Coeur Mining, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017. Coeur operated the Palmarejo, Rochester, Kensington, Wharf and San Bartolomé mines in the United States, Mexico and Bolivia. In October 2017, it acquired the Silvertip silver-zinc-lead mine in British Columbia; commercial production was expected in 2018.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $176.0m | $176.2m | $555.5m | $506.6m |
| Net income (loss) | $(16.7)m | $69.6m | $(8.9)m | $63.7m |
| Diluted EPS | $(0.09) | $0.42 | $(0.05) | $0.40 |
| Operating cash flow | $29.4m | $47.8m | $114.0m | $100.4m |
| Capital expenditures | $29.5m | $25.6m | $90.9m | $71.1m |
- Q3 production was 9.55m silver-equivalent ounces (3.95m silver ounces and 93,293 gold ounces); sales were 9.22m silver-equivalent ounces. Nine-month production was 27.72m silver-equivalent ounces, up from 26.29m.
- Q3 realized prices were $16.86 per silver ounce and $1,240 per gold ounce, down 14% and 6%, respectively, year over year. Revenue was nearly flat as increased volumes largely offset lower prices.
- Q3 costs applicable to sales (CAS) were $12.28 per silver-equivalent ounce; all-in sustaining costs (AISC) were $17.68 per ounce. Nine-month CAS was $12.21 and AISC $16.72 per ounce. Both measures are non-GAAP.
- Operating margin per silver-equivalent ounce was $6.19 in Q3 versus $8.45 a year earlier, and $6.02 for nine months versus $7.55.
- Cash and cash equivalents were $236.2m at September 30. Current assets were $474.1m and current liabilities $128.8m. Debt, including capital leases, totaled approximately $288.9m; the new $200m revolving facility was undrawn at quarter-end.
Material changes versus prior comparable periods
- Q3 and nine-month GAAP results swung from profit to loss, chiefly because 2016 included substantial tax benefits: $54.5m in Q3 and $53.1m for nine months, including a $40.8m valuation-allowance release and $15.0m deferred tax benefit. In 2017, tax expense was $14.2m and $23.2m, respectively; management noted jurisdictional income mix, foreign-exchange effects and Palmarejo results influence taxes.
- Nine-month revenue rose 10%, supported by higher volumes and lower precious-metal inventory, despite lower realized prices. Nine-month operating cash flow increased, helped by sales volume and working-capital movements; Q3 operating cash flow declined as prices and per-ounce operating margin weakened.
- Production gains at Palmarejo were partly offset by lower production at San Bartolomé, Wharf and Kensington over the nine-month period. Rochester’s per-ounce costs rose with lower placed recoverable ounces, waste mining and higher hauling and maintenance costs.
- Q3 exploration expense rose to $9.8m from $3.7m; nine-month expense increased to $22.9m from $7.7m. Nine-month capital spending increased to $90.9m from $71.1m, including development and Rochester’s Stage IV leach-pad expansion.
Debt, liquidity, unusual items and outlook
- Coeur issued $250m of 5.875% senior notes due 2024, receiving about $245m net proceeds, and repurchased or redeemed its 7.875% notes due 2021. The refinancing resulted in a $9.3m extinguishment loss; nine-month net interest expense fell to $10.9m from $30.1m.
- The four-year, $200m secured revolving facility may be increased by up to $50m and includes leverage and interest-coverage covenants. On October 12, after quarter-end, Coeur drew $100m at 3.5% to help fund Silvertip.
- Silvertip’s October 17 acquisition had initial consideration of $200m: approximately $147.5m cash, $37.5m in Coeur shares and assumption of $15m debt. Up to $50m additional consideration may be payable for specified permitting and exploration milestones. Integration, financing and development outcomes are uncertain.
- Other notable transactions included the February sale of the Joaquin project, generating a $21.1m gain, and the July sale of the Endeavor silver stream and remaining royalties to Metalla for $13.0m consideration, generating a $1.2m gain. Coeur also recorded a $2.3m gain on repurchase of the Rochester royalty obligation.
- Management maintained revised 2017 production guidance: 37.3–40.1m silver-equivalent ounces, including 15.3–16.6m silver ounces and 367,000–392,000 gold ounces. Revised AISC guidance was $16.25–$16.75 per silver-equivalent ounce; capital expenditures were $120–$140m, exploration $32–$36m and G&A $28–$32m. CAS guidance increased at Rochester, San Bartolomé and Kensington. San Bartolomé guidance reflected persistent drought and reduced ore availability.
- Risks include volatile metal and input prices, foreign exchange, mine grade and operating variability, permitting and environmental obligations, political and labor risks, and debt covenants and refinancing needs. Approximately 11% of the workforce was covered by an active San Bartolomé labor agreement with no fixed term. The Rochester leach-pad expansion increased the reclamation liability by $3.1m; total recorded reclamation liabilities were about $108.1m.
Important facts for investors to verify
- Whether 2017 production and revised cost guidance were achieved, particularly at drought-affected San Bartolomé and higher-cost Rochester and Kensington.
- Silvertip’s integration, permitting, capital requirements, expected 2018 production timing, contingent consideration and contribution to cash flow.
- Post-quarter debt and liquidity after the $100m revolver draw and acquisition funding, including compliance with facility and note covenants.
- Whether cash generation and realized metal prices can support the higher capital and exploration program while maintaining margins.
- The sustainability and timing of tax payments, valuation allowances and unrecognized tax benefits; also note that common shares outstanding were 181.4m at September 30 and 185.6m on October 23, 2017.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.