You Thought The Tech Conmico Turnaround Was Amazing ; Coeur d'Alene Mines (With an open Valuation Model)
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 This was thrown out and repealed for 3 years in various courts.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.