Falling silver prices continue to put pressure on silver miners. This is particularly true for those miners who were already unable to operate profitably at higher prices, like Coeur d'Alene Mines (CDE +4.46%). The company finished the third quarter with an adjusted $23.4 million loss, while the average realized silver price was $21.06. As silver prices drift under the $20 mark, things don't get easier for Coeur d'Alene.
Finding ways to grow
Cash flow from operating activities decreased by 57% in the third quarter compared to the second quarter of this year. Despite this alarming fact, the company stated that it believed that current market conditions provided a unique opportunity to pursue new growth opportunities.
Coeur d'Alene recently announced the formation of a new wholly owned subsidiary, Coeur Capital, which will hold Coeur's existing and future royalty and streaming interests. The company also announced it would acquire Global Royalty, which holds precious metals royalty interests in Mexico and Ecuador, for $23.8 million.
Another silver miner, Hecla Mining (HL +2.04%), already used depressed asset prices to diversify into gold production. Hecla financed the purchase of Aurizon Mines with the offering of $500 million 6.875% senior notes due 2021. So far, this move has paid off for Hecla, as gold prices have fallen less than silver prices this year. What's more, the purchase made Hecla a true diversified miner, as silver brought 38% of total revenue in the third quarter, gold brought 35%, and the remainder was supplied by lead and zinc.
Preserving cash
Coeur d'Alene had just $305 million of long-term debt and $211 million of cash on its balance sheet at the end of the third quarter. It looks like the company wants to preserve its cash, as the purchase of Global Royalty will be financed by just $0.3 million of cash and $23.6 million of Coeur common shares.
Coeur d'Alene decided to temporarily delay completion of construction and commencement of mining in Guadalupe, which was expected to begin commercial production in early 2014. The company will try to replace the ounces that would have been produced at this mine by increasing production at Palmarejo.
As well as Guadalupe, Palmarejo is situated in Mexico and will be affected by the new Mexican tax on mining companies. Coeur d'Alene also stated that it is evaluating the impact of the tax on its La Preciosa project, which is currently going through a feasibility study.
The blow by Mexican legislators is heavier for companies like Endeavour Silver (EXK +4.73%). Endeavour has all its producing mines and most of the exploration projects in Mexico. Endeavour finished the third quarter with adjusted income of $13 million. With the impact of the new tax and the falling silver prices, it will be difficult for Endeavour to remain profitable in the next year.
In order to return to profitability, Coeur d'Alene has a lot of work to do on the cost front. For example, cash operating costs were $35.83 at its Rochester mine in Nevada due to lower production. The company expects that the mine will be back on track in the fourth quarter.
Bottom line
Coeur d'Alene trades at less than half its book value. However, as silver prices drift lower and lower, Coeur d'Alene will continue to trade at a discount to book. The company has significant challenges to deal with.
Coeur d'Alene must increase production at Rochester and Palmarejo, and lower its costs at the same time. As of now, the company has a stable financial position, but investors want growth. I don't think that Coeur's recent move to purchase Global Royalty changes the company's prospects. At current silver prices, Coeur d'Alene will struggle to show any growth.
