Palmarejo delivers for Coeur

Of Coeur d’Alene Mines’ (CDM-T, CDE-N) five producing precious metals mines, Palmarejo in northern Mexico is the largest contributor to the company’s sales and cash flow. Metal sales from the mine in Chihuahua state last year reached US$513 million — about half of Coeur’s total metal sales — with operating cash flow  at US$299 million, and cash operating costs at negative US97¢ per oz. silver. 

Operated both as an open-pit and underground mine, Palmarejo is the fifth-largest primary silver mine in the world, and the third-largest in Mexico after Fresnillo and Penasquito. The mine completed its second full year of production in 2011, churning out 9 million oz. silver and 125,071 oz. gold, up from 2010’s 5.9 million oz. silver and 102,440 oz. gold.

This year the company is betting that Palmarejo will produce between 8.5 million and 9 million oz. silver, and between 98,000 and 108,000 oz. gold.

Production during this year’s second quarter totalled 2.4 million oz. silver and 31,258 oz. gold, with cash operating costs of negative US85¢ per oz. silver, compared with negative US$2.27 per oz. silver in the first quarter of 2012.

The higher costs in the second quarter over the first quarter were primarily due to higher maintenance expenses and downtime related to a temporary work stoppage at the mine in May. Sales and operating cash flow at the mine during the quarter reached US$136.4 million and US$63.6 million, respectively. Capital expenditures came in at US$11.2 million.

On the exploration front, US$16 million of the company’s US$40-million exploration budget this year is dedicated to Palmarejo. Last year, US$13 million was spent on exploration at Palmarejo.

Coeur drilled 32,321 metres in the Palmarejo district during the second quarter spread across targets around the current mine operation and in the Guadalupe area, about 5 km southeast of the mine, at La Patria, about 2 km southwest of Guadalupe and other exploration targets in the district.

The company has defined mineralization at Guadalupe over 2.5 km from southeast to northwest, and it appears that it remains open to the northwest and at depth. Coeur believes the Guadalupe deposit will be in production in 2013.

“We’re quite pleased with Guadalupe,” Don Birak, Coeur’s senior vice-president of exploration, says in a telephone interview from Mexico. “The deposit still has room to grow . . . it’s not done yet.” Currently Guadalupe has measured and indicated resources of 7.6 million tonnes grading 1.79 grams gold per tonne and 148.8 grams silver per tonne, inclusive of mineral reserves. Inferred resources add 5.05 million tonnes grading 1.63 grams gold per tonne and 115.2 grams silver.

Last year the company began drilling at La Patria, the third major northwest-trending mineral zone in the district, which remains open for expansion. The company is evaluating development options for La Patria, which may include a stand-alone mine and ore-processing facility, feed for the existing mill or a combination of both. Palmarejo, Guadalupe and La Patria are sub-parallel northwest-trending zones that criss-cross the Palmarejo district.

Birak is confident that he will find more mineralization in the district. “Most of our efforts have been on these three [Palmarejo, Guadalupe and La Patria], but as we continue to run Palmarejo and put a new mine in production at Guadalupe, we now have opportunities to go out and spread our wings, and look for the next deposit,” he says. His team has already found promising targets right around the current Palmarejo mine and mill — “A great place to have a discovery,” he says — and hopes that is what he is seeing at a target called La Blanca Norte, 500 metres north of the mill.

“We’re seeing evidence in the core at La Blanca Norte of typical Palmarejo-style mineralization at this stage, and the gold and silver grades are anomalous,” he explains. “We have had success at Guadalupe and La Patria, so what about the area around the current mine and mill? Where you find one elephant or two, you might have three or four. So it’s important to go back to where we know there’s a big deposit, and look there.”

Birak — who has been in the business for over 30 years, and has had assignments ranging from strata-hosted gold deposits, to massive sulphides to nickel — describes Palmarejo as a world-class deposit and district. “It was under evaluated by almost everybody,” he says. “It had a little bit of historical production on it but not much, so it was kind of sitting there without much exploration.”

And the geologist gives credit to the former owners of the land package that sold it to Coeur in 2007. “Getting a good land position in the Sierra Madre is really difficult,” he explains. “Palmarejo has been very good to Coeur.”

Total measured and indicated resources for the Palmarejo district, inclusive of reserves, stand at 15 million tonnes grading 153.5 grams silver per tonne for 73.8 million contained oz. silver and 1.86 grams gold per tonne, for 892,700 contained oz. gold. Inferred resources add 11 million tonnes grading 79.7 grams silver for contained silver of 28.2 million oz., and 1.74 grams gold for 614,700 contained oz. gold.

Apart from Palmarejo, the silver producer reported strong second-quarter results overall. Production reached 4.9 million oz. silver (the same as in the first quarter) and 63,047 oz. gold (up 44% over the first quarter), which resulted in US$254.4 million in sales (up 24% from the first quarter), US$88.4 million in operating cash flow (down 6% from first quarter) and a US$47.1-million increase in cash and equivalents and short-term investments, to US$200.3 million.

Including changes in working capital, net cash from operating activities totalled $113.2 million compared to $17 million in the first quarter. Consolidated cash operating costs totalled US$6.41 per oz. silver, up slightly from the first quarter. Cash operating costs per oz. gold fell 50% from the first quarter to $1,348, and the company expects they will reach US$900 by year-end. Adjusted earnings totalled US$28 million, or US31¢ per share, compared to US$41.5 million, or US46¢ per share in the first quarter. Net income reached US$23 million, or US26¢ per share, compared to US$4 million, or US4¢ per share in the first quarter.

Coeur forecasts that it will achieve the high-end of its 2012 silver and gold production guidance of 18.5 million to 20 million silver oz. and 210,000 to 230,000 gold oz., and expects to achieve the low-end of its 2012 guidance for cash operating costs per silver ounce of US$6.50 to US$7.50.

In June Coeur’s board of directors announced that the company would repurchase up to US$100 million of its common stock, and also finalized a US$100-million, four-year revolving credit facility.

As of June 30 the company held US$200.3 million in cash and short-term investments.

At press time Coeur was trading at $19.63 per share in Toronto within a 52-week range of $15.52 to $30.48, and in New York it was trading at US$19.81 per share within a 52-week range of US$15.15 to US$30.99.

Andrew Kaip of BMO Capital Markets has a “market perform” rating on the stock, with a price target of US$21 per share.