covenants.
- San Bartolomé’s continuing access to ore above 4,400 meters, and whether production restrictions or local conditions change.
- Martha’s end-of-life plan and any additional mineralization or strategic transaction that could alter the expected late-2010 cessation.
- The sensitivity and cash implications of the Franco-Nevada royalty, gold lease and other derivatives; fair-value movements materially affected reported earnings.
- Liquidity and financing needs against planned capital spending, near-term maturities and the dilution from debt repayments made in shares.