A leaner Coeur Mining boosts returns

Coeur Mining (TSX: CDM; NYSE: CDE) is steadily turning the corporate ship back towards profitability. The largest U.S.-based primary silver producer has spent nearly three years in transition — navigating choppy metal prices and financial struggles — to seek better returns.

Coeur has been focused on the five ingredients that it believes make up a successful miner: good management, attractive assets, a balanced growth pipeline, effective risk management, and a flexible balance sheet.

“These form the pillars of what our strategy is here and what has really been the foundational elements that we have pursued for a couple of years,” Coeur’s president and CEO Mitchell Krebs said during an afternoon Oct. 6 presentation by management. “We still have some ways to go: I’d say another couple of years to get where we need to be on all those five elements.”

But Coeur has made progress since Krebs — who first joined the company as a 24-year-old financial analyst in 1995 — took the helm in July 2011 from former chairman, president and CEO Dennis Wheeler.

Under the direction of chair Robert Mellor, Krebs put together a management team, where nearly 90% of the key members joined within the past two years. He also brought on new operational talent.

On the capital front, Krebs initiated a cost-reduction program in late 2012 to maximize cash flow. A year later, he relocated the company’s headquarters to Chicago from Coeur d’Alene, Idaho, arguing the city offered better management and transportation to the company’s operations. As part of the revitalization, Krebs renamed the firm “Coeur Mining” — previously Coeur d’Alene Mines.

“It’s a dramatic overhaul that’s going on here at this company,” Krebs said, emphasizing that it has been necessary.

In 2013, Coeur’s all-in sustaining costs were US$19.83 per equivalent oz. silver, down 7% from 2012. In the first half of 2014, all-in sustaining costs slipped to US$19.49 per equivalent oz. silver, but that wasn’t enough to turn a profit, which the company last reported in the first quarter of 2013.

But Krebs says Coeur could bring down costs to US$16 in the next couple of years by focusing on grade and efficiencies at its three top operations: the Palmarejo silver-gold mine in Mexico, the Rochester silver-gold mine in Nevada and the Kensington gold mine in Alaska.

At Palmarejo, the company updated the mine plan in July, whereby it will reduce mining rates at the pit and process fewer but higher-margin underground tonnes until late 2015, after which the nearby Guadalupe underground deposit will become Palmarejo’s main ore source.

Krebs expects Guadalupe to boost grades and recoveries and extend the mine life to 2021, offsetting the lower throughput.

His team recently reworked the gold royalty on Palmarejo with Franco-Nevada (TSX: FNV; NYSE: FNV) to retain more cash flow from the operation. Under the new deal, Franco will provide US$22 million for developing the high-grade Guadalupe deposit and receive half of the life-of-mine gold produced at the Palmarejo operation for US$800 per oz., instead of US$408 per oz. previously. Coeur says the royalty and mine plan changes could improve returns from its biggest asset, which produced 35% — or 2.9 million of the company’s 8.2 million equivalent oz. silver in the third quarter.

“It’s going to take a little bit of time for the dust to settle on everything we have done there in a short period of time. But we are leaving 2014 with a solid plan in place,” Krebs said.

At Rochester’s open-pit heap-leach operation, Coeur is ramping up the stage-three leach pad that it completed last year, which added 72 million tons of capacity. It has also upgraded the mine’s crushing and loading circuit.

In the second quarter, Coeur revealed that the improvements have boosted production and lowered processing costs. Silver-equivalent ounces rose 35% quarter-over-quarter to 1.67 million, while costs per ton dropped 54% to US$1.31. 

But the total cash costs jumped 25% to US$15.79 per equivalent oz. silver in the same period due to higher crushing and leaching costs. Coeur expects costs to flatten out in the second half of the year.

Rochester reported third-quarter silver-equivalent production of 1.86 million oz., up 12% from the second quarter and 110% from the third quarter of 2013. The higher silver-equivalent production mostly came from the higher gold grade in the pit.

“We are principally after the silver, but additional incremental volumes of gold are very helpful to our revenues and costs,” Coeur’s chief operating officer Frank Hanagarne said.

As a result, Coeur has boosted its 2014 gold expectations from Rochester to 38,000 to 42,000 oz. from 34,000 to 38,000 oz. This has pushed up the mine’s silver-equivalent target to 6.38 million to 6.92 million oz., from 6.14 million to 6.80 million oz., which includes 4.1 million to 4.4 million oz. silver.

Meanwhile, Coeur has started permitting the fourth- and fifth-stage leach-pad expansions, with approval expected in early 2015. Combined, these expansions will add 120 million tons of capacity.

At Kensington, the firm’s sole gold mine, Coeur says mine planning and exploration has focused on high-grade areas, mainly the Jualin and Raven zones.

Coeur is developing and mining the Raven zone. It is targeting a resource estimate for the Jualin zone by year-end, and a mine plan in early 2015.

The zone should be developed in the next two years, with mining by 2017.

To improve efficiencies, Coeur intends to use an ore sorter to bring mill recoveries up by 2% to 98%, and reduce power costs.

Kensington churned out 30,773 oz. gold in the third quarter — a 10% increase despite an 11% drop in tons milled, due to a maintenance shutdown.

Along with these three operations, Coeur owns the San Bartolome silver mine in Bolivia, and has a non-operating interest in the Endeavor polymetallic mine in Australia. It has two silver-gold feasibility stage projects: La Preciosa in Mexico and Joaquin in Argentina. It has deferred construction at La Preciosa until it sees better returns from the project. 

“I’m excited about where we are heading,” Krebs said. “Times are challenging … but if you can’t make money at these prices, you shouldn’t be in the business. And we have plans to do just that: make money.”

The company is guiding 2014 silver-equivalent production of 30.74 million to 32.64 million oz., including 17 million to 18 million oz. silver and 229,000 to 244,000 oz. gold. Its third-quarter financials should be out on Nov. 5.