That’s led to miners taking significant losses on their assets, with many having to write down the value of their reserves. Most miners saw weak fourth-quarter earnings, Coeur included, and it’s unlikely that miners’ fortunes will turn around immediately. The cost-cutting that some miners started to do late last year will probably continue into 2014, with all mining operations seeing some funding reductions.
In some respects, Coeur’s timing to revisit its business plan was fortunate, said Mitchell Krebs, president and chief executive officer of Coeur Mining.
“That was a little bit ahead of the curve for the whole industry, but it gave the whole effort a little bit of a tailwind because we were wrapped up in this larger industry-wide process of evolving and improving how we run these businesses in this industry. And that has helped because it has been a bit of a consistent theme at the company level and the industry, but in some ways, I don’t want people to look at us and say they’re just doing it because everyone else is doing it. We have been on this path for a while I’d like to think we’re further along than most and I think our actions prove that out,” he said.
Krebs sat down with Kitco News late last week in Coeur’s new Chicago offices, overlooking Lake Michigan. Although Chicago is a commodities town, home to the oldest commodities exchanges, Coeur is probably the only miner in the city. Pulling up its roots from its long-time base in Coeur d’Alene, Idaho, shortening its name to Coeur Mining and moving to a new city was just part of the physical, economic and mental changes the firm sought as it works to change its identity.
Not surprisingly, the seismic change Coeur experienced “was fairly chaotic,” Krebs said, particularly last year as the firm sought to hire nearly an entirely new staff at headquarters, as only a small percentage of workers moved to Chicago from Idaho. Additionally, Coeur replaced one-third of its board of directors and the leadership at its mines. Most of the new hires were outside of mining, too.
New people mean new ways of thinking. “There has been an overwhelming fresh wave of perspective and faces, that, to a large extent, the legacy mentality that people brought with them from Idaho has sort of been wiped away,” Krebs said.
Aside from the change in personnel and scenery, Coeur made other changes, such as revising how it reports its cash costs. Starting in its fourth-quarter earnings statement, the firm moved to a silver-equivalent cash-cost reporting, rather than cash costs including by-products. Coeur sought to simplify for investors what are its cash costs, he said. Analysts who cover the company said on Coeur’s fourth-quarter conference call they appreciated the new method.
Since Coeur has one mine that produces 100% gold, another than produces 100% silver and two mines that have slightly more silver output than gold, it made sense to use one reporting method across the company, he said.
Cash costs including by-products is confusing for investors not familiar with the mining industry as it takes time to explain what it means, he said.
For instance, he said, the Palmarejo mine receives 60% of its revenue from silver and 40% from gold. Last year, on a by-product basis, Coeur’s costs there were $2.33 an ounce, but that doesn’t mean an investor can just subtract $2.33 from a $20 silver price and get what the firm’s cost was to produce an ounce of silver, he said.
“We have seen too often with investors that are trying to get comfortable with this industry, they look at you like you have two heads after you start going down that path (of trying to explain by-product costs). We’re trying to make it straightforward and make our numbers reconcile with what’s on (the) income statement. That’s why we’re using cost applicable to sales; that’s right off the income statement. (When an investor asks) how many ounces did you sell on a silver-equivalent basis, you can answer the question with one simple number,” he said, adding that the by-product methodology makes more sense for companies that have some revenue from base metals.
Coeur is also focusing on seeking more royalty deals in the $3 million to $30 million range, to build on its purchase of Global Royalty last year. Many miners don’t focus on royalty streams for revenue enhancement, but Krebs said it’s a good fit for the new Coeur.
“It improves our business because it adds higher-margin cash flow, less-volatile cash flow, very low-intensity cash flow. You do your work upfront, you monitor the investment. It’s a great business model. All you have to do is look at the trading model of the Silver Wheatons and the Franco Nevadas and the Royal Golds of the world to see the market loves that business model, too,” he said.
Mexican Tax Issue, Higher Reserves
Like many miners, the Mexican government’s decision to impose higher taxes on miners is hitting Coeur. Krebs said the new tax will cost the firm $3 million a year at its Palmarejo mine. Coeur is still proceeding with its La Preciosa project, but is being more deliberate in its planning on how to mitigate the new tax, such as looking how to lower its taxable earnings before interest, taxes, depreciation and amortization, he said.
“Regardless, it raises that bar in after-tax returns in projects in Mexico. You combine that with lower prices, and it shrinks the list of new projects even faster,” he said.
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