There's no way to sugarcoat it: 2017 was not a particularly good year for shareholders of silver and gold miner Coeur Mining, Inc. (NYSE:CDE). When it comes to investing, though, you need to balance the past with the future, and this miner's efforts in 2017 look like they will set up a much better long-term future. Here's why precious metals investors should be taking a closer look at Coeur Mining, but probably shouldn't rush to pull the trigger.
A look back
Although investing is a forward-looking endeavor, you can't completely ignore the past, because it provides valuable context for the future. In the case of Coeur, the past includes a 17.5% stock price decline in 2017. Part of that was related to a relatively weak silver market (30% of revenues), with the price of that metal down 1.6% compared to a 12% advance in gold prices (70% of revenues). The bigger issue for the stock, though, was a collection of company-specific problems.
For example, although the company's all-in sustaining costs per silver equivalent ounce fell year over year in 2017, they were higher than investors may have been hoping for at the start of the year. That's partly because of drought conditions that hit the San Bartolome mine in Bolivia last year. (This asset has since been sold.) Lower-than-expected gold grades at the company's Kensington, Alaska, mine were also a trouble spot. And costs for consumables like fuel were an issue across the portfolio.
Coeur also ramped up its exploration budget in 2017, increasing it from roughly $25 million in 2016 to $42 million in 2017. However, that increase wasn't in the plan at the start of the year, when the miner was calling on exploration costs to be flat year over year. Those higher costs, 72% of which were expensed, were an additional headwind to the company's financial results.
Coeur also acquired the Silvertip mine in Canada in mid-October of 2017. Although that mine was expected to have lower costs than the now-sold San Bartolome mine, it required some investment before it would start producing. In other words, it was largely just an added cost through most of the fourth quarter. Production didn't commence until early 2018. The costs associated with the acquisition also helped to nearly double the miner's total debt year over year. The company had been working to reduce debt in recent years.
When it all came together, investors clearly weren't pleased. Coeur's earnings, meanwhile, supported the negative take on the company's progress, as they fell from $0.10 per share in 2016 to $0.02 in 2017.
That said, there are positives on the horizon that were set in motion in 2017. For example, all of the additional exploration spending in 2017 helped drive the company's proven and probable reserves up 10%, with an over 40% increase in both measured and indicated reserves and inferred resources. That bodes well for future production.
The Silvertip mine, meanwhile, is expected to help push production up by 7% in 2018. Note that it started producing ahead of schedule, as well, so it's reasonable to expect Coeur to hit its full-year projection targets at this point. This deal also added zinc and lead to the miner's portfolio (projected to be 7% of production, combined, in 2018), adding a little diversification to its production mix.
That said, Coeur has been working on a portfolio overhaul for a couple of years now. Selling non-core assets and buying mines to shift its mix more toward gold. In 2010, for example, silver made up roughly 64% of production, with gold chipping in the rest. In 2018, gold is projected to be 58% of production, silver 34%, with zinc and lead rounding out the total. So, Coeur has successfully shifted its mix toward a metal (gold) that has been performing relatively well as of late. Production, meanwhile, is more equally distributed across its operating mines today than in previous years.
On the negative side, total capital expenditures are expected to remain high this year, and that's partly because of increasing costs at existing mines. The overall budget is set to be about the same, year over year, but sustaining costs are expected to rise from 40% of the capital budget in 2017 to 63% in 2018. This is a clear negative. However, Coeur reworked a streaming deal with Franco-Nevada in 2017 that will roughly double its revenue from the arrangement over the previous deal. That will be a material support to the company's cash flow and should help to offset at least a portion of the rise in ongoing costs.
When all is said and done, there are clear positives taking shape at Coeur Mining. However, the real benefits still appear to be further in the future. In fact, it seems as if 2018 will be another transition year as Coeur works to ramp up the new Silvertip mine and digests higher ongoing costs across the portfolio. Ultimately, what's lacking is a fundamental catalyst to back the 10% stock price advance so far in 2018, other than chalking it up to a rebound after a bad year.
Coeur isn't the same company it was a few years ago, but I don't think it's done with its transition yet, either. Watch the progress at Silvertip, but also keep a close eye on the miner's ongoing costs. That will be the real determinant of Coeur's long-term success. Until the cost picture is more clear, most investors are probably better off waiting on the sidelines.