Coeur Mining, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Coeur is a gold and silver producer operating mines in the United States, Mexico, and Bolivia, with a silver stream interest through Coeur Capital. Financial amounts below are in U.S. dollars; “Q3” refers to the three-month period.
Financial and operating performance
| Metric | Q3 2016 | Nine months 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $176.2 million | $506.6 million | $162.6 million; $481.8 million |
| Net income (loss) | $69.6 million | $63.7 million | $(14.2) million; $(64.2) million |
| Diluted earnings (loss) per share | $0.42 | $0.40 | $(0.11); $(0.52) |
| Adjusted net income (non-GAAP) | $38.6 million | $45.0 million | $(19.5) million; $(61.0) million |
| Cash provided by operating activities | $47.8 million | $100.4 million | $36.8 million; $70.3 million |
| Capital expenditures | $25.6 million | $71.1 million | $23.9 million; $65.2 million |
| Silver-equivalent ounces produced | 8.64 million | 26.29 million | 8.97 million; 26.11 million |
Q3 operating income before other income/expense was $27.8 million, or about 15.8% of revenue. Costs applicable to sales were $12.38 per silver-equivalent ounce in Q3 and $11.79 for the nine-month period. All-in sustaining costs (non-GAAP) were $17.02 and $16.03 per silver-equivalent ounce, respectively. Q3 AISC per ounce rose 11% year over year, primarily due to lower production, higher sustaining capital, and greater exploration spending; nine-month AISC declined 3%.
At September 30, cash was $222.5 million, current assets were $467.5 million, and current liabilities were $113.2 million. Total reported debt, including capital leases, was approximately $401.7 million, down from $490.4 million at December 31, 2015; cash exceeded reported debt by approximately $179.2 million. The company reported $27 million of undrawn San Bartolomé credit lines. Operating cash flow less capital expenditures was approximately $22.2 million in Q3 and $29.3 million year to date; these are simple calculations, not company-reported non-GAAP measures.
Material changes versus prior periods
- Q3 and nine-month net income turned positive, while revenue increased 8% and 5%, respectively. Higher realized metal prices drove the revenue improvement, partly offset by fewer silver-equivalent ounces sold.
- The reported tax benefit was unusually large: $54.5 million in Q3 and $53.1 million year to date. A legal-entity reorganization led to a $40.8 million valuation-allowance release, and the company recorded a $15.0 million deferred tax benefit related to unremitted earnings. Excluding the reorganization, management reported Q3 tax benefit of $13.7 million and nine-month benefit of $12.3 million.
- Silver production declined 3% in Q3 and 8% year to date; gold production declined 1% in Q3 but increased 8% year to date, partly reflecting a full nine months of Wharf production.
- The company repaid its $99.0 million Term Loan principal in July for $103.4 million including a $4.4 million prepayment premium, and redeemed the remaining convertible notes. Q3 debt reduction was reported as 21%, primarily due to the Term Loan repayment.
- Coeur completed an ATM equity offering of up to $200 million and had sold 4.29 million shares for approximately $53.4 million net proceeds by quarter-end. Nine-month equity issuance also included a separate $75 million offering. Shares outstanding were 167.6 million at quarter-end, versus 151.3 million at year-end 2015.
Outlook, commentary, and risks
Management left full-year 2016 production guidance unchanged from its revised October 6 outlook: 34.375–37.035 million silver-equivalent ounces, including 14.395–15.735 million silver ounces and 333,000–355,000 gold ounces. Updated cost guidance lowered expected costs at Palmarejo, Kensington, and Wharf. Company-wide AISC guidance is $15.75–$16.25 per silver-equivalent ounce. Capital expenditure guidance increased to $105–$115 million from $90–$100 million, and exploration guidance increased to $14–$16 million from $11–$13 million.
Management expects the Palmarejo gold stream agreement, effective after the minimum royalty obligation was satisfied in July, to significantly improve free cash flow. Under the agreement, Coeur sells 50% of eligible Palmarejo gold production for the lesser of $800 per ounce or spot price. The company said liquidity and capital resources were adequate for operations and corporate activities.
Key operating and financial uncertainties include volatile silver and gold prices, production and grade variability, mine development and permitting, foreign exchange, and the ability to raise financing or refinance debt. Bolivia presents specific political and community risks: a 2016 decree affecting mining cooperatives could require contract renegotiations, while mining above 4,400 meters at San Bartolomé remains limited in areas beyond Huacajchi and Huacajchi Sur. Management warns that a renewed restriction could affect production and asset values. Other matters include potential environmental liabilities associated with former Callahan sites, reclamation estimates, VAT and tax refund recovery, and labor relations; approximately 11% of the global workforce was covered by a collective bargaining agreement.
Unusual items include a $10.0 million loss on debt extinguishments, a $4.7 million Q3 gain on sale of a non-core royalty, and a $3.7 million inventory write-down related to lower recoveries at Wharf. The company also recorded $4.4 million of year-to-date write-downs, primarily related to the Endeavor silver stream after the mine operator curtailed production amid low lead and zinc prices. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and deferred tax assets depend on the one-time valuation-allowance release, and what assumptions support future realization?
- Whether Palmarejo’s transition to underground mining and the new gold stream deliver the expected production, costs, and cash flow.
- Whether revised production, AISC, capital expenditure, and exploration guidance was achieved, particularly given Q3 production and AISC trends.
- How Bolivia’s decree, community relations, and restrictions on higher-elevation mining affect San Bartolomé’s reserves, operations, and asset values.
- How future ATM share sales, debt obligations, royalty commitments, and recovery of tax/VAT receivables affect liquidity and shareholder dilution.
CAS, AISC, adjusted net income, EBITDA, and adjusted EBITDA are non-GAAP measures; the filing cautions that they are not substitutes for GAAP results and may not be comparable across companies.