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speedybure (< 20)

You Thought The Tech Conmico Turnaround Was Amazing ; Coeur d'Alene Mines (With an open Valuation Model)

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June 30, 2009 – Comments (4) | RELATED TICKERS: CDE , RGLD , SLW

 I've written about Tech's and Lihir's amazing turnaround story, but they have nothing on CDE, a company which I have been buying the last month and continue to do so. This has now become my second favorite silver company. Below is a quick recap of their storied history followed by the numerous catalysts including a return to the 45m/ oz club (in GEO). CDE VALUATION: http://spreadsheets.google.com/ccc?key=rNg4MVvs7EO59ZBgzYc0UKw

The Story regarding this once best of breed company and their storied history of frustration has come to an end, and better yet, the market is slow to react as usual. CDE used to be one of the two or three leading silver companied in the world, until a series of unfortunate events occurred haunting them as long as I can remember. I'm not saying they are completely out of the woods as they still have 300m of debt o their balance sheet with less than 50m in cash and cash equivalents. But lucky them, the precious metal mining industry is in nirvana, especially relative to anything else, able to get financing left and right. So I don't think their debt will be a problem whatsoever.

MAJOR HURDLE (SEE BELOW FOR A DETAILED HISTORY): They were engaged in a 17 year (well really since 2005) long battle in regards to their permit at their Kensington mine. This was handed down by the Supreme Court so it is fair to say, we have heard the end of that. This will be one of their flagship mines, so the importance of this legal victory is enormous. It is located in Juneau, Alaska giving them diversity away from Mexico which is often the case with silver miners. To help understand the vast importance of this legal victory, let’s take a step back at the production of this mine alone relative to the market cap of the company.

The real obstruction to a key mine necessary for CDE’s survival began in 2005 when a deposition was filed by environmentalists regarding a previously issued permit for the lower slate lake. This was thrown out and repealed for 3 years in various courts. As mentioned above it reached the Supreme Court and the permit was ruled in Coeur d’Alene’s favor. Given the fact the Kensington mine accounts for about 35-40% of CDE’s NAV, coupled with two other flagship mines coming online, will spur rampant growth to the tune of 45m GEO by 2011! What’s more amazing is the market price, which has stayed suppressed and obviously has a stigma in the market place. Some may think that’s not a great thing, but I can’t think of anything better. I like to be the first to the party and wait a while if extraordinary returns are in plain sight. This game called investing is about patience, willpower & conviction. If you don’t have these attributes, maybe the mining industry is not for you anyway. Enough with the philosophical jargon and let’s take a look at the company in terms of size, capital structure & future growth

Market CAP: <900m

Kensington Annual Production (for 2010) : 125k-150k oz of GOLD. Due to the fact it is a silver company I use GEO (Gold equivalent ounces) with at 60:1 ratio, with a production cost of $7/oz. So in 2010, operating income should from Kensington should be in the neighborhood of --- 40m (125,000 x (14-7) = 50m. This of course is only operating income not free cash flow but CDE's will have a very low effective tax rate for the next several years due to tax loss carry forwards.

It gets better.. 2011 will see gold production ramp up to 300k oz! or 18m of GEO in addition to 27m oz of silver from their other mines. We also know their average cash costs will decline to $6/oz in addition to only 25 million in capital expenditures. So if everything is executed as planned their operating income, net income & free-cash flow will be ...

2011: Revenue: 45m oz x $14 ($26 silver price less cash costs of $6/oz) = 900m

Less tax: likely a rate around 25-28%. So 900m x (1-.28) = 650m in net income

Free cash flow = 650m - 25m = 625 million.

 

This is likely on the conservative side as substantial growth will also be driven by their two other flagship mines San Bartolome & Palmarjo. Not to mention they will see year over cash costs decline to under to around $5/oz in 2010. But more importantly, especially in this environment are the significant tax carry-forwards and lack for any substantial capital expenditures. I imagine, due to the concern of some investors, CDE may possibly sell off a minority stake in one of their flagship mines to a company like silver wheaton or royal gold. 

 

4 Comments – Post Your Own

#1) On June 30, 2009 at 8:42 PM, checklist34 (99.71) wrote:

hmmmm, I have an unholy mob of shares of TCK bought for <$5 and added to after bridge loan extension and bond sale. I love TCK, it makes me happy.  I love Canucks too, like their CEO, he just seems rather transparent and straight-forward.

And I grew up w/in spitting distance of Canada, lots of family there, one member of your Parliament is an uncle of mine, I've always liked Canadiens.  I drank my first beer in a pub in Canada.  

It does seem that the ones that inhabit stock message boards are frequently in possession of a massive US inferiority complex, which is too bad.  Not aimed at you at all, speedy, just a general observation.

But enough of all that.  Thanks for the tip, this looks interesting.  Couple of questions.

1.  whats the basis for the price of silver going up 5x in 5 years?  I don't mean this disrespectfully or skeptically, but are you a hyperinflation-assumption kind of guy?

2.  anybody know if its legal to buy a brick of silver?  I asked my advisor to get me a paper stock certificate for brk-a and/or a brick of gold, he said it couldn't be done on both counts.  lol

good post 

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#2) On June 30, 2009 at 10:38 PM, speedybure (< 20) wrote:

Well even if we expirience high inflation (late 70's style), silver reached $50/oz then. Just adjusting that for the 3x+ increase in the money supply would see silver in triple digits. But thats only part of my case, for example did you know their is more gold than silver above ground currently? Silver is usually a bi-product of base metals, which haven;t really been mined in over a year, so the supply is falling. But what really makes me bullish is the next generation batteries that will replace the lithium Ion. They require substancially more silver. Silver will also be a huge part of all the alternative energy nonsense, as their is a lot of silver in solar panels, etc. Not to mention the industrial need for all these emerging countries, you the BRIC countries. but after that you will have a new wave of them. Silver is the metal of the future. I mean platinum is rare yes, but it serves far less indsutrial needs than silver will. 

Yes you can get bricks of silver, although I bought mine in 100oz denominations no the 1000oz.

On one last note: if hyperinflation does happen silver will be worth thousands or hundreds of thousands.  

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#3) On June 30, 2009 at 11:55 PM, checklist34 (99.71) wrote:

i'm completely not a hyperinflation guy, although it seems reasonable to expect some.  inflation isn't an investors enemy, it just transports us to a different playing field.

Thanks for all the comments, its interesting.  I've posted on the CAPs game before that if someone likes gold they should buy silver instead.  

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#4) On July 01, 2009 at 12:16 AM, speedybure (< 20) wrote:

Well you have to be careful when you say it isn;t an investors enemy because there are many industries that can't increase prices at the same rate of inflation. But I do like silver more than gold. I only invest in 3 main industries and a few others but they account for a small portion. I would rather know a few industries inside and out which for me are PM miners, Oil (the oil sands and deep water drilling), and Agriculture (Although I own all of them on foreign exchanges). These 3 make up 80% of my portfolio while Genzyme & Phillip Morris In't make up almost 12-13%, and the rest for hedging and cash.

What industries or equities are you into or bullish on 

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