Coeur d’Alene Mines Corporation — Q1 2012 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2012. The company operated or held interests in silver and gold mines in the United States, Mexico, Bolivia, Argentina and Australia. Its principal producing properties included Palmarejo, San Bartolomé, Kensington, Rochester, Martha and Endeavor. Results are unaudited and are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Metal sales | $204.6 million | $199.6 million |
| Gross profit | $59.4 million | $57.1 million |
| Operating income | $44.2 million | $38.5 million |
| Net income | $4.0 million; $0.04 per diluted share | $12.5 million; $0.14 per diluted share |
| Cash provided by operating activities | $17.0 million | $35.8 million |
| Capital expenditures | $31.6 million | $15.9 million |
| Silver production | 4.9 million ounces | 4.1 million ounces |
| Gold production | 43,901 ounces | 53,130 ounces |
Metal sales rose 2.5%, reflecting higher silver sales and realized metal prices. Realized prices were $32.61 per silver ounce and $1,702 per gold ounce, versus $31.27 and $1,374, respectively. Gross margin was approximately 29.0% versus 28.6%; operating margin was approximately 21.6% versus 19.3%. Net margin declined to approximately 1.9% from 6.2%.
Net income was pressured by $23.1 million of net fair-value losses, compared with $5.3 million a year earlier, largely from remeasurement of the Palmarejo gold-production royalty as gold prices increased. Production costs applicable to sales were broadly flat at $92.6 million. Depreciation, depletion and amortization increased to $52.6 million from $50.0 million. Administrative and general expense fell to $7.6 million from $12.2 million, while exploration expense increased to $6.6 million from $2.8 million. Net interest expense fell to $6.7 million from $9.3 million.
Operating cash flow was lower year over year, mainly because of movements in operating assets and liabilities. The filing’s adjusted operating cash flow, excluding those changes, was $93.8 million versus $90.1 million. Cash and cash equivalents were $151.9 million at quarter-end, down from $175.0 million; cash, cash equivalents and short-term investments totaled $153.2 million, down from $195.3 million. The company attributed the decline primarily to a Bolivian income-tax payment. Working capital was $192.3 million, and the current ratio was 1.77 versus 1.84 at year-end.
At March 31, total current and long-term debt and capital-lease obligations were approximately $144.8 million. The $48.7 million principal amount of 3.25% Convertible Senior Notes was classified as current because holders may require repurchase on March 15, 2013. The Kensington Term Facility balance was $75.8 million. The company also reported a $240.9 million carrying amount for the current and non-current Palmarejo royalty obligation, including its embedded derivative.
Material changes and management commentary
- Silver output increased 19.1%, principally from Palmarejo and Rochester; gold output fell 17.4%, mainly because Kensington temporarily reduced processing while completing operational initiatives.
- Palmarejo produced 2.5 million ounces of silver and 31,081 ounces of gold. Rochester’s restarted production contributed 441,337 ounces of silver and 5,292 ounces of gold.
- Kensington produced 7,444 ounces of gold versus 23,676 ounces a year earlier. The company announced on April 26, 2012 that the mine had resumed full production ahead of schedule.
- Capital spending more than doubled year over year, with significant spending at Palmarejo, San Bartolomé and Kensington. The filing cites tailings-dam work, new filter presses and a paste-backfill plant among the projects.
- Management planned $39.9 million of exploration spending for 2012, with approximately 84% allocated to existing operations and projects.
Outlook, risks and contingencies
- Debt covenant: The company was not in compliance with the Kensington facility’s project cash-flow-to-debt-service covenant at March 31. The lender waived that requirement for the year ending December 31, 2012.
- Commodity and currency exposure: Earnings and cash flows are sensitive to gold and silver prices and foreign exchange rates. The Palmarejo royalty’s embedded derivative had a fair-value liability of $171.8 million; the filing reports material sensitivity to gold-price changes. Gold collars also expose the company to specified floors and ceilings.
- Operational and regulatory matters: Mining above 4,400 meters at San Bartolomé remained restricted in certain areas by a Bolivian suspension; continued restrictions could reduce production and potentially lead to an impairment. Mining, permitting, environmental and labor risks are also discussed.
- Rochester litigation: A dispute with Rye Patch concerns 447 unpatented mining claims. An adverse injunction or ownership outcome could disrupt operations or constrain expansion. A separate administrative appeal challenges the BLM’s approval of Rochester’s operating plan; operations continued while it was pending.
- Other exposures: The filing discusses legacy environmental sites, reclamation and closure obligations, and customer concentration. Seven bullion trading counterparties accounted for approximately 90% of metal sales in Q1 2012.
- Management identifies risks including metal-price volatility, mine hazards, reserve-estimation uncertainty, permitting delays, foreign-country risks, labor disputes, smelter availability and the ability to obtain financing. No specific full-year production or earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether Kensington’s return to full production was sustained and whether costs normalized after the temporary reduction.
- The timing and cash-versus-share implications of any holder repurchase of the $48.7 million convertible notes in March 2013.
- Continued compliance with Kensington facility covenants after the 2012 waiver.
- Progress and potential operating effects of the Bolivian mining restriction and the Rochester claims and permitting proceedings.
- Whether higher capital spending and planned exploration can be funded while maintaining liquidity, and how royalty remeasurement affects reported earnings.
- Mine-level cost trends, especially at Kensington, Rochester and Martha; per-ounce cash-cost measures are non-U.S. GAAP measures and should be assessed alongside reported production costs.