What do you do when the dollars in your pocket are withering in value? Well, you can try to cushion the blow by investing in foreign stocks and bonds…or you can try to profit from the situation. We like the second option, which is why we like investing in selected gold and silver companies…especially the small-cap "junior" companies.
Unfortunately, lots of junior mining companies consist of nothing more than a few tracts of unexplored land and lots of glowing press releases. These companies bear a close resemblance to Mark Twain's famous description of a gold mine: "A hole in the ground with a liar standing next to it."
But the "real deals" in the mining sector can deliver really big gains. For example, one of North America's oldest silver miners is about to become the world's largest. The name of the company is Coeur d'Alene Mines (NYSE: CDE )…and we think its stock is very, very cheap. By 2009, Coeur will join the ranks of Silver Wheaton Corp. and Pan American Silver Corp. as one of the top silver miners on the planet. Thanks to a merger Coeur completed three weeks ago, this junior mining company expects to produce 29 million ounces of silver in 2009. That's more than anyone else in the world.
On top of just plain out-producing everyone else, Coeur will also have the lowest cash production cost per ounce of silver in the industry at $1.73 per ounce. So, it's not hard to see that the largest silver producer with the lowest production costs in the world will not remain a "junior" for too much longer.
Despite Coeur's exciting growth profile, its share price languishes. Perhaps investors are focusing on Coeur's difficult past, rather than its promising future. For the past few years, Coeur d'Alene has only produced a moderate amount of silver and a small amount of gold out of its five mines. The company produces about 12.8 million ounces of silver every year, which puts it right in the middle of the pack. But production dropped sharply during the second half of 2007.
Coeur's Cerro Bayo mine encountered serious setbacks, which caused the mine to report an astronomical cash cost of $6.05 for every ounce of silver produced there during the quarter. The company blamed higher costs of contracts, outside services, supplies, and supervision, as well as a slow transition in higher grades.
Meanwhile, Coeur's Rochester mine just shut down for good. Rochester was the company's largest mine – accounting for about 40% of Coeur's entire production in 2006. Losing 40% of total production is quite a hit to take for any small mining company.
However, big changes are around the corner…
Next month, Coeur's San Bartholomew Silver Project should begin producing around 9 million ounces of silver annually. That's a 75% increase in production over the company's current operations. (However, the project is in Bolivia, which just passed legislation calling for a 50% tax rate on the mine. The company claims that despite the high tax, the higher price of silver is still worth opening the mine).
On top of this, later this year, the Kensington Gold Project near Juneau, Alaska should start producing upwards of 150,000 ounces of gold annually, which would ramp up the company's gold production by 500%. This project is already 100% complete, but cannot begin production until the local and state governments finalize permitting. Nothing is certain when bureaucrats begin deliberating, but Coeur expects no significant delays.
The final pieces of the "new" Coeur d'Alene are the Guadalupe and Palmarejo Mines that are set to go into production in the first quarter of 2009.
Together, these two mines should produce more than 10 million ounces of silver per year and 115,000 ounces of gold. This project will be the largest and highest quality silver-gold project in the world. Coeur acquired these large-scale projects through a merger it completed just three weeks ago.
Taking account of all these new projects, Coeur d'Alene's annual silver production will triple to nearly 30 million ounces per year, while its gold production will quintuple to 200,000 ounces.
Coeur's 29 million+ ounces of production would be the highest of any major silver miner like Silver Wheaton (22.1 million ounces per year), Pan American Silver Corp (24.7 million ounces per year) or Hecla (6.2 million ounces per year). Also, Coeur's reserves and resources will rise sharply. Thanks to the merger, Coeur has 30% more in-ground assets than the next closest silver miner.
Then there's Coeur's gold production, which helps to offset the cost of silver mining. By counting the Kensington and Palmarejo gold production as a "by-product credit" against the cost of silver mining, Coeur's average cash cost to lift silver out of the ground and separate it from the other ores, will be $1.73 per ounce across all of the company's mines. (Coeur's cash costs at the new Palmarejo Project will be only 41 cents per ounce!) That beats Silver Wheaton ($3.98 per ounce), Hecla ($5.02 per ounce), and Pan American Silver ($2.98 per ounce). In fact, it will be the absolute best in the industry.
Starting in 2009, Coeur will be the No. 1 primary silver producer in the world. And it'll be doing it cheaper than anyone else. So when you look at the current top three silver producers (Silver Wheaton has a market cap of $3.6 billion, Pan American Silver's is $2.72 billion, and Silver Standard's is $2.71 billion), Coeur's $1.15 billion market cap seems unfairly discounted. Even if the stock doubled from here, Coeur's valuation would trail behind the other three silver majors.
As for the company's current setbacks, Coeur has made it a point of utmost urgency to dig in and figure out what happened in Cerro Bayo and find a way to fix it. The company recently hired a new general manager to take over operations and is preparing a detailed technical review of the situation. This topic dominated the company's third quarter shareholder's conference call, and was a major reason for the decline of the company's share price since summer.
Good news has already come out of Cerro Bay. A total of 5 new veins have been discovered, doubling the mine's reserves. Thanks to this new discovery, along with the recent breakout in silver prices, the tide may be turning for Coeur…
It's almost impossible to ignore that by 2009, the company will be graduating out of junior status by out-producing all the rest. Coeur shares could very well be volatile for the next few months. But at the current quote of $4.26 a share, the stock seems very, very cheap…especially if the dollars in your pocket continue to wither.
CXC Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
