June 25, 2012 / 7:01 PM / 5 years ago

TEXT-S&P rates Coeur D'Alene Mines

10 Min Read

     -- U.S.-based silver miner Coeur d'Alene Mines Corp. plans to issue $350 
million of unsecured notes and enter into a $100 million secured revolving 
credit facility.
     -- We are assigning our 'B+' corporate credit rating to the company and 
'BB-' issue-level rating to the proposed unsecured notes, with a recovery 
rating of '2'.
     -- The stable rating outlook reflects our view that the company's 
operating performance will be able to support the rating despite price 
volatility and high operating costs.

Rating Action
On June 25, 2012, Standard & Poor's Rating Services assigned its 'B+' 
corporate credit rating to Idaho-based Coeur d'Alene Mines Corp. The rating 
outlook is stable. 

In addition, we have assigned our 'BB-' (one notch higher than the corporate 
credit rating) issue-level rating to the company's proposed $350 million 
senior unsecured notes due 2020. The recovery rating is '2', indicating our 
expectation of a substantial (70% to 90%) recovery for bondholders under our 
default scenario. The ratings are based on preliminary terms and conditions 
and are being sold pursuant to Rule 144a with registration rights. The 
revolving credit facility is unrated.

The 'B+' corporate credit rating on Coeur d'Alene incorporates our view of 
company's "weak" business risk profile, characterized by its exposure to 
volatile metals prices, high cost position, limited mine diversity, relatively 
small size, and the risks of being a primary silver producer, including that 
the majority of silver supply comes as a byproduct of other mining activities. 
The "significant" financial risk profile reflects our view of the company's 
recent strong cash flow generation, sound pro forma credit metrics and 
adequate liquidity. Recent operating performance and cash flow have benefited 
from unprecedented high metals prices, increased volumes, and lower capital 
expenditures as new mines have been completed. 

Assuming the $350 million senior unsecured notes are issued as contemplated, 
our baseline scenario expects 2012 EBITDA of $250 million to $300 million 
based on gold and silver price assumptions of $1,500 and $27 per ounce in 2012 
and $1,400 and $26 per ounce in 2013, respectively. Our production estimates 
for the company are in the range of 16 million to 19 million ounces of silver 
and 200,000 to 220,000 ounces of gold in 2012 with cash costs growing at the 
rate of industry-wide increases. Credit measures will initially look good 
relative to our "significant" financial risk assessment, with leverage under 
2.5x in 2012 and funds from operations (FFO) to debt approaching 30%. In 2013, 
we expect EBITDA to decline by approximately 20% due to anticipated declines 
in silver production and falling metals prices, bringing credit metrics more 
in line with the significant financial risk profile. Risks to our view include 
difficulties estimating Coeur's cost position, continued 
higher-than-anticipated capital expenditures at the Kensington mine, the 
possibility of a substantial acquisition of non-income producing assets to add 
to the company's reserve base, major capital spending needed to build out 
future mines, further shareholder rewards, and that gold and silver prices 
could significantly decline from recent cyclical highs. 

Despite being the largest primary silver producer in the U.S., Coeur is a 
relatively small miner with six operating mines. The company has doubled its 
annual silver production volumes and significantly increased its gold 
production since 2006. Its assets have relatively long mine lives, but each 
has faced significant operating issues including regulatory troubles in 
Bolivia, labor difficulties in Mexico, operating problems in Alaska, and a 
claims dispute over reserves in Nevada. In addition, Coeur is party to a 
royalty agreement which effectively precludes the company from realizing the 
market value of half the gold produced at its highly profitable Palmarejo 
mine. Moreover, we believe that Coeur is a relatively high cost producer, 
placing it at a disadvantage to peers, with all of its primary mines posting 
silver cash costs above industry averages. In addition, the company's position 
as a primary silver producer in an industry where most of the largest 
suppliers mine silver as a byproduct introduces additional uncertainty. In our 
view, byproduct producers are likely to continue to mine silver as long as it 
remains economical to mine their primary products, which include copper, gold, 
zinc, and lead.  

Although we expect good credit metrics and strong cash flow generation while 
gold and silver prices remain high, we project that metrics may deteriorate if 
prices were to return to historical norms and that price swings will introduce 
volatility into earnings, cash flow generation, and credit metrics over the 
longer term. Silver prices are driven by demand for the metal for industrial 
use and as a financial store of value. While industrial demand is expected to 
grow as promising new markets for industrial silver are emerging, the growth 
rate is likely to reflect the overall growth of the global economy. Lastly, 
the financial investment component inherent in both silver and gold prices 
introduces significant volatility into Coeur's revenue and cash flow stream, 
and current high prices are likely to return to historical norms as the global 
economy strengthens.

Coeur's liquidity position is adequate, in our view. Key aspects of our 
assessment reflect the following:
     -- Liquidity sources, which primarily consist of FFO generation, cash on 
the balance sheet, and the revolving credit facility will exceed uses by over 
1.2x over the next 12-18 months;
     -- Liquidity sources will continue to exceed uses, even if EBITDA were to 
decline by 15%; and
     -- Compliance with assumed financial maintenance covenants would likely 
survive a 15% decline in EBITDA.

Pro forma for the transaction, we expect Coeur's total liquidity to be 
approximately $520 million, consisting of $420 million in cash and full 
availability under the revolving credit facility due 2016. Cash flow from 
operations, which we estimate to be about $220 million in 2012, should cover 
estimated of capital expenditures in the $100 million to $150 million range. 
Working capital needs are moderate, in our view. In 2013 we expect declining 
capital expenditures to offset decreases in cash flow from operations, and 
that the company will have adequate cash on hand to fund a possible 
acquisition or future mine development.
The proposed refinancing will consolidate the company's capital structure 
while simultaneously pushing debt maturities out to 2020, easing current debt 
service requirements on the company's cash flow. We expect the company will be 
subject to an initial total leverage ratio of 3.25x and a minimum interest 
coverage ratio of 3x under its revolving credit facility (not rated) and that 
the bonds will be subject to standard high yield covenants. 

The company recently announced a $100 million share repurchase program, which 
we have factored into our analysis. We expect that any additional shareholder 
rewards initiated by the company will not negatively impact its financial 

Recovery analysis
For the complete recovery analysis on Coeur d'Alene, see our recovery report 
to be published shortly following the release of this report on RatingsDirect.

The stable rating outlook reflects our view that metals prices will remain 
high enough to support performance consistent with the rating despite high 
operating costs and price volatility. Risks to our forecast include the 
company's past operating difficulties and cost escalation throughout the 
industry. We believe the company's cost position may challenge its ability to 
remain profitable should prices fall to historical levels. 

We could take a negative rating action if market prices experience 
greater-than-expected declines, if production at one of the company's key 
mines is disrupted for an extended period, or if the company's cash costs 
become uneconomic relative to market prices. We could take a negative rating 
action if the company's leverage were to rise above 4x and its FFO to debt 
were to fall below 20%. 

A positive action is less likely in the near term given our assessment of the 
company's weak business risk. One could occur, however, if the company further 
diversified its asset base and achieved higher production volumes at costs in 
line with industry levels to better manage its exposure to metals prices. 

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining 
Industry, June 23, 2009 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008

Ratings List
New Rating; Outlook Stable
Coeur d'Alene Mines Corp.
 Corporate Credit Rating                B+/Stable/-- 
 Senior Unsecured
  US$350 mil nts due 2020               BB-                
   Recovery Rating                      2

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