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Value in Coeur d'Alene MInes Corporation
Tuesday. April 24, 2007
I would wager that over half the people in the general public don’t read annual reports, proxy’s, conference call transcripts or specially issued documents before making an investment decision. It strikes me as counterintuitive that people who consider themselves investors ignore the most basic pieces of publicly available information. I don’t read through these documents in detail, but I will take a look at the table of contents and read through sections of the documents that interest me.
I believe people are always interested in growth and prospects, before understanding the fundamental balance sheet merits of an investment. After all, as Peter Lynch alluded to in One Up on Wall Street, an exciting growth story is easier to tell over at a party than some discussion over cash flow merits or a staid company with respectable growth.
Investors who heed the advice of people like Peter Lynch will likely form the stories surrounding their investment choices with the “happened”, rather than the “may happen” facts.
It is with this advice that I have found one of my current favorite value picks, Coeur d’Alene Mines Corporation (CDE).
The Story:
Coeur d’Alene is principally a silver miner with minor mining exposure to gold. Silver has taken a backseat to the publicity surrounding the recent rise in gold prices. Silver equities aren’t covered with as much press as gold equities, paving the way for possible investment opportunities that may be overlooked.
The business of mining is not very exciting: you explore, you dig it up, you store it, you sell it and repeat as needed. The repeat part of the formula provides a company with future growth.
The Good:
* Coeur has strong earnings. Specifically a few things I focus on are Return on Assets and Return on Equity. Coeur’s ROA is 6.09% and ROE is 16.35% for the quarter completed December 31st, 2006. These numbers are respectable in comparison to a principal competitor like Hecla Mining Company (HL) whose ROA is 5.43% and ROE is 35.81% for the same quarter.
* Coeur has a low Trailing P/E of 13.07 and Forward P/E (fye 31-Dec-08) of 9.66. Hecla for example has a Trailing P/E of 15.93 and a Forward P/E (fye 31-Dec-08) of 17.23. It’s not uncommon to see Trailing and Forward P/E’s in the 20’s and above for silver miners.
* Coeur has a cash and cash equivalents hoard of $270.67 Million. Note: I am not using the higher number of $341.05 Million provided by quote services that report a combination of cash and short-term investments.
* Coeur has debt of $180 Million in debt from issuing 1 1/4% Convertible Senior Notes due 2024.
* A large part of the debt is being used to fund new operations. Coeur announced that its new San Bartolome mine in Potsi, Bolivia is estimated to cost $174 Million in construction. According to the 2006 Annual Report: [Coeur has]…obtained a political risk insurance policy from the Overseas Private Insurance Corporation (“OPIC”) and a private insurer. The combined policies are in the amount of $155 million and covers 85% of any loss arising from expropriation, political violence or currency inconvertibility.
I view this as a positive move by management to cover the potential risk behind a high return investment. Coeur expects to begin full production by early 2008.
* I am bullish on silver. I expect to see silver over $20 if gold reaches above $800. I am expecting to see these targets reached in the next 12-24 months. Coeur estimates the cash cost at San Bartolome in the initial four years to average approximately $4.00 per ounce of silver produced.
The Bad:
* Coeur’s shareholders suffer from dilution. In order to raise new funds, Coeur’s management has issued a large number of new shares. The number of shares outstanding is 278.03 Million compared to 120.11 Million for a comparable company like Hecla Mining.
* Coeur’s Kensington Gold Project in Alaska has experienced some permitting setbacks. The extent and the degree of the setbacks are to be determined. By the end of 2007, Coeur will have spent nearly $200 Million on the Kensington project. The project has received tremendous local community and government support in Alaska. Depending on your stance about the Kensington project it may present a tremendous liability or a tremendous purchasing opportunity created from a temporary setback.
* The company has taken on new debt to fund operations. San Bartolome can be seen as a positive or negative depending on your view of Bolivia. I believe the 85% political risk insurance policy negates much of the political risk involved with Bolivia.
* Bolivia may adjust tax policies for Mining companies profits.
* The price of silver may go down.
My view:
Due to my bullish stance on silver, Coeur’s low P/E, strong cash position, ROE, ROA, and expansion opportunities, I view Coeur as a good long-term investment. Shares of Coeur can currently be bought at under $4. I believe this is an extremely positive entry point. If shares drop below $3.75 I will likely add to my existing position.
Disclaimer:
The author currently owns 15,000 shares of CDE purchased at an average price of $4.24.
BSG
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