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Silver mining stocks were stuck in a rut in 2017, with some of the largest producers like Coeur Mining (NYSE: CDE) losing nearly 17.5%, faring only slightly better than Hecla Mining, which shed 24%, but lagging First Majestic Silver, which lost 11.7%.
In hindsight, Coeur delivered where it matters -- production and investments for the future – and if not for external factors that the company could do little about, Coeur would've been among the top-performing silver companies in 2017. In fact, Coeur just released its preliminary fiscal 2017 sales and production numbers, and they're encouraging.
Coeur's silver equivalent ounces (SEO) production hit record highs of 39.4 million ounces in FY 2017, driven primarily by a 64% jump in production from its largest mine, Palmarejo in Mexico.
While Coeur will release its full-year numbers on Feb. 7, I expect Palmarejo to have contributed substantially to the miner's cash flow thanks to its renewed streaming agreement with Franco-Nevada Corp (NYSE: FNV), under which Coeur was to sell a portion of the gold produced from the mine to Franco-Nevada at $800 per ounce. That's twice the amount Coeur was getting under its previous streaming agreement with Franco-Nevada. For those of those who wish to learn more about the precious-metals streaming business, I encourage you to read this.
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The only problem is that Coeur will likely report substantially lower profits for FY 2017 -- given that it incurred losses of $8.9 million during the nine months ended Sept. 30 compared with a profit of $63.7 million in the year-ago period -- thanks to significant mining and tax expenses, which depends on jurisdictional taxes and foreign currency fluctuations. As Coeur derived a significant portion of production from Palmarejo in 2017, fluctuations in the Mexican peso hit its bottom line hard.
Coeur is guiding for 36.6 million to 40.0 million SEO production for FY 2018. That may sound discouraging, but the ongoing mine sequencing at Palmarejo, which should boost ore grades and recovery in the longer run, is a major reason why Coeur's production is expected to decline this year. Furthermore, Silvertip -- a mine that Coeur acquired last year and is expected to start production soon -- should help offset some of the production loss from Palmarejo.
What investors should watch for are Coeur's costs and cash flow in 2018. If the company can control its costs and remain free-cash-flow positive despite production hiccups -- which I believe it will -- 2018 could be a better year for the stock.
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