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Silver miner Coeur Mining (NYSE: CDE ) has lost more than half its value over the past year as the commodities bubble burst, sending the price of the gray metal plunging along with the stocks of industry peers Endeavour Silver, First Majestic Silver, and Hecla Mining (NYSE: HL ) , which are are all down by like amounts.
With mining interests coming under attack from environmentalists and indigenous tribes, along with onerous tax schemes by rapacious governments, the sector is experiencing sustained weakness that shows no signs of relenting.
To lend assurance to skittish investors, the mining community is devising creative ways to provide some stability and security, and Coeur has hit on the latest scheme with its acquisition of Global Royalty and the creation of a financial vehicle to hold its royalty and streaming interests.
Silver streamers such as Silver Wheaton (NYSE: SLW ) and Silver Standard Resources (NASDAQ: SSRI ) have long realized that the risk associated with mining ventures could be minimized by eliminating the most costly component of the industry from their business models -- the actual mining -- and simply pay others for their production. By giving the miners money upfront for rights to their silver output later, in a rising price market such as we witnessed several years ago, the streamers will enjoy some of the fattest margins around.
So while not ceding any of its production capabilities, Coeur is introducing a formal structure to capture some of that lightning in a bottle by forming Coeur Capital, a subsidiary that will hold its existing royalty and streaming interest along with any interests it acquires in the future, as well as its portfolio of eight strategic silver and gold development companies that have projects in North and South America.
In conjunction with this specialty arm, Coeur also acquired Global Royalty, which has interests in operating mines in Mexico and Ecuador, including a tiered royalty agreement with McEwen Mining (NYSE: MUX ) and a net smelter royalty agreement with Canadian-listed Dynasty Metals & Mining.
Altogether, Coeur says its purpose is to provide investors with higher-margin, less volatile free cash flow, exposure to a diversified portfolio of metal, and future avenues for growth. And while it could smooth over some of the financing issues the industry is currently experiencing, it might not go as smoothly as Coeur hopes.
First, Dynasty challenged Coeur's assertion that Global had an option to acquire an additional NSR royalty on its Ecuador mining projects. Sure, it's always considering the options available to it, but it says it hasn't made any decision with Global, or anyone else for that matter, about additional royalties. That suggests the near-$24 million Couer paid for Global, while attractive, may not be as fully realized as mentioned.
Moreover, the streaming business has its limitations. We're entering a period where it won't be production that drives gains by miners, but rather cost containment. Coeur reported in its third-quarter financials that it was temporarily delaying progress on its operations in Guadalupe, which was expected to begin commercial production in early 2014. While it will try to supplement the lost production with additional output from its Palmarejo mine, like other precious-metals miners, Mexico just imposed a special mining tax on them. Regardless of production, any savings from lowering costs won't be passed onto the streamers, so as miners benefit they don't accrue to those receiving its output.
Such developments run their course like fads. When gold was on its way up, miners began paying dividends linked to the price of the yellow metal. Now that it's fallen sharply, you don't hear about what a great idea that is anymore. Hedging also had its day in the sun, but gold again illuminated the risks after Ashanti Gold was nearly brought to ruin. Today, Great Panther Silver, Pan American Silver, and Silver Wheaton have all un-hedged themselves. Hecla, though, has started hedging all of its metals once they're shipped as a means of protection from price volatility.
Whether streaming follows that same course remains to be seen. Sandstorm Gold was created in the same vein as Silver Wheaton, but this time with gold, yet it's lost two-thirds of its value over the past year. Coeur Mining may be looking for stability, but the streams it creates may still rock the boat.
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