It's become a new normal for Coeur Mining (NYSE: CDE) shares to take a hit after earnings releases. The stock tanked after the silver and gold producer released its fourth-quarter and fiscal 2016 numbers in early February, and then they fell a bit more after the first-quarter release in April. Year to date, Coeur is down 25%, as of this writing.
But why is the market punishing a company that ended 2016 with record production, is striving to cut costs, and appears to be on its way to another record year? Coeur is in a transformational phase, and there's perhaps no better time to consider a stock than when a company is turning around. Here are just some of the things that Coeur is doing right and that could propel its shares higher in the near future.
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Tapping additional sources of income
After ending fiscal 2016 with a production record of 36.3 million silver equivalent ounces (SEO), Coeur now expects its SEO to rise to roughly 39.6 million ounces at the midpoint this year. Nearly half of that production growth is expected to come from Coeur's largest multiple-mine complex, Palmarejo in Mexico, which is in the midst of a major expansion phase. Palmarejo should bring in money for Coeur in two ways -- higher production, and the income from its renewed gold streaming agreement with Franco-Nevada Corp. (NYSE: FNV).
Franco-Nevada is a precious-metals streaming and royalty company that buys metal streams from pure miners like Coeur at low costs, in exchange for funding the miners upfront. Last year, Coeur and Franco-Nevada renewed their agreement under which Franco-Nevada buys 50% of the gold produced from Palmarejo at $800 an ounce. That's almost twice the amount Franco-Nevada was paying Coeur under its old agreement. Coeur made its first gold sale to Franco-Nevada under the new agreement in Q4 2016. In fact, Coeur's Q4 cash flows took a hit because of higher inventory, as it retained gold to sell later to the streaming company -- a fact that investors chose to overlook.
While banking on such streaming and royalty agreements for a steady flow of income, Coeur is focused on increasing its reserves. In line with those goals, Coeur has outlined an exploration budget of $40 million this year, compared with the $25.8 million it spent in fiscal 2016. Aside from Palmarejo, two other key mines Coeur is ramping up are Rochester, in Nevada, and Kensington, in Alaska.
Of course, Coeur isn't the only miner expanding its business -- Hecla Mining (NYSE: HL) is among its peers growing at a strong pace, hitting record production levels and reducing costs. But Coeur stands out for two reasons: the way it's redefining its portfolio in terms of metal and geographic mix, and moves that ensure long-term benefits.
Strengthening its product and geographic mix
You probably know Coeur as a silver producer, but you'd be surprised to know that the company has changed its product mix so dramatically in recent years that 63% of its revenue came from gold last year, versus only 31% in 2010. That was all part of a well-planned strategy that involved a shift toward the yellow metal and the lucrative streaming agreement from Franco-Nevada.
At the same time, Coeur operates in one of the safest geographic regions, with 64% of revenue originating in the U.S. last year, versus only 15% in 2010. Again, this improved geographic mix positions Coeur better than its rivals. Tahoe Resources (NYSE: TAHO), for example, operates primarily out of the higher-risk nation of Guatemala.
Improving mining technique to cut costs
There's another area where Coeur has made significant progress in recent quarters: the transition from open-pit mining to 100% underground mining, which translates into higher metal recovery rates and production at lower costs.
Coeur is focused on two key growth areas: production and costs. While I've already elaborated on what it's doing on the production front, Coeur also cut down its all-in-sustaining costs by 6% year over year to $13.65 per ounce of silver in Q1. Coeur's full-year costs could be slightly higher because of lower production from its Wharf mine in South Dakota, but its costs should trend down as its ongoing expansion projects start adding to its top line.
Foolish takeaway: Solid growth potential ahead
Coeur CEO Mitchell J. Krebs perfectly summed up 2016 during the company's Q4 earnings call, when he referred to the year as "a key inflection point for Coeur." Palmarejo could be a game-changer, as it has the potential to push Coeur's production and cash flows substantially higher in the near future. Given its growth catalysts and the fact that Coeur is already generating strong operating and free cash flow, a current price-to-cash flow of 8.5 looks like a bargain right now for investors with a long-term view.
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