Business Context and Reporting Period
Company: Coeur d'Alene Mines Corporation (Coeur Mining, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: Coeur is a large primary silver producer with significant gold assets located in North America, South America (Chile, Argentina, Bolivia), Mexico, and Australia. The company operates mines including San Bartolomé (Bolivia), Martha (Argentina), Cerro Bayo (Chile), Rochester (USA), Palmarejo (Mexico), and holds interests in Broken Hill and Endeavor (Australia). The Kensington project in Alaska is in the development stage.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Revenues (Sales of Metal) | $73,207 | $50,024 | $123,000 | $107,310 |
| Net Income (Loss) | $11,609 | $(5,377) | $17,667 | $(656) |
| Operating Income (Loss) | $(7,918) | $(3,569) | $(7,022) | $4,717 |
| Cash Flow from Operations | $20,127 | $(2,575) | $21,730 | $(10,224) |
| Cash and Cash Equivalents (End of Period) | $24,668 | $97,842 | $24,668 | $97,842 |
| Total Assets | $3,052,335 | $2,928,121 | $3,052,335 | $2,928,121 |
| Total Liabilities | $1,101,570 | $1,142,209 | $1,101,570 | $1,142,209 |
| Working Capital | $(11,258) | $(8,533) | $(11,258) | $(8,533) |
Note: Working Capital calculated as Current Assets ($165,435) minus Current Liabilities ($176,693) for June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Sales of metal increased 46.3% in Q2 2009 and 14.6% in the first six months of 2009 compared to the prior year. This was driven by full-quarter production from the San Bartolomé mine (Bolivia) and the commencement of commercial production at the Palmarejo mine (Mexico) in April 2009.
- Profitability: The company reported a net income of $11.6 million for Q2 2009, a significant turnaround from a net loss of $5.4 million in Q2 2008. This improvement was largely due to a $23.1 million gain on debt extinguishments and a $3.7 million income tax benefit.
- Operating Loss: Despite net income, the company reported an operating loss of $7.9 million in Q2 2009, compared to $3.6 million in Q2 2008. Operating costs increased due to the ramp-up of new mines and higher depreciation/depletion ($21.2 million vs. $6.3 million in Q2 2008).
- Debt Reduction: The company significantly reduced its debt load by exchanging $79.6 million of 3 1/4% Convertible Senior Notes and $73.2 million of 1 1/4% Convertible Senior Notes for common stock during the first half of 2009.
- Production Volumes: Silver production increased to 4.3 million ounces in Q2 2009 from 2.5 million ounces in Q2 2008. Gold production remained relatively flat at 13,800 ounces in Q2 2009 compared to 13,500 ounces in Q2 2008, impacted by the suspension of the Cerro Bayo mine.
Guidance, Outlook, and Risks
- Outlook: Management expects the Palmarejo mine to ramp up to full capacity in Q4 2009. The Cerro Bayo mine remains suspended with a target to resume operations in 2010. The Kensington project in Alaska is expected to commence production in the second half of 2010, with an estimated $70 million in remaining capital expenditures.
- Subsequent Event: On July 16, 2009, the company agreed to sell its interest in the Broken Hill Mine (Australia) to Perilya Limited for $55.0 million in cash, expecting a net gain of approximately $22.0 million in Q3 2009.
- Liquidity: The company reported a working capital deficit of $11.3 million. Management believes current cash and projected operating cash flows are sufficient to meet obligations for the next 12 months, though additional financing may be required for future acquisitions or projects.
- Risks:
- Commodity Prices: Results are highly sensitive to silver and gold prices. Realized silver prices dropped to $13.85/oz in Q2 2009 from $18.84/oz in Q2 2008.
- Derivatives: The company incurred a $4.6 million loss on derivatives in Q2 2009 due to mark-to-market adjustments on royalty obligations, gold lease facilities, and foreign exchange contracts.
- Regulatory/Litigation: The Kensington project faced significant legal challenges regarding its tailings facility permit, which were resolved in the company's favor by the U.S. Supreme Court in June 2009.
- Foreign Operations: Operations in Bolivia, Argentina, and Chile expose the company to political instability, currency fluctuations, and regulatory changes.
Investor Verification Checklist
- Debt Extinguishment Gains: Verify the sustainability of net income, as Q2 2009 results were heavily influenced by a one-time $23.1 million gain from converting debt to equity.
- Operating Cash Flow vs. Net Income: Note that while Net Income was positive, Operating Cash Flow ($20.1M) was the primary driver of liquidity, as operating income remained negative.
- Working Capital Deficit: Confirm the company's ability to fund capital expenditures ($120.9M in H1 2009) given the current working capital deficit of $11.3 million.
- Derivative Exposure: Review the $13.9 million loss on derivatives for the six-month period and the company's hedging strategy regarding silver and gold prices.
- Palmarejo Ramp-up: Monitor the cost per ounce at the new Palmarejo mine, which was $19.44 in its first quarter of operation, significantly higher than other operations.
- Broken Hill Sale: Confirm the closing of the $55 million sale of the Broken Hill interest and the recognition of the expected $22 million gain in Q3 2009.