Buy, Sell or Hold: After the 44% Sell Off, Is Coeur Mining a Solid Buy Now?

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As Money Morning readers, you're all too familiar with the reasons gold and silver are a necessary part of your portfolio.

Precious metals are one of the only practical hedges against political upheaval, a falling economy and the monetary debasement that is going on around the world.

So when subscriber, Elke B. suggested I review Coeur Mining Inc. (NYSE: CDE), I knew I didn't have to reinvent the wheel.

Because given the current wall of worry, the long-term future of silver and gold prices still looks bright.

And with the largest U.S.-based silver miner and a growing gold miner like Coeur down 44% since Jan. 1., I thought Elke might be onto something of a solid rebound play.

But to find out, I needed to dig a little deeper. Here's what I found…

The Tarnishing of Coeur Mining

Admittedly, what has recently occurred with the price of gold and silver has sent a shudder down the spines of Coeur's shareholders. 

From last year's October highs to today's price of near $1400 per ounce, gold has fallen 20%, while silver has dropped roughly 35% in that same time frame to approximately $22 per ounce. 

The share price for Coeur has followed suit and is down over 50% from its October 2012 highs to its present price of $14 per share.

Coeur Mining Inc. (NYSE: CDE)

Naturally, with precious metals falling in price, profits for Coeur are also down significantly, which is reflected in its share price.

In the first quarter, adjusted profit fell to $6.8 million or 8 cents per share, versus $41.5 million, or 46 cents per share in the first quarter of 2012.  The company also saw a drop in sales of 16% to $171.8 million.

To make matters even worse, Coeur also foresees an increase in operating costs for mining silver.  The company raised the estimated costs for 2013 from $8.00-$9.00 per ounce to $9.50-$10.50.

But here is an instance where the disclaimer "past performance does not dictate future results" is very appropriate. 

Coeur is now poised to survive the wounds it has taken from increasing costs and decreasing commodity prices and should begin to flourish when the momentum swings the other way.

Understanding the Costs

When it comes to evaluating a miner, the analysis is quite simple but a little nuanced. 

The basic question is: Are the company's costs covered by the sale of the underlying asset?  If the costs can be kept and maintained at a minimum then there is considerable profit to be made if the value of the underlying asset is rising.

As mentioned above, Coeur estimates costs to be $9.50-$10.50 for an ounce of silver and $900-$950 for an ounce of gold. 

Of course, Coeur is in the business of making money, and if the price of the metal gets too low, the company will not sell the metal at a loss.  Instead, it would rather scale back or shut down operations. 

This, in effect, sets a floor for the price of the metal and will cause a price rise due to the decreased supply and increased probable demand.

But here is where it gets a little more nuanced. 

You can't just look at the daily prices of gold and silver and extrapolate how much money a miner would make by subtracting costs.  Those tricky accountants muck it up a little using non-GAAP accounting methods to measure the costs. 

Basically, the costs tabulated for an ounce of metal are the mining costs only – they do not include all the other costs associated with running a $1 billion company. 

It is a bit misleading, to say the least, but even so, we can do a little "digging" of our own to see if costs are being managed appropriately and what is driving them.

To do so, we have to look at Coeur's most proven mines and their future prospects.

According to Coeur CEO Mitchell Krebs, "Production costs at our mines are on plan and we are now seeing some reductions versus budget thanks to a lot of hard work."

First, the Kensington gold mine in Alaska is now becoming more of a focus.

Since the metal price of silver suffered even more than the price of gold, Coeur slightly shifted its focus to the production and sale of more gold.  Silver now accounts for 53% of total sales as opposed to the previous year when silver accounted for 68%. 

The Kensington mine is primarily underground. In the first quarter, costs were higher due to temporary production slowdowns in order to complete critical infrastructure projects.  Those costs are now evaporating and the plan is to ramp up operations where it will be able to produce 115,000 ounces of gold per year.

Next is the Rochester gold and silver mine in Nevada, which is also undergoing expansion.

This is a mine that Coeur has been digging away at for the past 25 years.  You may think it has dried up at this point, but in fact Coeur is very enthusiastic about its future prospects. 

Years ago, when the price of silver was far below where it is today, it was not to Coeur's advantage to mine every last drop of silver with advanced processing.

Instead, much was left to "waste."  Well, now with the price of silver higher, Coeur is going through all those years of "waste" – bleeding out more silver on the already extracted and crushed stockpiles on the surface.  Therefore, much of the mining costs have already been capitalized. 

The company can process around 15 million tons of ore a year and it has 150 million tons (or 10 years' worth) of stockpile material.  Couple this "waste" reclamation with further mining, and the prospects are quite appealing.

Stepping outside of the U.S. to Chihuahua, Mexico, there is the Palmarejo gold and silver mine where Coeur runs its largest operation.  During the first quarter, there was not much luster to be found as companywidesilver output dropped by 22% from the prior year quarter primarily due to lower-grade ore being mined out of Palmarejo. However, the mine has seen improvement and stability since the end of 2012. 

CEO Krebs doesn't seem worried, stating, "I'm happy to be able to say that with March and April and May results being very strong, we feel real confident about the full-year outlook for Palmarejo." 

Also, keep in mind that the company has only explored 20% of the territory it controls there.

Finally, there is Bolivia and the San Bartolomé silver mine.

Here, Coeur is planning to invest $17 million this year in order to expand the processing capacity of San Bartolomé.  So as production goes up, the cost of mining will come down.  This expansion has the potential for a quick two-year payback of that initial investment where, when all is said and done, Coeur will be able to mass produce silver for many more rewarding years.

One thing to note about Bolivia, and probably another reason why the stock has been oversold, is that there is some rumbling regarding the nationalization of some of the country's industries.  This is not something to be taken lightly. 

In response to this possibility, Coeur has shifted more production (percentage-wise) to its other mines.  Coeur does reassure investors that its relationship with the Bolivian government is very strong and they have a unique relationship. 

Suffice it to say, I am glad that Coeur is gradually decreasing its emphasis on the San Bartolomé mine.

Coeur Mining is Oversold

I can understand the argument that many precious metal bulls prefer the actual physical metal or a precious metal ETF proxy over the more speculative nature of owning a company like Coeur Mining.  But I do believe there is room to squeeze in a gold and silver producer into your portfolio when the upwards path on metals prices resumes.

Coeur has the necessary ingredients to yield gains in excess of the metal itself.  The company has a plan for getting its costs in order and also has $330 million in cash to ride out any further unforeseen drop in the metal price. 

Investors focused on the long-term would be well advised to BUY Coeur Mining at these depressed prices before the "smart" money looks to jump in with both feet.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

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Join the conversation. Click here to jump to comments…

  1. Donald Bright | June 17, 2013

    DNI Metals Inc (DNI;TSX)
    has been getting good reports from precious metals writers for a couple of years.
    They have an enormous land holding in Canada and company reports over the past couple of years indicate a lot of rare earths metals. After reading your report on Coeur Mining i would be interested to see what you have to say about DNI.
    Regards, Don Bright.

  2. carl murphy | June 17, 2013

    please find out about avalon rare minerals toronto and new york markets

  3. Gary Conrad | June 17, 2013

    What about annaly mortgage Co. (NLY)?

  4. Barry Murray | June 17, 2013

    Those of us on the supply side of mining who live in the dark, just as mushrooms that are fed recycled manure, would like to know if investors might think bundling Alaska photovoltic silver (SilverMiningClaims) and Oregon "R" value (NephelineSyenite) might qualify for an IRS energy style MLP creating ETFs that can be sold on "big boards" to bypass British/Chinese IPO control in precious metals?

  5. Barry Leggett | June 19, 2013

    David,
    Looking at the monthly CDE chart downward trend still in effect but with consolidation. No reversal as yet.
    Cheers

  6. Hans Venter | June 21, 2013

    It will be appreciated if an evaluation of Endeavour Silver (EXK) could be done.

    Thank you.

  7. Konnor | July 24, 2013

    Would you suggest buying Sony Corporation (SNE) now with the PS4 coming out and poised to beat the XBOX One?

  8. Ridi | September 13, 2013

    What about AMB : AMERICAS BULLION ROYALTY CORP ?
    any analyze on this stock ?

  9. Mestengo Hidalgo | September 23, 2013

    This is the dumbest stock recommendation I have read in more than a year. The recommendation is 12 months late.I wonder how long this website has been controlled by bucket shop promotors?

  10. Mustafa | October 28, 2013

    I'd like to get your opinion on Apogee Silver. So far I know that they have 115 mil ounces of high grade silver. Their share price came down due to nationalization fears which I think is over done. Currently the company is seeking financing for their Pulacayo deposit. If they get the financing and when the mining law comes out How do you think will impact APE's share price going forward.

    Thank you.

  11. John Coffey | May 12, 2014

    Please offer comments on Abcourt Mines, ABI on the TSX Venture exchange. 2 great properties, Elder Mine in Quebec that just started producing gold and another mine in Quebec, Abcourt Barvue mine which is loaded in silver and zinc and whose immediate start up and operation will be funded from the gold revenues at Elder. The stock is languishing at 6-7 cents which seems unnaturally low. I would like to add a bucket more of this stock to my holdings but am scared that it might look too good to be true? Your thoughts please.

  12. Peter | June 3, 2014

    what are your thoughts on the drop in pps on Quicksilver (ZQK)?

  13. Dipendra | July 21, 2014

    What about Levon Resources (LVN.to). Heard lots of good news about it.

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