We’re now more than two-thirds of the way through the Q2 earnings season for the Silver Miners Index (SIL), and Coeur Mining (CDE) was one of the first names to report its earnings. While the company had a rough Q1 with free-cash-flow hitting a 1-year low, the company had a decent Q2 given the challenges it was up against with COVID-19. Even though Coeur’s flagship Palmarejo Mine was shuttered for most of Q2 due to COVID-19, its US operations picked up much of the slack, with a reasonable quarter across the board. Given the higher metals prices and the improved operating metrics, Coeur’s earnings trend is finally improving after two years in a row of net losses per share. While I see much better opportunities elsewhere in the silver space, I believe we should see a floor at $6.35 for the stock given the accumulation we saw last month.
Coeur Mining released its Q2 results earlier this month and reported quarterly gold production of 78,200 ounces and silver production of 1.6 million ounces. While gold production was only down slightly year over year despite the COVID-19-related headwinds, silver production took a beating, down by nearly 50% from the 3.1 million ounces produced last year. This was due to a 45-day shutdown at Coeur’s largest contributing mine, Palmarejo, which was related to the government-mandated shutdowns aiming to curb COVID-19 spread. However, despite near-unprecedented headwinds, the company managed to have a decent quarter across the board, and things should improve massively given that the silver (SLV) spot price is over 50% higher than it was in Q2. This had led to upwards revisions in earnings estimates as well as quarterly revenues. Let’s take a closer look at the results below:
Beginning with the Palmarejo Mine, it was a very tough quarter, with quarterly gold production of 15,200 ounces vs. 28,400 ounces in the same period last year. When it comes to silver production, the decline was even worse, with silver production slipping from 1.73 million ounces to 867,000 ounces due to the shutdown. Based on these much softer operating results, we saw free cash flow plunge, from $8 million in Q2 2019 to (-) $8 million in the most recent quarter. Fortunately, operations are mostly back to normal at Palmarejo, with Coeur currently processing 4,600 tonnes per day vs. a typical run rate of 5,000 tonnes per day. The slightly lower throughput is to remain in guidelines with the government to keep workforce capacity at just 85% for the time being. However, based on Coeur going after higher grades and the much higher silver price ($26.00/oz vs. $16.00/oz), we should see a massive Q3 from a cash-flow standpoint regardless of the slightly reduced workforce.
Fortunately, while Palmarejo suffered due to COVID-19-related closures, the company’s Kensington Mine in Alaska operated without a hitch, with a solid quarter across the board. During Q2, the company produced 33,100 ounces of gold at a quarterly cost of sales of $934/oz vs. 34,000 ounces produced in the year-ago period at $842/oz. The slightly lower production was due to marginally lower grades (0.21 ounces per tonne gold vs. 0.23 ounces per tonne gold), with the higher costs stemming from higher treatment and refining costs. However, while we saw a slight dip year over year, this was the best quarter since Q3 2019 and in a big way. As shown above, free cash flow came in at an impressive $23.9 million, and throughput hit a multi-year high at 170,500 tonnes processed. Overall, it was a solid quarter, and the company remains on track to produce 130,000 ounces of gold this year.
Finally, at the company’s Wharf Mine in South Dakota, we saw an outstanding quarter, with quarterly gold production coming in at 24,800 ounces, up 58% year over year. This exceptional performance was driven by much higher ore tons placed in Q2 of 1.4 million tonnes vs. 919,400 tonnes in the year-ago period. Meanwhile, grades also improved considerably to 0.032 ounces per tonne gold, the best quarter since 2018 from a grade standpoint. Given the impressive results and much higher average realized gold price ($1,715/oz vs. $1,311/oz), the company generated $18.8 million in free-cash-flow, a new 1-year high for the operation and a massive improvement from the dearth in free cash flow generated in the same period last year ($0.3 million).
At Kensington, Coeur still posted negative free-cash-flow in Q2 of $6.7 million. The silver lining was that this figure was a significant improvement from the (-) $30.2 million last quarter, and it’s worth noting that the thesis for Coeur has completely changed over the past months. This is because the silver price is currently more than 60% higher ($26.00/oz vs. $16.25/oz), while the gold price is more than 10% higher ($1,900/oz vs. $1,641/oz). Therefore, while Coeur Mining has been unable to generate free cash flow consistently and has been a serial share diluter the past couple of years, we are likely to see a completely different Coeur at current metal prices. Let’s take a look at the company’s growth metrics below:
As we can see from the earnings trend above, Coeur is finally expected to post positive annual EPS this year, a massive improvement from the net loss per share of $0.04 that was expected just a couple of months ago. These upwards earnings revisions are a result of the much higher metals prices and what’s likely to be a much better second half for Coeur Mining with Palmarejo back online. If we look ahead to FY2021, annual EPS estimates are currently sitting at $0.30, and this would translate to 200% growth in yearly EPS year over year vs. estimates of $0.10 for FY2020. This is quite bullish as it’s the first shift to a rising earnings trend we’ve seen for Coeur in a decade now. Assuming the silver price stays above $23.00/oz, I believe the annual EPS estimates of $0.30 next year are conservative.
Moving over to quarterly revenues, we saw a pretty significant dip in Q2 on a sequential basis. Still, revenues were only down 5% year over year due to the higher average realized gold price ($1,641/oz vs. $1,277/oz). If we look ahead to Q3, though, we should have a multi-year high for quarterly revenue on deck, with current estimates sitting at $212.6 million. This would translate to over 6% growth in revenue year over year, confirming that we’re finally seeing a turnaround. While this revenue growth is much lower than the industry average, this is certainly a step in the right direction.
Based on the improved earnings trend and two quarters in a row of revenue growth ahead based on estimates, I believe the worst is finally over for Coeur Mining. While it took much higher metal prices to finally achieve this, and the company remains a laggard, I would expect the stock to find strong support at $6.35 going forward. This is based on both the technical picture and the fact that valuation would become a tailwind. At a share price of $6.35, if we were to see a deep correction, Coeur would be trading at just 20x FY2021 annual EPS, which is very reasonable for a company growing earnings at triple-digit levels and operating out of mostly Tier-1 jurisdictions. Let’s take a look at the technicals below:
As we can see from the daily chart above, we saw three accumulation bars in mid-July at the $6.00 to $6.50 region, and generally, these accumulation bars become the new floor for the stock going forward. This is because if big money rushed into the stock at these prices, judging by the massive volume, we would expect them to add to or defend their positions on any pullbacks to this area. Meanwhile, the $6.20 to $6.35 area also coincides with the previous ceiling, and past resistance often becomes new support. The one issue currently is that Coeur Mining is nestled up against $9.00 area resistance, and this could be a tricky area to get through on the first test. Therefore, for investors looking to jump into the stock, I believe any pullbacks towards $6.35 would be low-risk buying opportunities. Personally, I prefer to stick with the leaders, so I have no plans to buy the dip here.
Just over three months ago, I discussed that any rallies above $5.50 would be a selling opportunity on Coeur Mining, and I was clearly wrong in my assessment. While the stock has been a laggard for years and we’ve seen significant share dilution, there is no denying that the investment thesis here has improved considerably if $20.00/oz silver prices are here to stay. This is because we should see high double-digit revenue growth in FY2021 and an earnings trend that is finally going in the right direction. While I do not have any plans to buy the stock as I prefer the leaders in the sector, I do believe that the $6.20 to $6.45 area is likely to be the new floor for Coeur Mining. For now, I would be careful entering new positions in the $8.80 area as the stock remains a little extended short term.
Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.