Judging by the swift disposal of 20% of its market capitalization, the market was keeping this 84-year-old mine operator on a very short leash.
Coeur d'Alene Mines (NYSE:CDE) surprised investors with a $15.8 million net loss for the third quarter, impaired by $37.6 million in fair value adjustments relating to the company's gold royalty obligation to Franco-Nevada (TSX:FNV) for 50% of gold production at its flagship Palmarejo mine. The gold price has more-than-doubled since Coeur inked that royalty in early 2009 for just $80 million, turning that cash consideration into some seriously costly capital.
And speaking of costs, Coeur revealed a 20% increase in operating cash costs to reach $9.05 per ounce of silver. "Unfavorable underground conditions" at Palmarejo forced Coeur to slow operations within a high-grade portion of the deposit in order to add "additional underground support measures." The company offset some of the underground shortfall with accelerated production from the open pit, but the increased proportion of lower-grade material -- as well as a "transition phase" in the open pit's mine sequence helped to push costs higher. Coeur's President and CEO Mitchell Krebs added: "It's important to stress what affected third-quarter production in the 76 clavo in Palmarejo's underground operation is a timing issue and is temporary in nature."
Because Coeur's second-largest silver mine, San Bartolomé, has itself struggled with upwardly mobile costs in recent quarters, the miner relies upon Palmarejo as the low-cost anchor in its portfolio. Palmarejo's average cost for the quarter of just $3.75 per ounce may not appear terribly troubling on its own, but it represents a 423% increase from the prior-year period that brought into focus the elevated cost structure at San Bartolomé. San Bartolomé suffered a 30% cost increase as well, recording a cash operating cost of $12.13 for the period.
And on the gold side, Coeur's Kensington mine in Alaska operated at a cost structure that I would characterize as sub-economic on an all-in basis. The industry's average all-in cost is roughly $1,200 per ounce, which AngloGold Ashanti (NYSE:AU) CEO Mark Cutifani characterized as essentially a break-even cost structure at prevailing gold prices once the industry's cost of capital is factored in. Wherever cash costs are trending above that average all-in cost, or at least until gold prices adjust to set a new floor above $2,000 per ounce, I encourage investors to watch those operations carefully for signs of improvement. Fortunately, Coeur expects Kensington's average cost to decline to roughly $950 per ounce for 2013, and I do expect a rising gold price to likewise ease the present margin malaise.
From a devastating stock collapse several years back that prompted a 1-for-10 reverse split, to the embarrassing mess involving disputed mining claims at the Rochester mine that could cede some 40.5 million silver-equivalent ounces of measured and indicated resources to claim-staker Rye Patch Gold, I believe the company has given some cause for the market to keep its stock on a short leash. That being said, Tuesday's 20% collapse may have pushed a bit further than the recent developments warranted. Although I plan to stick with my preferred silver investment vehicles -- which include Endeavour Silver (NYSE:EXK) and First Majestic Silver (NYSE:AG) -- I see more upside potential than downside risk in Coeur's stock after Tuesday's massive sell-off.