Coeur d'Alene Mines Pressured by Low Silver Prices

Coeur d'Alene's high costs make the company vulnerable to downside in silver prices, but improvements on the cost front could pave the way for upside.

Apr 15, 2014 at 1:52PM

So far this year, Coeur d'Alene Mines (NYSE:CDE) has been the worst performer among silver miners, losing 18% year to date. The reason for this is quite simple: Coeur d'Alene's costs are high. The company's all-in sustaining costs were $18.94 per silver equivalent ounce in 2013. As silver prices continue to trade below $20 per ounce, Coeur d'Alene's profitability is under question.

Flat production levels mean costs are the thing to watch
Coeur d'Alene Mines has recently reported its first quarter production numbers. The company produced 7.6 million silver equivalent ounces. In comparison, Coeur d'Alene produced 7.5 million silver equivalent ounces in the first quarter of 2012 and 7.2 million silver equivalent ounces in the first quarter of 2013. These numbers highlight the lack of production growth, which currently isn't typical for a silver miner.

Coeur d'Alene also maintained its 2014 production guidance. The company expects to produce 17 million-18.2 million ounces of silver and 220,000-238,000 ounces of gold, compared to 17 million ounces of silver and 262,217 ounces of gold produced last year. In short, this means no growth in production once again, as the possible growth in produced silver is offset by lower gold production.

At the same time, other silver miners are increasing their output. For example, Hecla Mining (NYSE:HL) recently announced that it produced 2.5 million silver ounces in the first quarter, up 32% over first quarter 2013 production numbers. First Majestic Silver (NYSE:AG) scored a new quarterly record of 3.6 million equivalent ounces of silver, a 33% increase compared to the same quarter in 2013.

While other silver numbers try to offset lower silver prices with increased output, Coeur d'Alene has to deal with its relatively high costs. Fourth quarter cost numbers were promising, as the company had all-in sustaining costs of $16.92 per silver equivalent ounce, lower than the full-year cost average. Still, there's a lot of work ahead for Coeur d'Alene. In comparison, First Majestic Silver predicted that its all-in sustaining costs would be $15.87-$16.69 per silver equivalent ounce in 2014.

Financing remains expensive
This March, Coeur d'Alene issued $150 million of 7.875% senior notes due 2021. Earlier in 2013, the company offered $300 million of 7.875% senior notes due 2021. The high interest rates signal that bond investors demand significant premium to lend money to Coeur d'Alene. Given the company's current performance, it is unlikely that its financing rates will drop in the near term.

However, the debt is not a problem for Coeur d'Alene. The company had just $306 million of long-term debt at the end of 2013. Interest expense isn't weighing heavily on the company's performance, and improvements on the cost front will be immediately reflected in Coeur d'Alene's cash flows.

Bottom line
Surely, Coeur d'Alene's performance is far from optimal, but the company remains in a healthy condition. Coeur d'Alene has sufficient liquidity, as it finished the fourth quarter with $206 million of cash on the balance sheet and attracted $150 million from the bond market in March. Analysts expect that the company will report a first quarter loss of $0.27 per share, but these expectations might have already been priced into Coeur d'Alene's shares, which trade at a 50% discount to book value. If silver prices don't dip lower, Coeur d'Alene shares could see upside should the company demonstrate meaningful improvements on the cost front.

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