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