Coeur builds on 2016 success 
with exploration investment

Coeur Mining (NYSE: CDE) is reaping the fruits of its laborious corporate transformation, helped along by higher precious metal prices, as it produced earlier-than-expected positive free cash flow of US$12.2 million in the June quarter.

“What the higher gold and silver prices did was accelerate by a quarter or two some of the trends that we’ve seen in our business. Those go back over the last two years of some pretty aggressive cost reductions that we have been able to realize,” the company’s president and CEO Mitchell Krebs says in an interview.

Coeur operates five precious metal mines in Mexico, the U.S. and Bolivia, and has improved operating costs as well as lowered general and administrative (G&A) costs since 2013, Krebs says.

From 2013 to 2015, G&A fell from US$55.3 million to US$32.8 million, and should total US$30 million in 2016. Most of the initial reduction has come from streamlining and rebranding the organization, which included relocating the company’s headquarters to downtown Chicago from Coeur d’Alene, Idaho, in 2013.

Over three years, silver-equivalent production increased from 32.7 million oz. to 35.6 million oz., as Coeur added more gold ounces.

It’s now on track to meet its 2016 silver-equivalent production guidance of 33.8 million to 36.8 million oz., with Krebs noting the company might lower its annual cost guidance of US$16 to US$17.25 per equivalent oz. silver, if costs trend lower in third quarter.

In the second quarter, all-in sustaining costs per equivalent ounce of silver were US$14.82, down 11% from the same period a year ago, and 24% from US$19.59 in 2013. (On an adjusted basis, all-in sustaining costs have dropped 35% since 2013 to US$13.27 per realized equivalent oz. silver in the June quarter.)

The cost reduction came from many factors, including acquisitions and “more efficient mining through both a focus on scale and grade, depending on the mine,” Krebs notes.

Coeur is benefiting from its US$99-million acquisition of the Wharf heap-leach gold-silver mine in South Dakota from Goldcorp (TSX: G; NYSE: GG) in early 2015. The asset is Coeur’s lowest producer and largest source of free cash flow, generating US$14.7 million in free cash flow in the June quarter.

“It looks like we already — in owning that only for a year and a half — recouped 60% of the $100-million acquisition cost. That’s as good of an acquisition you’d find in this industry, and a 20% rate of return,” Krebs says.

In late 2014, Coeur agreed to acquire junior Paramount Gold and Silver for its project that bordered the company’s Palmarejo silver-gold operation in Mexico’s Chihuahua state.

“The former property boundary between the two companies sort of split a few deposits in half, and by buying Paramount, we’ve consolidated ownership of those deposits — one of which is called Independencia,” Krebs says.

Coeur finished transitioning Palmarejo, its largest asset, from an open-pit operation to a lower-tonnage, higher-grade underground mine in the second quarter.

For a year and half, it has underground-mined the Guadalupe deposit, and in the past year has driven two declines from Guadalupe over to Independencia, where underground mining has also started.

Palmarejo’s second-quarter output totalled 2.4 million equivalent oz. silver, up 34% from the previous quarter, and 4% higher than a year ago. The adjusted cost applicable to sales was US$8.24 per realized equivalent oz. silver, down 19% over the previous quarter, and 32% lower than a year ago.

At Coeur Mining’s Wharf gold-silver mine in South Dakota, which the miner bought for US$99 million in 2015. Credit: Coeur Mining.

Krebs expects more cost improvements, as underground mining at Independencia reaches 1,000 tons per day by year-end. Combined, the two deposits should produce 4,000 tons per day in 2017 and beyond. “That is going to drive the overall results not only for Palmarejo, but for the company,” the executive says.

Coeur will also benefit from the revised gold royalty agreement on Palmarejo with Franco-Nevada (TSX: FNV; NYSE: FNV), which came into effect in August, after Coeur met the 400,000 oz. minimum delivery option under the original agreement. Under the revised terms, negotiated in October 2014, Franco-Nevada agreed to pay US$22 million to help develop Guadalupe in 2015. In return, it will receive half of the life-of-mine gold production from Palmarejo’s original land package for US$800 per oz., instead of US$416 per oz. previously. This saves Coeur US$40 million in annual royalty payments, Krebs says.

The revised agreement, the Paramount acquisition and the continued exploration have turned Palmarejo into a higher-margin, longer-life underground mine, he adds.

Palmarejo has an eight-year mine life. Coeur says it could extend that through ongoing exploration, where it will deepen the two deposits it is mining, convert resources to reserves and test underground targets.

After the company’s exploration results in the first half of the year, as well as higher metal prices, Coeur has increased its company-wide exploration budget by US$8 million, mainly to upgrade resources to reserves at Palmarejo, the Kensington gold mine in Alaska and the Rochester gold-silver mine in Nevada. Nearly half of the US$8 million will go toward exploration activities, while the rest will go towards capitalized exploration.

Elsewhere in Mexico, Coeur is re-evaluating its La Preciosa silver project, located in Durango, as a lower-capital, higher-grade and lower-cost growth project, with an update expected in September. Over the medium-term, Coeur intends to complete revised economic studies for La Preciosa, where Coeur put off a construction decision in 2014, given unfavourable project economics.

Krebs says he “loves” working in Mexico. “It’s the world’s largest silver-producing country, with a great workforce, great infrastructure, and responsible permitting processes and timetables.”

While La Preciosa is likely in the company’s future, Coeur will continue to invest in Palmarejo, with Krebs noting that the company spent US$4 billion in Mexico since 2007.

The executive says there is “still a lot to come” at Palmarejo and its other assets. “Now, it’s more about execution, and less about transition … we are a year and a half into seeing the benefits of a lot of the transitional work. But a lot of the good things that we expect to happen are still out in the future for us.”

Meanwhile, the stock is up an astonishing 460% year-to-date to close Aug. 29 at US$13.83, up from US$2.47. (The stock, however, was trading in the low thirties in late 2012.)

“Our stock price this year has outperformed every single U.S.-listed equity, with a market cap of over US$250 million. We have been on a tremendous run this year,” Krebs says.

The firm, which has focused on capital discipline and strengthening its balance sheet, recently repaid a US$100 million medium-term loan. It has a US$150-million cash position, and US$230-million total net debt.