Coeur Mining

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Coeur Mining is a precious metals producer primarily focused on gold and silver, with operations spanning across the United States, Mexico, and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Coeur Mining is primarily engaged in the production of precious metals, specifically gold and silver, from various mining operations in North America. The company’s diversified portfolio includes active mines, development projects, and exploration activities, making its revenue streams directly tied to the volatile prices of these metals.

Business Overview

Revenue Distribution: CDE’s revenue is largely dependent on production volumes and realized prices of gold and silver. While the company mines other metals, gold and silver are its primary revenue drivers. They are exposed to commodity price fluctuations. Revenue is driven by mines in the US, Mexico and Canada.
Industry Trends: The mining industry is cyclical and highly sensitive to commodity prices and global economic conditions. In the recent years, we’ve seen increasing prices and volatility in the precious metals markets due to global uncertainty and economic fears, but this can swing both ways, leading to significant risks if the trends change. Moreover, the increased focus on ESG (environmental, social, and governance) practices are impacting operational decisions, forcing companies to spend more on these operations, which could lead to higher costs of production. In some instances, the increased focus and effort required for environmental compliance can also delay production and slow down the speed at which they can get their product out in the market, thus affecting revenue. Also, there has been pressure on companies to focus on low impact mining techniques, to reduce carbon emissions, and for sustainable operations that provide value to the communities it is a part of.
Margins: Historically, margins for gold and silver miners have been highly dependent on metal prices and production levels, but now we are also seeing input costs becoming a huge factor, including energy, labor, and equipment, which are all susceptible to macroeconomic events and global supply chain issues. Companies need to carefully manage these costs in order to maintain profitable operations. These companies are also capital-intensive operations which require high investments in maintaining and setting up their operations. Therefore they should make sure to utilize their capital efficiently to generate sufficient return.
Competitive Landscape: The precious metals mining industry is highly competitive, with a number of players ranging from large multinational corporations to smaller producers. Competition stems mainly from securing resource-rich properties, cost optimization, and achieving operational efficiencies. Many companies are also competing for the very best talent to help their operations be efficient. Companies can distinguish themselves through innovative mining methods, which often require high investments in R&D. Companies also try to distinguish themselves by having a great track record of consistent and high production.
What Makes CDE Different?: The primary differentiating factor for CDE is their mine portfolio. Each mine has a different mix of mineral composition and quality, as well as unique political and geological challenges. CDE operates on lower grades of mineral content than some of the larger gold and silver companies. However, they are still able to maintain a low cost of production by having the company be well-integrated and by cutting down on operational costs. As far as their assets are concerned, the key differentiators are their Palmarejo mine and their Rochester mine. Palmarejo is in a high gold content region in Mexico, while Rochester is a large-scale silver-gold mine in Nevada, US. CDE’s strategy is to expand and grow using these assets. Additionally, they utilize new technology for increased recovery and mine life.

Financial Analysis

While CDE’s financials have shown improvement in recent years, challenges remain, mainly due to the capital intensive nature of the business.

Recent Performance: Recent results show that increased metal production and higher gold/silver prices led to considerable improvement in revenue and profitability. But given the cyclical nature of the business, this should be taken with a pinch of salt. Moreover, for the first nine months of 2022, the company has seen a decrease in revenue and a significant increase in losses. This should be taken into account.
Revenue Growth and Profitability: For the period 2013-2022 revenue has been relatively volatile. The company’s profits have been poor, although they made a large profit in 2020 and 2021, mainly due to rising gold and silver prices. But it is worth noticing, even then the company had trouble generating enough profit and cash. Now with costs of operation rising, they need to make sure they can generate sufficient profits in the coming years to sustain the company. Moreover, when commodity prices decline, the company might have problems achieving profitability.
Cost Management: While they have focused on cost control and maintaining low operational costs, they are still susceptible to fluctuations in input prices (energy, materials, labor). Moreover, with increased focus on environmental regulations, it remains to be seen what impact new rules and regulations will have on cost of production.
Debt and Capital Structure: CDE has significant debt, which could pose risk. In the past, the company has often funded operations through debt, and it has also had some difficulty in paying it off. They have been facing pressure to lower debt. However, if they continue their aggressive expansion strategy, they might find a need to acquire more debt. The debt-to-equity ratio is very high, and that requires careful monitoring. Given the cyclical nature of the business, heavy debt positions them for large losses during the lean times.
Cash Flow: A key factor to the success of CDE will be its ability to generate sufficient cash flows. From 2013-2022, their operational cash flows have been highly erratic. They need to maintain consistent positive cash flow to ensure the company is profitable and viable.
Capital Expenditure: Mining companies, especially ones involved in development activities, have high capital expenditures. This requires careful financial planning and an efficient use of capital. Otherwise, it can drain the finances of the company. CDE needs to spend a lot more capital on projects, and any mismanagement in the allocation of capital will significantly affect their bottom line.

Moat Assessment

CDE’s moat is quite weak, given the commoditized nature of the products it produces. Mining is a competitive business and prices are determined by supply and demand, not by any individual firm. Here is a more detailed look at each aspect:

Intangible Assets: CDE doesn’t have strong intangible assets, other than some of their mines, which are not easily reproducible, but this is also true for other mining companies. They have some proprietary processing techniques, but they aren’t enough to create a very strong moat. In general, they don’t have strong brand value, patents, or regulatory licenses that make it difficult for competition.
Switching Costs: The switching costs for their consumers (refineries and industrial buyers) are basically nonexistent. Buyers choose the product with the best price (lowest cost), and there is virtually no incentive to be sticky to a particular company.
Network Effects: Network effects have very little relevance for a company such as CDE. These are a bit more relevant to companies involved in knowledge transfer and sharing information, which isn’t the case for CDE.
Cost Advantages: Their costs of mining seem to be relatively lower than their peers. This gives them a slight edge in the commodity market. However, it doesn’t offer a significant or sustainable advantage. They do have mines which are difficult for competitors to match because of its resource composition. But other companies can always try to purchase similarly productive mines.

Based on the above, the moat is fragile. Other mining companies with strong assets or better cost structure can easily take CDE’s market share. Therefore, the moat rating is 2/5.

Risks to the Moat and Business Resilience

Commodity Price Volatility: Fluctuations in gold and silver prices directly impact CDE’s revenues, margins, profitability, and ability to survive. If there’s a sustained drop in gold and silver prices, it may threaten the viability of the company. These price swings are nearly impossible to accurately and reliably predict and it depends on global events, which makes it quite unpredictable and not suitable for long-term investment.
Operational Risks: Mining operations are susceptible to various operational risks, including unforeseen geological issues, production bottlenecks, equipment failures, and accidents. These risks can be heightened with underground operations. A major mishap can cause production to be severely impacted, leading to loss of revenue and possible increase in expenses.
Geopolitical and Regulatory Risks: Operations in countries like Mexico and Canada can be affected by changes in local regulations, taxes, and political climates, which is a large risk that should be monitored carefully.
Environmental Concerns: CDE is subject to increased scrutiny around environmental compliance and sustainability. Stringent environmental laws could raise operating expenses, and can reduce the long-term viability of certain mines.
High Debt Load: CDE’s reliance on debt exposes them to higher costs and financial risk during unfavorable economic cycles. The inability to service debt obligations due to decreased prices can lead to financial distress.
Exploration Risk: The company spends heavily on exploration, but that doesn’t guarantee positive returns or sufficient deposits. Exploration efforts can be futile, which results in wasteful spending and poor returns.
Dependence on Key Assets: CDE has a few important mines, and if these have issues related to production or reserve exhaustion, the impact on their bottom line can be significant.
Competition for Talent: A key component of a company in any sector is their ability to attract and retain talent. Mining is no different, and if CDE cannot compete with the competition to obtain the best talent, its operations might be impacted.
Global Economic Conditions and Supply Chain Issues: Global supply chain and economic health will have a massive impact on all the variables including inflation, interest rates, and operational efficiencies.

Resilience: CDE’s diversification across a variety of different assets and geographies is its strength. But even then the company has a relatively higher risk profile due to high debt, reliance on commodity prices, and the capital intensive nature of the business.

Understandability CDE’s business isn’t very straightforward and requires a certain degree of expertise in mining and finance to deeply analyze. A lot of its value is dependent on geological surveys, macroeconomic predictions, and understanding the complex accounting and financial statements, all of which make it a bit hard to understand for the layperson investor. The company is also involved in mergers and acquisitions, which makes its financials slightly more difficult to keep track of. All in all, the complexity of the mining business and understanding the financial statements requires a level of proficiency which makes the understandability rating not that high. The understandability rating is 3/5.

Balance Sheet Health CDE’s balance sheet is a bit shaky because of their debt load and erratic profitability, coupled with a reliance on commodity prices, which it cannot control. Their operating cash flows are sometimes low and are dependent on volatile metal prices, which puts a strain on the sustainability of the company. Also, the company has a long history of acquisitions and divestitures, all of which make the balance sheet more volatile and difficult to understand. The balance sheet is also capital intensive, so there might be a continuous need to raise capital, through debt or equity dilution. It should also be noted that the company has deferred tax liabilities and debt-like items that create an additional financial burden for the company. Finally, the company has intangible assets, which can be hard to accurately value. Given the nature of the assets the company owns, they may require large amounts of upkeep, which makes the company financially more susceptible to external risks. Therefore, it receives a rating of 3/5 for its balance sheet health.