Coeur d’Alene Mines Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. The company was a multi-country silver producer with growing gold production; Kensington entered commercial production in July. Cerro Bayo was sold in August and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Metal sales | $118.6 million | $90.3 million | $307.9 million | $201.5 million |
| Gross profit | $20.4 million | $3.0 million | $41.6 million | $14.0 million |
| Operating income (loss) | $10.5 million | $(4.1) million | $11.5 million | $(12.6) million |
| Net income (loss) | $(22.6) million | $(17.3) million | $(81.4) million | $0.4 million |
| Diluted EPS | $(0.25) | $(0.23) | $(0.94) | $0.01 |
| Cash provided by operating activities | $12.9 million | $28.9 million | $36.2 million | $47.0 million |
- Gross margin was approximately 17.2% in Q3 and 13.5% for the nine months, versus 3.3% and 6.9%, respectively, in the comparable 2009 periods. Operating margin was approximately 8.8% and 3.7%, versus negative 4.6% and 6.2% (negative), respectively.
- Net losses included non-cash fair-value losses of $19.1 million in Q3 and $65.9 million year to date, primarily associated with the Palmarejo gold royalty, gold lease and options. Nine-month results also included $12.7 million of debt-extinguishment losses; the comparable 2009 period recorded a $35.4 million gain.
- Cash and short-term investments totaled $32.8 million at quarter-end. Working capital was a deficit of $17.1 million, compared with a $2.6 million deficit at December 31, 2009; the current ratio was 0.9:1. Management said liquidity and projected operating cash flows should cover obligations for at least 12 months, while noting that capital investment could be deferred or additional financing sought.
- Capital expenditures were $129.4 million for the first nine months, including $83.1 million at Kensington and $43.1 million at Palmarejo. Investing activities used $111.0 million; financing activities provided $79.8 million.
- Debt and capital-lease obligations totaled approximately $214.5 million, including $67.7 million current and $146.8 million non-current. The separate royalty obligation was approximately $206.8 million, including $46.4 million current. The filing reports a $32.6 million fair-value liability for the gold lease facility.
Changes, operating trends and outlook
- Sales rose 31.3% in Q3 and 52.8% year to date, reflecting substantially higher realized metal prices and increased gold output. Q3 realized prices were $18.87 per silver ounce and $1,228.51 per gold ounce, up 30.0% and 28.9% year over year.
- Q3 silver production fell to 4.33 million ounces from 5.20 million; gold production increased to 47,514 ounces from 28,955. For nine months, silver production was 11.92 million ounces versus 12.61 million, while gold production rose to 96,421 ounces from 46,541.
- Kensington produced 15,155 ounces of gold in Q3 after commencing commercial production July 3; management expected production to ramp up through year-end. The filing does not provide a clear consolidated full-year production or earnings guidance figure.
- Management was pursuing a potential Rochester active-mining restart in 2011. The feasibility study cited potential average annual production of 2.4 million ounces of silver and 35,000 ounces of gold; the BLM issued a key permitting decision record in October 2010. Residual heap leaching was expected to continue through 2014.
- Silver output was affected by restrictions on mining above 4,400 meters at San Bartolomé, whose duration remained uncertain, and reduced throughput at Martha. Martha’s Q3 silver production fell 56.7% year over year; nine-month production fell from 2.7 million to 1.4 million ounces. At San Bartolomé, Q3 production was down about 15% year over year.
- Coeur exchanged convertible notes for shares during the first nine months, issuing 6.5 million shares for $99.7 million of 3.25% notes and 1.2 million shares for $20.4 million of 1.25% notes. Issued shares increased from 80.3 million at year-end 2009 to 89.3 million at September 30, 2010.
- The Cerro Bayo sale brought $6.0 million cash, Mandalay shares, 125,000 ounces of silver to be delivered in installments, a 2% net smelter royalty subject to production thresholds, and retained value-added taxes. Coeur recorded a $2.1 million after-tax sale loss; Mandalay assumed the next $6.0 million of specified reclamation costs, with further costs shared equally.
Risks, contingencies and notable items
- Results remain sensitive to gold and silver prices, foreign exchange, production and recovery estimates, permitting, operating costs, and financing access. Higher gold prices increased the estimated royalty-related liability and non-cash earnings volatility.
- Management identified elevated violence near Palmarejo in Chihuahua as a potential threat to staffing, supplies, mine capacity and metal deliveries. Around 19% of the workforce was union-represented; the Martha labor agreement expired October 31, 2010.
- Other disclosed exposures include San Bartolomé’s mining restrictions, mine closure and reclamation estimates, and legacy Callahan-related environmental inquiries in several states. The filing states no cleanup-cost claim had been made against Coeur or Callahan for the described sites as of the report.
- Gold price collars tied to the Kensington facility covered 122,500 ounces at September 30, with weighted-average put and call prices of $862.50 and $1,688.50 per ounce. The company also had gold delivery obligations under the gold lease facility and a large embedded derivative liability under the Palmarejo royalty.
- Disclosure controls and procedures were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Kensington’s ramp-up meets operating and cost expectations, and how its production affects cash generation.
- Whether Rochester receives remaining approvals and can restart on the stated 2011 timetable and projected production profile.
- How San Bartolomé restrictions and Martha’s lower throughput affect silver volumes and unit costs.
- The cash-flow, debt-service and dilution implications of scheduled term-note repayments, remaining convertible notes, royalty payments and gold-lease deliveries.
- The sensitivity of reported earnings and the royalty liability to metal prices, and the assumptions behind Rochester leach-pad recoveries and mine-life estimates.
- That reported cash-cost-per-ounce figures are non-GAAP measures; Palmarejo’s unusually low Q3 silver cash cost of $0.15 per ounce reflects substantial by-product gold credits and should be assessed alongside total production costs and the GAAP statements.