Coeur d’Alene Mines Has Hidden Upside on Silver Assets

CDE has one of the lowest cash costs per ounce of silver in the industry at $6.41 in Q2 2012, giving it a nice buffer compared to the $35 spot price of the metal. Coeur also has extremely strong operating cash flows of $430mn over the past 12 months, $213mn in levered free cash flow, and very little debt. I expect silver prices to remain high for the foreseeable future, CDE’s production to increase substantially, and cash flow to grow strongly over the coming quarters.

Most investors overlook the minority interest that Coeur has in 7 exploration companies. Coeur recently doubled its stake in one of these, Huldra Silver, which has two attractive properties in Canada that could be worth a lot if they are developed. It is hard to get detailed information on some of these other smaller, unlisted companies, but they are a nice potential bonus in case one of them makes it big. Although there is no specific catalyst here, I don’t think the market recognizes these assets. If consolidation in the mining space occurs, these junior miners could get bought by one of the larger miners at a big premium.

Valuation
Trading at just 15% over book value and 6x operating cash flow, CDE definitely has a margin of safety. Using some modest assumptions for the Guadalupe expansion of Palmarejo (which will be complete in early 2013) and the current spot price of silver and gold, I expect 2013 EBITDA to reach around $750mn. With a 5.5x EBITDA multiple, that values CDE around $48/share. For each $1 change in long term silver prices, I would adjust my price target by about $1.50.

Risks
Investors might feel that CDE deserves to be trading at a discount because of its exposure to Bolivia and Argentina, two countries with histories of nationalizing foreign companies. While I am by no means saying this is completely unfounded, I believe it is unlikely. The low grade, high volume San Bartolome mine in Bolivia is very different that the rest of the high grade mines in the country. More importantly it comes down to local politics. Management had this to say in the Q2 conference call:

"First, the actions the Bolivian government recently took with other companies were not a result of any federal initiative or strategy to nationalize the natural resource sector. Rather, the Bolivian government has stated that their actions were taken to resolve conflicts specifically related to those mines in those communities.…Finally, and probably most importantly, we continue to have very positive and constructive relationships with the local community and with the cooperatives with whom we are partners at San Bartolome."

As for Argentina, I think these fears are even less realistic. While it is certainly bad that President Cristina Fernandez is on a nationalization spree and plundering the country’s foreign reserves, CDE’s properties in the country don’t make any sense to nationalize. The Martha mine is depleted and is now more of a liability than an asset. The Joaquin project is still in its early phases and will require badly needed foreign investment in the country. The Argentinean government would lose money, not make it, by nationalizing CDE’s properties in the country.

Given the unrest in the precious metals mining industry in South Africa, I would much rather have exposure to South America. Although to be fair, strikes could happen in South America too.

Conclusion
Despite the recent rally, I still believe CDE is the best way to play precious metals in general. Miners are trading at an extreme discount to net asset value, levels that have never been seen before. By investing in CDE, investors are betting that precious metals prices will stay elevated and this gap will close with time. Any potential incremental increase in the spot price of silver and/or gold will continue to add to the bottom line exponentially. I encourage investors to look at just how profitable and cheap CDE is at current silver and gold prices.

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