Coeur d’Alene Mines Corporation (Coeur Mining) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing presents unaudited consolidated results; interim results are not necessarily indicative of full-year performance.
Business context and key financial metrics
Coeur operated silver and gold mines in the United States, Mexico, Bolivia, Argentina and Australia. Principal operations included Palmarejo, San Bartolomé, Kensington, Rochester, Martha and the third-party-operated Endeavor mine. Martha ceased active mining in September 2012.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Metal sales | $230.6 million | $343.6 million | $689.6 million | $774.3 million |
| Gross profit / margin | $52.8 million / 22.9% | $143.7 million / 41.8% | $173.8 million / 25.2% | $297.1 million / 38.4% |
| Operating income | $34.0 million | $127.4 million | $119.8 million | $245.3 million |
| Net income (loss) | $(15.8) million | $31.1 million | $11.1 million | $82.1 million |
| Diluted earnings (loss) per share | $(0.18) | $0.35 | $0.12 | $0.92 |
| Cash provided by operating activities | $79.7 million | $181.9 million | $209.9 million | $328.8 million |
Q3 production was 4.4 million ounces of silver, down 10.2%, and 58,768 ounces of gold, up 3.0%. Q3 realized prices were $30.09 per silver ounce and $1,654 per gold ounce; reported average market prices were lower year over year for both metals. Nine-month production was 14.2 million silver ounces and 165,716 gold ounces. These cash-cost measures are non-GAAP.
At September 30, cash and cash equivalents were $142.9 million, short-term investments $0.7 million, and working capital $171.7 million. The current ratio was 1.67, down from 1.84 at year-end 2011. Cash and short-term investments together were $143.6 million. Capital expenditures were $93.9 million for the nine months. Cash declined $32.1 million from year-end.
Debt and capital leases on the balance sheet totaled approximately $61.4 million, including $47.4 million net carrying value of convertible notes classified as current and $14.0 million of capital leases. The notes’ $48.7 million principal could be put to the Company on March 15, 2013. The Company also had a $100 million, four-year secured revolving facility, with no borrowings outstanding at quarter-end. The Palmarejo royalty obligation is presented separately: its balance-sheet carrying amount included a $170.2 million embedded derivative; the remaining minimum payment obligation was $64.1 million. The filing’s risk disclosure describes total indebtedness of approximately $125.5 million using the latter royalty measure.
Material changes and drivers
- Q3 metal sales fell 32.9%, reflecting lower ounces sold and lower realized silver and gold prices. Silver sales volume fell to 4.5 million ounces from 6.2 million; gold sales fell to 59,156 ounces from 67,391.
- Q3 silver output declined mainly because of slower underground advances and open-pit transition at Palmarejo, and temporary power-related mill interruptions at San Bartolomé. Q3 operating cash flow was substantially below the prior-year quarter, primarily due to lower sales.
- Nine-month sales fell 10.9%, while production costs applicable to sales rose to $349.3 million from $310.8 million. Management cited higher silver volumes sold, higher consumables and maintenance costs, and Rochester’s return to active mining.
- Noncash fair-value adjustments were a $37.6 million expense in Q3 and a $44.7 million expense for nine months, mainly related to the Palmarejo gold production royalty and other derivatives. They materially affected reported earnings.
- Coeur repaid approximately $68.6 million of the Kensington Term Facility in August and established the new revolving facility. Financing cash outflows included debt and royalty payments; the Company repurchased 475,500 shares for approximately $10.0 million during Q3.
- Martha recorded a total $6.1 million impairment for the first nine months and ceased active mining. Q3 also included a $2.5 million San Bartolomé business-interruption insurance settlement and additional Bolivian uncertain-tax-position expense.
Outlook, risks and contingencies
The filing does not provide a clear quantified consolidated production or earnings forecast. Management described priorities as maximizing cash flow from operating mines, controlling costs and capital spending, and pursuing exploration and growth. It reported ongoing exploration and development, including Palmarejo underground work and the Guadalupe satellite project.
- Operating and commodity exposure: Results depend heavily on volatile silver and gold prices, ore grades and recoveries, input costs, mine conditions, equipment and power availability, and foreign exchange rates. Hedging and royalty arrangements can limit upside, create opportunity costs and produce material noncash earnings volatility.
- Bolivia: Mining above 4,400 meters remained partially restricted. COMIBOL could challenge operations at Huacajchi or Huacajchi Sur; broader restrictions or changes to mining laws and policy could reduce production or require asset write-downs.
- Rochester claims and permits: A dispute with Rye Patch concerned 447 unpatented claims after Coeur missed a maintenance-fee payment. Mining continued, but an adverse outcome could constrain expansion and require permit changes. A separate administrative appeal challenged approval of Rochester’s operating-plan amendment; no stay was in place.
- Other legal and environmental matters: Asarco sued Callahan Mining Corporation seeking contribution related to a $3.5 million settlement at the Van Stone site; Callahan disputed liability. The filing also describes legacy-site inquiries and reclamation obligations. The ultimate outcomes and financial effects of these matters are uncertain.
- Liquidity and financing: The convertible-note holder put date in March 2013 creates a near-term liquidity item to monitor. The secured revolver has financial and other covenants. Management cautioned that cash generation, refinancing, asset sales or equity issuance may be needed if operating cash flows are insufficient.
- Additional risks: The filing highlights mine safety and environmental regulation, permitting, labor disruptions, foreign political and social risks, reliance on third-party operator Cobar at Endeavor, smelter availability, reserve-estimation uncertainty and potential dilution.
Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether silver and gold prices, production volumes and realized prices recover or further pressure revenue and margins.
- Cash generation, capital spending, working-capital needs, covenant compliance and the Company’s plan for the March 2013 convertible-note put.
- How much of reported earnings volatility reflects noncash derivative marks, and the cash-payment trajectory of the Palmarejo royalty.
- Resolution of Bolivia’s mining restrictions and the Rochester claim and permitting disputes.
- Whether mine-level cost and production trends—especially at Palmarejo, San Bartolomé and Kensington—improve, and the implications of Martha’s closure.
- The eventual tax, litigation, reclamation and environmental exposures, and the value and liquidity of the minority development-company investments.