The recent rise in silver prices has helped shares of most silver miners post solid gains so far this year. However, there is one exception to this trend – Coeur d'Alene Mines (NYSE:CDE), which is up only 7% year to date. What's holding this silver miner down?
Playing with reserves numbers
Coeur d'Alene reported a 16% rise in silver reserves and a 12% increase in gold reserves at year-end 2013. These numbers look great, until we find out that the company used a $25 per ounce price assumption for silver and a $1,450 per ounce price assumption for gold.
It looks like currently the market likes operators which prefer to be on the conservative side in their assumptions. For example, Pan American Silver (NASDAQ:PAAS), which used prices of $22 per ounce of silver and $1,300 per ounce of gold, is up 30% this year. Of course, this was not the only factor that contributed to Pan American Silver's performance. Pan American Silver achieved healthy production levels, maintained a solid balance sheet with almost no debt, and maintained its dividend, which currently yields 3.30%.
During the earnings call, Coeur d'Alene stated that it ran a reserves test under $20 silver and $1,250 gold. This test resulted in a 6% decline in silver reserves and an 8% decline in gold reserves. These numbers look more realistic given the current price environment.
Looking into royalty and streaming
Coeur d'Alene acquired Global Royalty Corp.,which held operating interest in mines in Mexico and Ecuador, back in December. The size of the deal was relatively small, as Coeur d'Alene issued 2.1 million of shares to pay Global Royalty shareholders and added just $0.3 million of cash.
The company stated that it will be focusing on royalties that can have an immediate impact. Coeur d'Alene is planning to look at companies that try to obtain funding through the sale of a royalty or a stream. Perhaps the company is inspired by the example of Franco-Nevada (TSX:FNV), to which it paid $57 million in royalty payments in 2013. Franco-Nevada's royalty applies to 50% of the gold production in the Palmarejo mine, which is situated in Mexico. Franco-Nevada's shares have enjoyed a decent run this year and are up 31%.
The company has further cut its capital spending to $65 million-$80 million in 2014, down from $101 million in 2013. Eighty percent of these capital expenditures will go to sustaining capital, leaving little money for further exploration. If we combine this fact with the above-mentioned intent to focus on royalties, we can come to the conclusion that Coeur d'Alene is not that happy with operating its own mines.
In my view, the plan to dive into the royalty and streaming world is not the best one for the mining company, and Coeur d'Alene's share performance reflects this. The miner's first target must be the improvement of its own operations. The company's operating cash flow was positive in 2013, but it was barely sufficient enough to offset the capital spending.
Coeur d'Alene plans to produce 17 million-18.2 million of silver in 2013. The achievement of the high end of the guidance will result in a 7% increase in production. However, there is more work to do on the cost front to improve margins.
Rochester mine in Nevada had negative net cash flow of $40.5 million in 2013, and this has to be changed if Coeur d'Alene wants to improve its overall performance. The company states that the mine will produce 4.1 million – 4.4 million ounces of silver this year, up from a dismal 2.8 million ounces last year. Hopefully for Coeur d'Alene, the increase in production will lower costs as some costs are fixed and they are distributed between the number of ounces produced.
All in all, Coeur d'Alene lacks catalysts that will allow its shares to show growth similar to other silver miners.