Coeur d’Alene Mines Corporation (now Coeur Mining, Inc.) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Amounts are in U.S. dollars unless stated otherwise. Interim financial statements are unaudited.
Business context and performance
The company operated silver and gold mines in the United States, Mexico, Bolivia, Argentina and Australia. Its principal revenue sources were Palmarejo, San Bartolomé, Kensington, Rochester, Martha and its silver interest in Endeavor. Cerro Bayo was sold in 2010 and is reported as discontinued operations.
- Q3 silver production rose 13.3% to 4.9 million ounces; gold production rose 20.1% to 57,052 ounces. Nine-month production increased 15.4% to 13.8 million silver ounces and 77.2% to 170,838 gold ounces.
- Q3 average realized prices were $38.28 per silver ounce and $1,681 per gold ounce. Nine-month realized prices were $36.69 and $1,523, respectively.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Metal sales | $343.6m | $118.6m | $774.3m | $307.9m |
| Gross profit | $143.7m | $20.4m | $297.1m | $41.6m |
| Operating income | $127.4m | $10.5m | $245.3m | $11.5m |
| Net income (loss) | $31.1m | ($22.6m) | $82.1m | ($86.2m) |
| Diluted EPS | $0.35 | ($0.25) | $0.92 | ($1.00) |
| Cash provided by operations | $181.9m | $12.9m | $328.8m | $36.2m |
- Sales growth reflected higher metal prices, increased production and Kensington’s contribution. Gross margin was about 41.8% in Q3 and 38.4% for the nine months, versus about 17.2% and 13.5%, respectively, in 2010.
- Fair-value adjustments reduced earnings by $53.4m in Q3 and $71.1m for the nine months, chiefly reflecting changes in the value of royalty and gold-option derivatives. Nine-month interest expense rose to $26.6m from $21.4m, primarily because less interest was capitalized after Kensington entered production.
- At September 30, cash and cash equivalents were $207.9m; cash, equivalents and short-term investments totaled $209.0m. Working capital was $177.7m, versus a $4.5m deficit at year-end 2010; the current ratio improved to 1.64 from 0.98.
- Nine-month investing cash use was $96.2m, including $79.8m of capital expenditures, down from $129.4m in the prior-year period. Financing activities used $90.8m, principally reflecting debt and royalty payments. Operating cash flow less capital expenditures was approximately $249.0m for the nine months.
- Balance-sheet debt and capital leases totaled approximately $176.1m, comprising $51.6m current and $124.5m long-term. Royalty obligations were separately reported at $253.6m current and non-current combined; the company also disclosed a $179.4m fair-value liability for the embedded Palmarejo royalty derivative.
Material changes and operating developments
- Q3 and nine-month metal sales rose 189.8% and 151.5%, respectively. Production costs applicable to sales increased more slowly, by 133.9% in Q3 and 82.0% year to date.
- Palmarejo and San Bartolomé increased silver output. Kensington produced 25,687 ounces of gold in Q3 and 75,121 for the nine months as it ramped up. Rochester resumed active mining and began placing ore on a new leach pad; management expected recovery from the new pad to begin in Q4 2011.
- Performance was mixed at other sites: Martha’s Q3 silver production fell 76.8% as ore grades declined during a transition to developing higher-grade areas. Rochester’s per-ounce costs rose sharply while ore was placed on its new pad ahead of production. Endeavor costs increased partly because its agreement requires additional cost contributions when silver prices exceed $7 per ounce.
- Capital expenditures focused principally on Palmarejo, Rochester and Kensington. Management reported increased exploration activity and expected to maintain the elevated exploration pace into Q4 2011 and 2012.
Outlook, risks and unusual items
- No consolidated production, earnings or cash-flow guidance is provided in the supplied filing text. Management said Kensington would reduce processing rates to approximately 700 tons per day for six months to complete operational-efficiency initiatives.
- San Bartolomé continued to face a Bolivian restriction on mining in areas above 4,400 meters, except for the Huacajchi deposit. The filing says duration is uncertain; if the restriction remains, production could be reduced and an asset write-down may be required.
- Commodity-price volatility is material. Gold-price movements affected the Palmarejo royalty derivative and Kensington gold collars; the company reported a net $32.9m fair-value liability for Kensington put and call options. Mexican-peso forwards also had a $3.8m fair-value liability.
- Other risks include mine-safety and environmental regulation, permits, labor, foreign-country operations, reserve and recovery estimates, counterparty or smelter availability, and dependence on precious-metal prices. Six trading counterparties accounted for 81% of nine-month metal sales; the company stated loss of a smelter could be material if alternatives were unavailable.
- Contingencies include legacy mine-site environmental inquiries and the San Bartolomé restriction. The filing states no cleanup-cost claim had been made against the company in the described Callahan matters. Reclamation and mine-closure liabilities were approximately $30.1m.
- Subsequent event: on October 31, 2011, the company bought the remaining $18.8m principal of its Senior Term Notes due 2012 for 118% of principal plus accrued interest; none remained outstanding afterward. It also acquired a 9.9% interest in Apogee Silver for $1.7m.
Important facts for investors to verify
- Whether higher realized metal prices and production volumes can be sustained, and how mine-level costs and grades develop, particularly at Rochester and Martha.
- Rochester’s new leach-pad timing, recoveries and cash requirements, and Kensington’s reduced processing schedule and operating performance.
- Current debt, royalty-payment obligations and liquidity after the October 2011 note repurchase; distinguish reported royalty balances from the derivative fair-value liability.
- Exposure to gold and silver prices, including the effect of derivatives and hedges on reported earnings and future production proceeds.
- Resolution and production impact of Bolivia’s mining restriction, and any developments in environmental, reclamation, permitting or mine-safety matters.
- Tax expense and cash-tax exposure: the nine-month 2011 income-tax provision was $61.9m, compared with a $13.1m benefit in 2010.