An amended royalty agreement with Franco-Nevada (TSX: FNV; NYSE: FNV) has given Coeur Mining (NYSE: CDE) the breathing room it needs to consider completing the Guadalupe underground mine at its Palmarejo silver–gold complex in Mexico’s Chihuahua state, with initial production set for early 2015.
The amendment calls for the termination of a royalty on half of the gold produced from the open-pit and underground operation at Palmarejo after Coeur has completed its initial 400,000 oz. gold obligation, expected by September 2016.
Once fulfilled the agreement would kick in with Coeur delivering half of the life-of-mine gold production from Palmarejo to Franco-Nevada, but receiving US$800 per oz., compared to US$408 per oz. previously.
Raymond James analyst Chris Thompson estimates this would save Coeur US$20 million a year in royalty payments.
Along with that, Franco-Nevada would contribute US$22 million to develop Guadalupe versus no contribution under the old agreement, which Coeur will pay US$2 million to cancel. Franco-Nevada would pay the US$22 million in five quarterly installments starting in the first quarter of 2015.
Coeur has pegged Guadalupe’s pre-production costs at US$19 million, and total capital expenditures at US$85 million.
“The revised royalty agreement with FNV provides CDE the financial flexibility to develop the Guadalupe deposit (and prolong the mine life at Palmarejo), which in our view would have not been developed without such an agreement,” Thompson said in a note. He has an “outperform rating” and a US$13.50 target on Coeur.
BMO analyst Andrew Kaip agrees, noting the new agreement “reduces the effective production costs at Palmarejo, bolsters cash-flow generation and provides a strong incentive for CDE to develop the Guadalupe deposit that hosts the majority of [Palmarejo’s] underground reserves and resources.” Kaip has upgraded Coeur to “market perform” from “underperform,” and his target price to US$9.50 from US$7.
Late last year, Coeur stopped construction at Guadalupe when it realized the original plan would have not generated decent returns at then-current metal prices. In its updated mine plan Coeur intends to selectively mine higher-grade sections of the Guadalupe orebody earlier in the mine life to reduce underground development by 40%, compared to the old mine plan.
The new preliminary plan assumes recovering 2.5 million tons grading 4.7 oz. per ton (134 grams per tonne) silver and 0.08 oz. (2.27 grams) gold, with first production expected in early 2015. The mining rate should average 1,300 tons per day in 2015 and 1,500 tons per day from 2016 to 2018.
Guadalupe contains underground reserves of 5.4 million tons grading 4.32 oz. (122.5 grams) silver and 0.052 oz. (1.76 grams) gold, which make up 72% of Palmarejo’s underground reserve tons. Guadalupe also hosts 37% and 99% of Palmarejo’s underground measured and indicated tons and inferred tons.
Guadalupe’s inferred resource grades 5.26 oz. silver and 1.12 oz. gold, which is markedly higher than its reserve grades. The company intends to focus its 2014 and 2015 exploration efforts on bringing these ounces into the mine plan.
“We expect to provide additional details on Guadalupe as part of an updated mine plan for the Palmarejo operation within the next month, further demonstrating the improved production and cash-flow profile of this flagship mine,” Mitchell Krebs, the company’s CEO, said in a statement.
Cowen and Co. analyst Adam Graf estimates Palmarejo will transition to an underground-only operation by 2019. He has bumped his target to US$10.49 from US$9.42 on the new streaming deal.
Coeur also operates the San Bartolome silver mine in Bolivia, the Rochester silver–gold mine in Nevada and the Kensington gold mine in Alaska. On June 24 — the day after the revised royalty agreement — shares were off 1% at US$8.68.
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