Business Context and Reporting Period
Company: Coeur d'Alene Mines Corporation (Coeur)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: Coeur is a large primary silver producer with operations in North America, South America, Australia, and Africa. The company focuses on increasing silver production and reserves while managing costs. Key operational highlights for the period include the commencement of commercial production at the San Bartolomé mine in Bolivia (June 2008) and significant capital expenditures at the Palmarejo project in Mexico.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Revenues (Sales of Metal) | $39,763 | $147,073 |
| Net Income (Loss) | $(3,634) | $(4,291) |
| Operating Income (Loss) | $(8,762) | $(4,046) |
| Cash Flow from Operating Activities | $1,188 | $(9,037) |
| Cash and Cash Equivalents (Ending) | $55,677 | $55,677 |
| Total Assets | $2,860,034 | $2,860,034 |
| Total Liabilities | $1,135,534 | $1,135,534 |
| Long-Term Debt (Convertible Notes) | $410,000 | $410,000 |
| Capital Expenditures | $87,727 | $256,362 |
| EPS (Basic & Diluted) | $(0.01) | $(0.01) |
Note: Long-term debt includes $230 million in 3 1/4% Convertible Senior Notes due 2028 and $180 million in 1 1/4% Convertible Senior Notes due 2024.
Material Changes vs. Prior Period
- Revenue Decline: Sales of metal decreased 24.8% ($13.1 million) in the third quarter compared to the same period in 2007, driven by a reduction in silver and gold ounces sold, partially offset by higher realized metal prices ($14.47/oz silver vs. $12.87/oz; $886/oz gold vs. $702/oz).
- Net Loss: The company reported a net loss of $3.6 million for the quarter, a reversal from a net income of $3.6 million in the prior year quarter. This was primarily due to lower revenues and increased depreciation/depletion expenses from the new San Bartolomé mine.
- Production Costs: Production costs applicable to sales decreased 19.7% ($7.5 million) in the quarter, largely due to lower costs at the Rochester and Cerro Bayo mines.
- Depreciation and Depletion: Increased 70.0% ($2.7 million) in the quarter due to the San Bartolomé mine coming into service.
- Cash Position: Cash and cash equivalents decreased by $42.2 million during the quarter, primarily due to capital spending on development projects (Palmarejo, Kensington, San Bartolomé).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Cost Reduction: In October 2008, management announced a cost reduction plan targeting a $10 million annual reduction in non-operating costs (40% reduction), including workforce reductions at the Kensington project and corporate offices.
- Project Status:
- Palmarejo (Mexico): Construction is underway with commercial production expected in Q1 2009. Capital costs estimated at $180 million for 2008.
- Kensington (Alaska): Development activities temporarily curtailed pending a U.S. Supreme Court decision on tailings permits (expected Q2 2009). Workforce reduced by 50%.
- Cerro Bayo (Chile): Operations temporarily suspended in late October 2008 due to lower metal prices and higher operating costs. Management is reassessing the mine plan to extend mine life.
Risks and Contingencies
- Commodity Price Volatility: The company has no hedging activities for silver or gold. A sustained decline in prices could force suspension of mining and trigger asset impairment write-downs.
- Asset Impairment: The suspension of Cerro Bayo and the Kensington litigation are triggering events for impairment testing. While no impairment was recorded as of September 30, 2008, future declines in silver prices or reserve estimates could necessitate material write-downs.
- Legal Proceedings: The Kensington project faces ongoing litigation regarding its tailings facility permit, with a Supreme Court decision pending.
- Debt Obligations: The company has approximately $437 million in outstanding indebtedness. Future cash flows must be sufficient to meet debt service obligations.
Unusual Items
- Subsequent Financing: On October 20, 2008, the company sold $50 million in senior secured floating rate convertible notes to fund the Palmarejo project.
- Inventory Adjustment: In Q3 2008, the company increased estimated silver ounces in the Rochester heap inventory by 5.4 million ounces, extending the residual leaching phase to 2014.
Investor Verification Checklist
- Impairment Risk: Verify the impact of the Cerro Bayo suspension and potential future impairment charges on the balance sheet.
- Kensington Permit Status: Monitor the U.S. Supreme Court decision timeline (expected Q2 2009) and its effect on the $331.4 million carrying value of Kensington assets.
- Capital Expenditure Burn Rate: Assess the company's ability to fund the $180 million Palmarejo construction and other projects given the $55.7 million cash balance and recent debt issuance.
- Commodity Price Sensitivity: Evaluate the company's break-even points given the lack of hedging and the recent drop in silver prices (to $8.81/oz as of Oct 28, 2008).
- Debt Covenants: Review the terms of the new $50 million floating rate notes and existing convertible notes for potential covenant restrictions.