Coeur Mining: A Mid-Tier Gold/Silver Producer (NYSE:CDE)

Introduction

If you follow me and read my articles, you will know that I focus on big returns and try to find good risk-reward opportunities. Coeur (NYSE:CDE) has never been a stellar performer. In fact, to reach their all-time high from 2006, they need to reach $70 (after a 10 to 1 reverse split). I doubt they will ever attain that level again, but they could get halfway, which gives them huge upside potential.

To be a fan of Coeur, you need to believe in higher gold prices. I like to value gold miners at $2,500 gold. When I use that price target, Coeur looks extremely cheap, especially when you value them in 2025, after they grow production. So, if you look at this play as a 3 to 5 year investment, with gold reaching $2,500, the risk-reward is pretty juicy.

Coeur doesn’t look that great in 2023, but I like to get a good entry for future expectations. They will be hedging about 70% of gold production in 2023 at $1,955, so even if gold takes off, they won’t benefit.

Their Rochester expansion, which should be done about mid-year in 2023, will add about 5 million oz. of silver production and 35,000 oz. of gold production. That is a significant increase, and should also improve their costs. But I don’t see their costs coming down that much, and the real returns for Coeur only will occur when gold and silver break out. This play only makes sense as a bet on higher gold and silver prices.

Coeur has really solid exploration potential. First, their Silvertip development project in Canada is about 45 million oz of silver and growing in size with a lot of drill targets. Plus, their four producing properties all have significant drill targets. This is a company with 8 million oz of gold and 350 million oz of silver, and will probably find a lot more.

They are currently primarily a gold producer, with 70% of their revenue in gold, but after the Rochester expansion and the likelihood of silver outperforming gold, I expect their revenue to soon be about 50/50 gold and silver. Future production in 2025 will be about 370,000 oz of gold and 16 million oz of silver.

If I am right that silver outperforms gold, that gives Coeur an advantage over pure gold miners. I think that is a big reason why to own Coeur. That 16 million oz. silver production could provide a lot of FCF (free cash flow). In fact, I have Coeur producing about $800 million in FCF in 2025 at $2,500 gold and $50 silver. At those price levels, they will have more silver FCF than gold.

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Company Overview

Coeur Mining has not been a strong performer. One reason for this is that they are constantly spending money on growth. In recent years, they acquired Orko Silver, Paramount Gold, and a mine from Goldcorp. With this growth strategy, they tend to have a weak balance sheet, which is currently $635 million in debt and only $75 million in cash. Thus, they tend to be spenders (constantly building mines) and not cash-focused (shareholder-friendly). And to make matters worse, they like to hedge.

Even with these negatives, it’s a stock you probably want to own because of their leverage to higher gold/silver prices. If they can significantly improve their balance sheet, their share price should take off.

Currently, they have a development project with a $650 million capex to expand their Rochester mine in Nevada. It is due to be completed in mid-2023. Also, they tend to perform well during bull markets because of high FCF (free cash flow), and it is a name brand that institutions will buy.

In 2022, they produced about 10 million ounces of silver and 330,000 ounces of gold. That is substantial, and will increase significantly in 2023. The Rochester expansion will add about 4 million oz of silver and 45,000 oz of gold production. They are a high-cost producer, but costs should come down a bit in 2023 from Rochester.

As a high-cost producer, they are not a pricey stock. In fact, when you value them in 2025 at their targeted production of 370,000 oz of gold and 16 million oz of silver, they could have $800 million in FCF at $2,500 gold and $50 silver. If you give them a 15 FCF multiple, that gives them a projected valuation of $12 billion. While that might be a bit optimistic valuation, I don’t think $10 billion is that much of a leap at those PM prices.

Properties (Estimated 2023 Production)

Rochester (Nevada): 8 million oz of silver production and 75,000 oz gold production (after expansion in mid-2023).

Kensington (Alaska): 120,000 oz of gold production

Palmarejo (Mexico): 6.5 million oz of silver production and 110,000 oz gold production.

Wharf (South Dakota): 80,000 oz of gold production.

Silvertip (Canada): 45 million oz of high-grade silver. Growing in size.

Company Info

Cash: $75 million

Debt: $675 million

Current Gold Resources: 8 million oz.

Estimated Future Gold Resources: 8 million oz.

Estimated Future Gold Production: 370,000 oz.

Estimated Future Gold All-in Costs (breakeven): $1,500 per oz.

Current Silver Resources: 350 million oz.

Estimated Future Silver Resources: 350 million oz.

Estimated Future Silver Production: 16 million oz.

Estimated Future Silver All-in Costs (breakeven): $21 per oz.

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 7

People/Management: 7.5

Cash/Debt: 6.5

Location Risk: 8

Risk-Reward: 7.5

Upside Potential: 8

Production Growth Potential/Exploration: 8

Overall Rating: 7.5

Strengths/Positives

Significant upside potential

Significant production growth potential

Significant exploration potential

Good management

Large resources

Good locations

Quality properties

Risks/Red Flags

High debt

High costs

Management has not been shareholder focused

Hedging

Location risk in Mexico

Valuation ($2,500 gold prices / $50 silver prices)

Gold production estimate for the long term: 370,000 oz.

Gold All-In Costs (break-even): $1,500 per oz.

370,000 oz. x ($2,500 – $1,500) = $370 million annual FCF (free cash flow).

Silver production estimate for the long term: 16 million oz.

Silver All-In Costs (break-even): $21 per oz.

16 million oz. x ($50 – $21) = $464 million annual FCF (free cash flow).

Total FCF ($370 million + $464 million) = $834 million

$834 million x 15 (multiplier) = $12 billion

Current FD market cap: $1.2 billion

Upside potential: 900%

Note: I used a $2,500 gold price and $50 silver to identify their future value because I am a long-term investor who plans to wait for higher gold prices.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 15 because I’m confident that investors will bid up its valuation when they have very large margins.

Balance Sheet/Share Dilution

Coeur Mining has $75 million in cash and $675 million in debt. They are generating around $50 million a year in FCF at $1,900 gold. Plus, they still need cash to finish Rochester. Clearly, they do not have a strong balance sheet, and this adds risk. I am not risk-averse and have no problem assuming this added risk, but it could be a no-go for you.

With this poor balance sheet, it brings in the potential for share dilution, which is probable in 2023. This will put downward pressure on their share price and will reduce our expected returns. It will also damage Coeur’s near-term reputation as a good place to invest. Positive sentiment for Coeur could drop, and it could take some time for them to rebuild.

Risk/Reward

The main risk is the gold price. Unless it rises, the upside potential could not only be limited but negative. In fact, a volatile gold price could put you underwater at some point and perhaps significantly down. Also, without higher gold prices, their weak balance sheet comes into play.

Debt and share dilution are major risk factors

Another risk factor is potential higher taxes and royalties (especially in Mexico), which can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.

To take on that risk, the reward has to be high. A 100% or 200% return, in my opinion, is simply not enough for accepting high risk. I want outsized returns. For Coeur, I think those outsized returns are likely if the price of gold trends higher. Anything above $2,000 and Coeur should take off higher. But what we really want are gold prices at $2,500 or higher, for the big returns.

Investment Thesis

I want to be overweight gold producers, and own as many high-quality mid-producers as I can find. Moreover, I like to find undervalued producers that are likely offering outsized gains at $2,500 gold. Coeur Mining fits this strategy.

I don’t know which gold miners will perform the best, so I use a low cost-basis allocation strategy to lower my risk for individual companies. Instead of using concentrated positions, I prefer to allocate 1% or less per stock. This takes the emotion out of it and reduces the need to trade. As a result of this strategy, I tend to own a lot of stocks.

The more quality stocks like Coeur that I own, the better. But these types of stocks are hard to find, especially at good entry prices. A company like Coeur, I plan to hold for the long term. I will consider selling 80% at around $3,000 gold, and then let the last 20% stop-out on its own using a trailing stop. Quality names like Coeur I will sell last, and not likely before $3,000 gold.

I realize that Coeur Mining has high risk and could fail to achieve my objective, and this is why I keep my allocation low (around 1%). I also realize that to reach my objective I have to be patient and wait for higher PM prices. This could take several years. So, this is kind of a buy-and-hold stock. I consider it another stock added to my collection. Then if gold does reach $3,000, we can see which ones performed the best. My bet is that Coeur will have done better than many expected.