Coeur Mining Earnings 2018-12-31
CDE 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File Number 1-8641
COEUR MINING, INC.
(Exact name of registrant as specified in its charter)
Delaware | 82-0109423 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
104 S. Michigan Ave. Suite 900 Chicago, IL (Address of principal executive offices) | 60603 (Zip Code) |
Registrant’s telephone number, including area code: (312) 489-5800
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | o | ||
Non-accelerated filer | o | Smaller reporting company | o | ||
Emerging growth company | o | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
$1,402,184,610
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
As of February 15, 2019, 203,305,545 shares of Common Stock, par value $0.01 per share
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III of the Form 10-K is incorporated by reference from the registrant’s definitive proxy statement for the 2019 Annual Meeting of Stockholders which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
COEUR MINING, INC.
FORM 10-K
INDEX
PART I | ||
PART II | ||
PART III | ||
Directors, Executive Officers and Corporate Governance | ||
Certain Relationships and Related Transactions, and Director Independence | ||
PART IV | ||
Item 16. | Form 10-K Summary | |
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PART I
Item 1. | Business |
INTRODUCTION
Coeur Mining, Inc. (“Coeur”, “the Company”, or “we”) is a gold and silver producer, as well as a zinc and lead producer after the acquisition of Silvertip (as defined below), with mines located in the United States, Canada, Mexico, and exploration projects in North America. The Company operates the Palmarejo complex, and the Rochester, Kensington, Wharf, and Silvertip mines. The Company’s principal sources of revenue are its operating mines. As described below, in October 2018, the Company acquired Northern Empire Resources Corp. (“Northern Empire”), owner of the Sterling Gold Project located in Nevada, and in November 2018 acquired the Lincoln Hill Project, Wilco Project, Gold Ridge Property and other nearby claims located in Nevada (“Lincoln Hill and related assets”) from a subsidiary of Alio Gold Inc. (“Alio Gold”). Also, in February 2018, the Company completed the Manquiri Divestiture (as defined below). As a result, the Company presents San Bartolomé as a discontinued operation for all periods presented. In this Annual Report on Form 10-K (this “Report” or “Form 10-K”), the operating statistics, results of operations, cash flows and financial condition that we present and discuss are those of our continuing operations unless otherwise indicated. For additional information regarding our discontinued operations, see Note 21 to the Consolidated Financial Statements and the discussion in our Results of Consolidated Operations below.
Coeur was incorporated as an Idaho corporation in 1928 under the name Coeur d’Alene Mines Corporation. On May 16, 2013, Coeur changed its state of incorporation from the State of Idaho to the State of Delaware and changed its name to Coeur Mining, Inc.
OVERVIEW OF MINING PROPERTIES AND INTERESTS
The Company’s operating properties and interests are described below:
• | Coeur owns 100% of Coeur Mexicana S.A. de C.V. (“Coeur Mexicana”), which has operated the Palmarejo complex in the State of Chihuahua in Northern Mexico since 2009. The processing facility on the Palmarejo complex is fed by the Palmarejo, Guadalupe and Independencia underground mines. The Company also has several exploration targets at the Palmarejo complex. The Palmarejo complex produced 122,722 ounces of gold and 7.5 million ounces of silver in 2018. The proven and probable reserves at the Palmarejo complex totaled 693,000 ounces of gold and 50.2 million ounces of silver as of December 31, 2018. |
• | Coeur owns 100% of Coeur Rochester, Inc. (“Coeur Rochester”), which has operated the Rochester mine, an open-pit silver and gold mine located in northwestern Nevada, since 1986. The Rochester mine produced 54,388 ounces of gold and 5.0 million ounces of silver in 2018. The proven and probable reserves at the Rochester mine totaled 684,000 ounces of gold and 106.2 million ounces of silver as of December 31, 2018. Coeur Rochester acquired the Lincoln Hill and related assets adjacent to its Rochester mine in November 2018 from Alio Gold for $19.0 million. |
• | Coeur owns 100% of Coeur Alaska, Inc. (“Coeur Alaska”), which has operated the Kensington mine, an underground gold mine located north of Juneau, Alaska since 2010. The Kensington mine produced a total of 113,778 ounces of gold in 2018. The proven and probable reserves at the Kensington mine totaled 552,000 ounces of gold as of December 31, 2018. |
• | Coeur owns 100% of Wharf Resources (U.S.A.), Inc. (“Wharf”), which operates the Wharf mine, an open-pit gold mine located in the Black Hills mining district of South Dakota near Lead, South Dakota. The Wharf mine has been in production for over 30 years, during which it has produced over 2.3 million ounces of gold. Coeur acquired Wharf in February 2015. The Wharf mine produced 76,840 ounces of gold in 2018. The proven and probable reserves at the Wharf mine totaled 882,000 ounces of gold as of December 31, 2018. |
• | Coeur owns 100% of Coeur Silvertip Holdings Ltd. (“Silvertip”), which operates the underground Silvertip silver-zinc-lead mine located in northern British Columbia, Canada. Coeur acquired Silvertip in October 2017 and commenced commercial production in September 2018. In 2018, the Silvertip mine produced a total of 0.3 million ounces of silver, 6.8 million pounds of zinc and 3.9 million pounds of lead. The proven and probable reserves at the Silvertip mine totaled 14.9 million ounces of silver reserves, 291.2 million pounds of zinc reserves and 197.5 million pounds of lead as of December 31, 2018. |
• | Coeur owns 100% of Coeur Sterling, Inc. (“Coeur Sterling”), whose principal asset is the Sterling gold project and the Crown Block of deposits consisting of the Daisy, Secret Pass and SNA historic resources located in the Walker Lane trend in Nevada. Coeur acquired Northern Empire, which owns 100% of the entity that has since been renamed Coeur Sterling, for $73.6 million. |
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• | Coeur owns 100% of the La Preciosa silver-gold exploration project in the State of Durango, Mexico. |
• | Coeur has made strategic equity investments in other early-stage precious metals companies. |
• | Coeur has an interest in exploration-stage properties throughout North America. |
• | Coeur formerly owned 100% of Empresa Minera Manquiri, S.A. (“Manquiri”), a Bolivian company that controls the mining rights for the San Bartolomé mine, which is a surface silver mine in Bolivia where Coeur commenced commercial production in 2008. In February 2018, the Company and certain of its subsidiaries sold all of the outstanding capital stock of Manquiri, which is the operator of the San Bartolomé mine and processing facility (the “Manquiri Divestiture”). The terms of the Manquiri Divestiture were modified in September 2018 as disclosed in Note 7 - Other, Net in the notes to the Consolidated Financial Statements. |
GOLD, SILVER, ZINC, AND LEAD PRICES
The Company’s operating results are substantially dependent upon the market prices of gold and silver, and to a lesser extent zinc and lead following the Silvertip acquisition, which fluctuate widely. The volatility of such prices is illustrated in the following table, which sets forth the high, low and average prices of each metal published by the London Bullion Market Association (“LBMA”) for silver and gold and the London Metal Exchange (“LME”) for zinc and lead:
Year Ended December 31, | |||||||||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||||||||
High | Average | Low | High | Average | Low | High | Average | Low | |||||||||||||||||||
Gold (per oz.) | $ | 1,355 | $1,268 | $ | 1,178 | $ | 1,346 | $1,257 | $ | 1,151 | $ | 1,366 | $1,251 | $ | 1,077 | ||||||||||||
Silver (per oz.) | $ | 17.52 | $15.71 | $ | 13.97 | $ | 18.56 | $17.05 | $ | 15.22 | $ | 20.71 | $17.14 | $ | 13.58 | ||||||||||||
Zinc (per lb.) | $ | 1.64 | $1.33 | $ | 1.04 | $ | 1.53 | $ | 1.31 | $ | 1.10 | $ | 1.31 | $ | 0.95 | $ | 0.66 | ||||||||||
Lead (per lb.) | $ | 1.22 | $1.02 | $ | 0.85 | $ | 1.17 | $ | 1.05 | $ | 0.91 | $ | 1.14 | $ | 0.85 | $ | 0.73 | ||||||||||
MARKETING
The Company’s mining operations produce gold and/or silver doré, and gold, zinc and lead concentrate. The Company uses a geographically diverse group of third-party refiners, smelters in the United States and Japan and third-party customers who may use various smelters in Asia and Europe for Silvertip and Kensington’s concentrate.
The Company's doré, as well as the concentrate product produced by the Wharf mine, is refined into gold and silver bullion according to benchmark standards set by the LBMA, which regulates the acceptable requirements for bullion traded in the London precious metals markets. The Company then sells its gold and silver bullion to multi-national banks, bullion trading houses, and refiners across the globe. The Company has seven trading counterparties at December 31, 2018. The Company's sales of doré or concentrate product produced by the Palmarejo, Rochester, and Wharf mines amounted to approximately 77%, 78%, and 74% of total metal sales for the years ended December 31, 2018, 2017, and 2016, respectively. In November 2018, one of the refiners of the Company’s doré, Republic Metals Corp. (“RMC”), a U.S.-based precious metals refiner, filed for protection under Chapter 11 of the United States Bankruptcy Code. See Note 3 - Segments in the notes to the Consolidated Financial Statements for additional detail.
The Company's gold concentrate product from the Kensington mine and the zinc and lead concentrates from the Silvertip mine are sold under a variety of agreements with smelters and traders, and the smelters and traders pay the Company for the metals recovered from the concentrates. The Company’s sales of concentrate produced by the Kensington and Silvertip mines amounted to approximately 23%, 22%, and 26% of total metal sales for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company believes that the loss of any one smelter, refiner, trader or third-party customer would not materially adversely affect the Company due to the liquidity of the markets and current availability of alternative trading counterparties.
HEDGING ACTIVITIES
The Company’s strategy is to provide stockholders with exposure to gold, silver, zinc and lead prices by selling gold, silver, zinc and lead production at market prices. The Company may enter into short-term derivative contracts to protect the selling price for certain anticipated gold, silver, zinc and lead production and to manage risks associated with interest rates and foreign currencies. For additional information see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and Note 11 -- Derivative Financial Instruments in the notes to the Consolidated Financial Statements for additional detail.
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GOVERNMENT REGULATION
General
The Company’s activities are subject to extensive federal, state and local laws governing the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic substances, protection of endangered, protected or other specified species and other matters. The costs to comply with such regulatory requirements are substantial and possible future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development and continued operation of the Company’s properties, the extent of which cannot be predicted. In the context of environmental permitting, including the approval of reclamation plans, the Company must comply with known standards and regulations which may entail significant costs and delays. Although the Company has been recognized for its commitment to environmental responsibility and believes it is in substantial compliance with applicable laws and regulations, amendments to current laws and regulations, more stringent application or interpretation of these laws and regulations through judicial review, or administrative action or the adoption of new laws could have a material adverse effect upon the Company and its results of operations.
Estimated future reclamation costs are based primarily on legal and regulatory requirements. At December 31, 2018, $133.5 million was accrued for reclamation costs relating to currently developed and producing properties. The Company is also involved in several matters concerning environmental obligations associated with former mining activities. Based upon the Company’s best estimate of its liabilities for these items, $2.0 million was accrued as of December 31, 2018. These amounts are included in Reclamation on the Consolidated Balance Sheet.
Environmental Laws
Certain mining wastes from extraction and beneficiation of ores would be considered hazardous waste under the U.S. Resource Conservation and Recovery Act (“RCRA”) and state law equivalents, but are currently exempt from the extensive set of Environmental Protection Agency (“EPA”) regulations governing hazardous waste. If the Company’s mine wastes were treated as hazardous waste under RCRA or such wastes resulted in operations being designated as “Superfund” sites under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) or state law equivalents for cleanup, material expenditures could be required for the construction of additional waste disposal facilities, for other remediation expenditures, or for natural resource damages. Under CERCLA, any present or past owners or operators of a Superfund site generally may be held liable and may be forced to undertake remedial cleanup action or to pay for the government’s cleanup efforts. Such owners or operators may also be liable to governmental entities for the cost of damages to natural resources, which may be substantial. Additional regulations or requirements may also be imposed upon the Company’s operations, tailings, and waste disposal areas, as well as upon mine closure, in Alaska, Nevada, and South Dakota under federal and state environmental laws and regulations, including, without limitation, CERCLA, the Clean Water Act, Clean Air Act and state law equivalents. The Company has reviewed and considered current federal legislation relating to climate change and does not believe it to have a material effect on its operations. Our operations in Mexico and Canada are also subject to government regulations for the protection of the environment, which can be as, less, or more restrictive than those in the United States. Future changes in U.S., Mexican or Canadian federal, state or provincial laws or regulations could have a material adverse effect upon the Company and its results of operations.
Environmental Permitting
The Rochester, Kensington and Wharf mines are subject to extensive U.S. federal and state permitting laws and regulations. Mexico, where the Palmarejo complex and the La Preciosa exploration project are located, and Canada, where the Silvertip mine is located, have all adopted laws and guidelines for environmental permitting that are similar to those in effect in the United States. The permitting process in each jurisdiction requires, among other things, a thorough study to determine the baseline condition of the mining site and surrounding area, an environmental impact analysis, and proposed mitigation measures to minimize and offset the environmental impact of mining operations. The Company has received all permits required to operate and carry out the current scope of activities at the Palmarejo complex, Rochester, Kensington, Wharf and Silvertip mines, and has received all permits necessary for the exploration activities currently being conducted at its other properties. The Company is in the process of amending existing permits at its Rochester, Silvertip, and Kensington mines to support future planned activities. For additional information regarding permitting risks, please see “Section 1A - Risk Factors”.
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Maintenance of Claims
United States
A portion of the Company’s U.S. mining properties consists of unpatented mining claims on federal lands. Legislation has been introduced regularly in the U.S. Congress over the last decade to change the Mining Law of 1872 as amended (the “Mining Law”), under which the Company holds these unpatented mining claims. It is possible that the Mining Law may be amended or replaced by less favorable legislation in the future. Previously proposed legislation contained a production royalty obligation, new environmental standards and conditions, additional reclamation requirements and extensive new procedural steps which would likely result in delays in permitting. The ultimate content of future proposed legislation, if enacted, is uncertain. If a royalty on unpatented mining claims were imposed, the profitability of the Company’s U.S. operations could be materially adversely affected. In addition, the U.S. Forest Service and the U.S. Bureau of Land Management (“BLM”) have considered revising regulations governing operations under the Mining Law on federal lands they administer, which, if implemented, may result in additional procedures and environmental conditions and standards on those lands. The majority of the Company’s operations are either outside of the United States or on private patented lands and would be unaffected by potential legislation.
Any such reform of the Mining Law or BLM and U.S. Forest Service regulations thereunder could increase the costs of mining activities on unpatented mining claims, or could materially impair the ability of the Company to develop or continue operations which derive ore from federal lands, and as a result, could have an adverse effect on the Company and its results of operations. Until such time, if any, as new reform legislation or regulations are enacted, the ultimate effects and costs of compliance on the Company cannot be estimated.
At mining properties in the United States, including the Rochester, Kensington, Wharf mines and the Sterling Project, operations are conducted upon both patented and unpatented mining claims. Pursuant to applicable federal law, it is necessary to pay to the Secretary of the Interior, on or before September 1st of each year, a claim maintenance fee of $155 per unpatented federal claim. This claim maintenance fee is in lieu of the assessment work requirement contained in applicable mining laws. In addition, Nevada and South Dakota holders of unpatented federal mining claims are required to pay the county recorder of the county in which the claim is situated a de minimis anual fee per claim. In Alaska, the Company is required to pay a variable, annual rental fee for State claims and a State upland mining lease based on the age of the claim or claims converted to the upland mining lease. Annual labor must also be performed on the claim or an annual payment in lieu of annual labor must be paid to the State of Alaska for State claims and upland mining leases. No maintenance fees are payable for federal patented claims. Patented claims are similar to land held by an owner who is entitled to the entire interest in the property with unconditional power of disposition and are subject to local ad valorem property taxes.
Mexico
In order to carry out mining activities in Mexico, the Company is required to obtain a mining concession from the General Bureau of Mining, which belongs to the Ministry of Economy of the Federal Government, or be assigned previously granted concession rights, and both must be recorded with the Public Registry of Mining. In addition, mining works may have to be authorized by other authorities when performed in certain areas, including ejidos (communal owners of land recognized by the federal laws in Mexico), villages, dams, channels, general communications ways, submarine shelves of islands, islets and reefs, marine beds and subsoil and federal maritime-terrestrial zones. Reports have to be filed with the General Bureau of Mining in May of each year, evidencing previous calendar year mining investment and works. Annual reports, detailing technical and statistical information and production results, must be submitted during the first 30 business days of the following year for each concession or group of concessions bearing production and all concessions over six years of age. Bi-annual mining duties are payable in January and July of each year and, based on amount of surface of each mining concession, holders of mining concessions must also pay annually and no later than the last business day of March a special mining fee based on 7.5% of the income before interest and certain other permitted deductions derived from the transfer or sale of minerals, plus 0.5% of gross revenues from sales of gold, silver and platinum. Failure to pay any of these duties and submit the required reports could lead to cancellation of the concessions. Upon expiration or cancellation of the concession, certain obligations remain, such as filing technical reports and ground support.
Canada (British Columbia)
Mineral claims and mining leases in British Columbia are regulated by the provincial government under the Mineral Tenure Act. Mineral claims are initially valid for one year after recording. To maintain a claim, the recorded holder must, on or before the expiry date of the claim, either perform exploration and development work on that claim (or contiguous block of claims) and register such work, or register a payment instead of exploration and development work. Only work prescribed by regulation is acceptable for registration. The value of exploration and development work required to maintain a mineral claim for one year is CAD5/hectare (“ha”) for each of the first and second years, CAD10/ha for each of the third and fourth years, CAD15/ha for each of the fifth and sixth years, and CAD20/ha for each subsequent year. If a payment is made instead of performing exploration
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and development work, the payment must be double the value of the required work. The recorded holder of a mineral claim is allowed to produce a very limited amount of mineralized material. For production in excess of these limits, a mining lease is required. Mining leases in British Columbia are generally issued for a term of 30 years, and renewal terms are available. An annual rental payment of CAD20/ha is required to maintain a mining lease. There are no annual work requirements for mining leases. Before any mechanical disturbance of the surface of the ground is performed by, or on behalf of, the recorded holder, the necessary approvals and permits under the Mineral Tenure Act must be obtained. Mines in production are subject to taxation by the provincial government. The Silvertip mine is subject to a British Columbia mining royalty tax of 13% of net revenues subject to certain permitted deductions.
EMPLOYEES
The number of full-time employees of the Company at December 31, 2018 was:
Palmarejo Complex | 860 | |
Rochester Mine | 290 | |
Kensington Mine | 383 | |
Wharf Mine | 208 | |
Silvertip Mine | 247 | |
Sterling Project | 12 | |
U.S. Corporate and Other | 75 | |
Total | 2,075 | |
BUSINESS STRATEGY AND COMPETITIVE STRENGTHS
The Company’s business strategy is to discover, develop and operate a balanced portfolio of high-quality precious metals assets currently in North America. The Company strives to Protect its People, Places and Planet; Develop Quality Resources, Growth and Plans; and Deliver Impactful Results through Teamwork.
Key components of the Company’s strategy include;
• | Focus geographically on North America; |
• | Concentrate on precious metals; |
• | Focus on disciplined capital allocation including portfolio optimization, prioritizing near mine growth opportunities; |
• | Bolstering a high performing organization and culture; |
• | Achieve investable level of scale and relevance through its unique portfolio of operating and growth assets; |
• | Deliver low cost production; |
• | Sustain balance sheet flexibility to provide financial flexibility through cycles and inherent volatility; |
• | Engage in leading Environmental, Social and Governance (“ESG”) programs, priorities and initiatives; and |
• | Maintain peer leading levels of trading liquidity. |
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Management believes the following strengths provide the Company with significant competitive advantages:
Strong track record of developing and operating mines
The Company has successfully acquired, developed, and operated a portfolio of operating mines since its founding in 1928. In 2018, we had production from continuing operations of 359,520 ounces of gold and 12.8 million ounces of silver at costs applicable to sales of $11.46 per silver equivalent ounce1 ($9.89 per average spot silver equivalent ounce) at primary silver mines and $982 per gold equivalent ounce1 at primary gold mines.
Gold Production Silver Production
(Continuing Operations) (Continuing Operations)
Costs Applicable to Sales per Gold Equivalent Oz1 Costs Applicable to Sales per Silver Equivalent Oz1
All-in Sustaining Costs per Silver Equivalent Oz 60:11 All-in Sustaining Costs per Silver Equivalent Oz Spot1 
(1) See Non-GAAP Financial Performance Measures.
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Operating and commodity diversity
The Company’s gold, silver, zinc and lead production comes from five operating mines. The Company operates the Palmarejo gold and silver complex in Mexico, the Rochester silver and gold mine in Nevada, the Kensington gold mine in Alaska, the Wharf gold mine in South Dakota, and the Silvertip silver-zinc-lead mine in Canada.
The Company’s metal sales breakdown by operating mine in continuing operations and metal is set out below:
2018 Gold Sales by Mine (ounces) 2018 Silver Sales by Mine (millions of ounces)
The Company also sold 4.4 million pounds of zinc and 2.6 million pounds of lead produced at Silvertip in 2018.
Experienced management team and Board of Directors
The Company has built a high-caliber management team of devoted professionals with extensive mining industry expertise. President and Chief Executive Officer, Mitchell Krebs, Senior Vice President and Chief Financial Officer, Thomas Whelan, Senior Vice President, Exploration, Hans Rasmussen and Senior Vice President, Operations, Terry Smith, each has significant experience in the mining industry. The board of directors also brings diverse industry backgrounds and a depth of professional experience to the Company.
Reserve replenishment and resource growth
The Company has spent significant capital in developing or expanding its five 100%-owned operating mines that remain as continuing operations. The Company has been able to successfully maintain the proven and probable reserves at many of its shorter lived mines through its exploration efforts.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains numerous forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to the Company’s gold, silver, zinc and lead mining business, including mineral reserve and mineralized material estimates, exploration efforts, drilling, development at Kensington and Palmarejo, estimated production, costs, capital expenditures, expenses, recoveries, metals prices, sufficiency of assets, ability to discharge liabilities, liquidity management, financing needs, environmental compliance expenditures, risk management strategies, operational excellence, cost reduction initiatives, capital discipline and business strategies. Such forward-looking statements are identified by the use of words such as “believes,” “intends,” “expects,” “hopes,” “may,” “should,” “plan,” “projected,” “contemplates,” “anticipates” or similar words. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include (i) the risk factors set forth below under Item 1A and in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7, (ii) the risks and hazards inherent in the mining business (including risks inherent in developing large- scale mining projects, environmental hazards, industrial accidents, weather or geologically related conditions), (iii) changes in the market prices of gold, silver, zinc and lead and a sustained lower price environment, (iv) the uncertainties inherent in the Company’s production, exploratory and developmental activities, including risks relating to permitting and regulatory delays (including the impact of government shutdowns), ground conditions and grade variability, (v) any future labor disputes or work stoppages (involving the Company and its subsidiaries or third parties), (vi) the uncertainties inherent in the estimation of gold, silver, zinc and lead reserves and mineralized material, (vii) changes that could result from the Company’s future acquisition of new mining properties or businesses, (viii) the loss of access to any third- party smelter to whom the Company markets its production, (ix) the effects of environmental and other governmental regulations, (x) the risks inherent in the ownership or operation of or investment in mining properties or businesses in foreign countries, and (xi) the Company’s ability to raise additional financing necessary to conduct its business, make payments or refinance its debt. Readers are cautioned not to put undue reliance on forward-looking
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statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.
CAUTIONARY NOTE REGARDING DISCLOSURE OF MINERAL PROPERTIES
Reserves, Resources and Mineralized Material
Coeur Mining, Inc. is subject to the reporting requirements of the Exchange Act and applicable Canadian securities laws, and as a result we report our mineral reserves according to two different standards. Canadian reporting requirements for disclosure of mineral properties are governed by National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”). The definitions of NI 43-101 are adopted from those given by the Canadian Institute of Mining, Metallurgy and Petroleum. U.S. reporting requirements, however, are governed by Securities and Exchange Commission (“SEC”) Industry Guide 7 (“Guide 7”). Both sets of reporting standards have similar goals in terms of conveying an appropriate level of confidence in the disclosures being reported, but embody different approaches and definitions. Under Guide 7, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.
In our public filings in Canada and in certain other announcements not filed with the SEC, we disclose measured, indicated and inferred resources, each as defined in NI 43-101, in addition to our mineral reserves. U.S. investors are cautioned that, while the terms “measured mineral resources,” “indicated mineral resources” and “inferred mineral resources” are recognized and required by Canadian securities laws, Guide 7 does not recognize them. The estimation of measured resources and indicated resources involve greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves, and therefore U.S. investors are cautioned not to assume that all or any part of measured or indicated resources will ever be converted into Guide 7 compliant reserves. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources, and therefore it cannot be assumed that all or any part of inferred resources will ever be upgraded to a higher category. Therefore, investors are cautioned not to assume that all or any part of inferred resources exist, or that they can be mined legally or economically.
In this Form 10-K and in our other filings with the SEC, we modify our estimates made in compliance with NI 43-101 to conform to Guide 7 for reporting in the United States. In this Form 10-K, we use the term “mineralized material” to describe mineralization in mineral deposits that do not constitute “reserves” under U.S. standards. “Mineralized material” is substantially equivalent to measured and indicated mineral resources (exclusive of reserves) as disclosed for reporting purposes in Canada, except that the SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces. We provide disclosure of mineralized material to allow a means of comparing our projects to those of other companies in the mining industry, many of which are Canadian and report pursuant to NI 43-101, and to comply with applicable disclosure requirements. We caution you not to assume that all or any part of mineralized material will ever be converted into Guide 7 compliant reserves.
Technical Reports and Qualified Persons
As required by Canadian securities laws, we hereby notify Canadian investors that the scientific and technical information concerning our mineral projects in this Form 10-K have been reviewed and approved by a “qualified person” under NI 43-101, namely our Director, Technical Services, Christopher Pascoe. For a description of the key assumptions, parameters and methods used to estimate mineral reserves included in this Form 10-K, as well as data verification procedures and a general discussion of the extent to which the estimates may be affected by any known environmental, permitting, legal, title, taxation, socio-political, marketing or other relevant factors, Canadian investors may view technical reports prepared for each of our properties as filed on SEDAR at http://www.sedar.com. Neither the technical reports nor the statements of any qualified person filed with the Canadian securities regulatory authorities are included in, incorporated by reference in or made a part of this Form 10-K. Because the definitions and standards of NI 43-101 differ from those of Guide 7, investors are cautioned that information contained in reports prepared pursuant to NI 43-101, like the technical reports, may not be comparable to similar information that we disclose in this Form 10-K or the other reports we file with the SEC.
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AVAILABLE INFORMATION
Coeur makes available, on its website (http://www.coeur.com), its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements, as well as Forms 3, 4 and 5 with respect to its common stock, including any amendments to any of the foregoing, as soon as reasonably practicable after such reports are electronically filed with the SEC (and which are also available at http://www.sec.gov). Copies of Coeur’s Corporate Governance Guidelines, charters of the key committees of the Board of Directors (Audit, Compensation and Leadership Development, Nominating and Corporate Governance, and Environmental, Health, Safety, and Corporate Responsibility Committees) and its Code of Business Conduct and Ethics, applicable to the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, among others, are also available on the Company’s website. Information contained on the Company’s website is not a part of this report.
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Item 1A. | Risk Factors |
The Company’s results of operations, cash flows and operating costs are highly dependent upon the market prices of gold, silver, zinc and lead, and of key input commodities used in our business, which are volatile and beyond the Company’s control.
Gold, silver, zinc and lead are actively traded commodities, and their prices are volatile. During the twelve months ended December 31, 2018, the price of gold ranged from a low of $1,178 per ounce on August 17, 2018 to a high of $1,355 per ounce on January 25, 2018, the price of silver ranged from a low of $13.97 on November 14, 2018 per ounce to a high of $17.52 per ounce on January 25, 2018, the price of zinc ranged from a low of $1.04 per pound on September 17, 2018 to a high of $1.64 per pound on February 16, 2018, and the price of lead ranged from a low of $0.85 per pound on October 31, 2018 to a high of $1.22 per pound on February 2, 2018. The closing market prices of gold, silver, zinc and lead on February 19, 2019 were $1,334 per ounce, $15.78 per ounce, $1.21 per pound, and $0.91 per pound, respectively.
Gold, silver, zinc and lead prices are affected by many factors beyond the Company’s control, including U.S. dollar strength or weakness, speculation, global currency values, the price of products that incorporate gold, silver, zinc or lead, global and regional demand and production, political and economic conditions and other factors. In addition, Exchange Traded Funds (“ETFs”), which have substantially facilitated the ability of large and small investors to buy and sell precious metals and base metals, have become significant holders of gold, silver, zinc and lead. Gold and silver prices are also affected by prevailing interest rates and returns on other asset classes, expectations regarding inflation and governmental decisions regarding precious metals stockpiles.
Because the Company derives a significant portion of its revenues from sales of gold and silver and, to a lesser extent, zinc and lead from the Silvertip mine, which commenced commercial production in September 2018, its results of operations and cash flows will fluctuate as the prices of these metals change. A period of significant and sustained lower gold and silver prices and, to a lesser extent, zinc and lead prices, would materially and adversely affect the Company’s results of operations and cash flows. Additionally, if market prices for gold, silver, zinc and lead decline and remain at lower levels for a sustained period of time, the Company may have to revise its operating plans, including reducing operating costs and capital expenditures, terminating or suspending mining operations at one or more of its properties and discontinuing certain exploration and development plans. The Company may be unable to decrease its costs in an amount sufficient to offset reductions in revenues, and may continue to incur losses.
Operating costs at the Company’s mines are also affected by the price of input commodities, such as fuel, electricity, labor, chemical reagents, explosives, steel and concrete. Prices for these input commodities are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, consumer or industrial demand and other factors. Continued volatility in the prices of commodities and other supplies the Company purchases could lead to higher costs, which would adversely affect results of operations and cash flows.
The Company may be unable to successfully integrate and may not realize the expected benefits of the recently acquired Sterling project, Lincoln Hill and related assets, Silvertip mine or other acquisitions.
There can be no assurance that the anticipated benefits of the recently completed acquisitions of the Sterling project and Lincoln Hill and related assets in Nevada, the Silvertip mine in British Columbia, Canada, or any future acquisition, will be realized. The success of these and any other acquisitions will depend upon the Company’s ability to effectively manage the integration and operations of entities or properties it acquires and to realize other anticipated benefits. The process of managing acquired businesses or assets may involve unforeseen difficulties and may require a disproportionate amount of management resources, which may divert management’s focus and resources from other strategic opportunities and from operational matters during this process.
In addition to the above, any acquisition would be accompanied by risks, including:
•a significant change in commodity or stock prices after the Company has committed to complete the transaction and established the purchase price or exchange ratio;
•a material ore body may prove to be below expectations;
•processing facilities may not operate as well as anticipated, and may require significant maintenance, downtime and capital investment;
•difficulties integrating and assimilating the operations and personnel of any acquired companies, realizing anticipated synergies and maximizing the financial and strategic position of the combined enterprise, and maintaining uniform standards, policies and controls across the organization; and
•difficulties or loss of social license to operate resulting from failure of efforts to establish positive relationships and/or agreements with local communities or local indigenous people
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•the acquired business or assets may have unknown liabilities which may be significant.
In addition, the Silvertip acquisition was funded, in part, with funds drawn under the Company’s revolving credit facility, resulting in increased interest expense, and a portion of the consideration for the Silvertip acquisition, as well as the consideration for the acquisitions of the Sterling project and Lincoln Hill and related assets were funded through the issuance of equity securities, resulting in dilution of the percentage ownership of existing Company stockholders. In connection with any future acquisition, the Company may incur indebtedness or issue equity securities or securities convertible into equity securities, resulting in further increased interest expense or dilution. The Company cannot predict the impact of future acquisitions on the price of its common stock, or assure that it would be able to obtain any necessary financing on acceptable terms. Unprofitable acquisitions, or additional indebtedness or issuances of securities in connection with such acquisitions or any mine development, may negatively affect results of operations.
Finally, the Company’s systems, procedures and controls may be inadequate to support the expansion of our operations resulting from an acquisition or development of a new mine. The Company’s future operating results could be affected by the ability of its officers and key employees to manage the changing business conditions and to integrate an acquired business or new operation into Coeur. There may also be liabilities, such as environmental liabilities, or significant capital expenditures that the Company failed to discover or have underestimated in connection with any acquisition or development. Any such liabilities or capital expenditure requirements could have a material adverse effect on the Company’s business, financial condition or future prospects.
The Company is an international company and is exposed to political and social risks associated with its foreign operations.
A significant portion of the Company’s revenues are generated by operations outside the United States. Exploration, development, production and closure activities in many countries are potentially subject to heightened political and social risks that are beyond the Company’s control and could result in increased costs, capacity constraints and potential disruptions to the Company’s business. These risks include the possible unilateral cancellation or forced renegotiation of contracts in which the Company, directly or indirectly, may have an interest, unfavorable changes in foreign laws and regulations, royalty and tax increases (including taxes associated with the import or export of goods), risks associated with the value-added tax (“VAT”) and income tax refund recovery and collection process, erection of trade barriers, including tariffs and duties, claims by governmental entities or indigenous communities, expropriation or nationalization of property and other risks arising out of foreign sovereignty over areas in which our operations are conducted. The right to import and export gold, silver, zinc and lead may depend on obtaining certain licenses and quotas, which could be delayed or denied at the discretion of the relevant regulatory authorities, or could become subject to new taxes, tariffs or duties imposed by U.S. or foreign jurisdictions, which could have a material adverse effect on the Company’s business, financial condition, or future prospects. In addition, the Company’s rights under local law may be less secure in countries where judicial systems are susceptible to manipulation and intimidation by government agencies, non-governmental organizations or civic groups.
Any of these developments could require the Company to curtail or terminate operations at its mines, incur significant costs to renegotiate contracts, meet newly-imposed environmental or other standards, pay greater royalties or higher prices for labor or services and recognize higher taxes, or experience significant delays or obstacles in the recovery of VAT or income tax refunds owed, which could materially and adversely affect financial condition, results of operations and cash flows.
These risks may be higher in developing countries in which the Company may expand its exploration for and development of mineral deposits. Potential operations in these areas increase the Company’s exposure to risks of war, local economic conditions, political disruption, civil disturbance and governmental policies that may disrupt its operations.
The Company’s future growth will depend upon its ability to develop new mines, either through exploration at existing properties or by acquisition of other mining companies.
Because mines have limited lives based on proven and probable ore reserves, the Company’s ability to achieve significant additional growth in revenues and cash flows will depend upon success in further developing existing properties and the opportunistic acquisition or development of new mining properties, such as the Company’s recent Silvertip acquisition, the Sterling project and the Lincoln Hill and related assets.
While initial development of the Palmarejo, Rochester, and Kensington mines has been substantially completed, development work continues to expand these mines while leveraging existing infrastructure. In addition, the Company acquired several mining properties in recent years, namely, the Sterling project, the Lincoln Hill and related assets, the Silvertip silver-zinc-lead mine, the Wharf gold mine and the properties held by Paramount Gold & Silver Corp. which are now part of the Palmarejo complex, and has significantly expanded its near-mine exploration program. The Company cannot assure that it will be able to successfully expand and develop existing or new mining properties or acquire additional mining properties on favorable economic terms or at all.
The Company regularly evaluates and engages in discussions or negotiations regarding acquisition opportunities. Any
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transactions that the Company contemplates or pursues would involve risks and uncertainties, and would be subject to competition from other mining companies. There can be no assurance with respect to the timing, likelihood or business effect of any possible transaction.
The Company’s success depends on developing and maintaining relationships with local communities and other stakeholders.
The Company’s ongoing and future success depends on developing and maintaining productive relationships with the communities surrounding its operations, including indigenous peoples who may have rights or may assert rights to certain of the Company’s properties, and other stakeholders in its operating locations. The Company believes its operations can provide valuable benefits to surrounding communities, in terms of direct employment, training and skills development and other benefits associated with ongoing payment of taxes. In addition, the Company seeks to maintain its partnerships and relationships with local communities, including indigenous peoples, and stakeholders in a variety of ways, including in-kind contributions, volunteer time, sponsorships and donations. Notwithstanding the Company’s ongoing efforts, local communities and stakeholders can become dissatisfied with its activities or the level of benefits provided, which may result in legal or administrative proceedings, civil unrest, protests, direct action or campaigns against it. Any such occurrences could materially and adversely affect the Company’s financial condition, results of operations and cash flows.
The Company’s operations outside the United States also expose it to economic and operational risks.
The Company’s operations outside the United States also expose it to economic and operational risks. Local economic conditions can cause shortages of skilled workers and supplies, increase costs and adversely affect the security of operations. In addition, higher incidences of criminal activity and violence in the area of some of the Company’s foreign operations, including drug-cartel related violence in Mexico, could adversely affect the Company’s ability to operate in an optimal fashion and may impose greater risks of theft and greater risks as to personnel and property security. These conditions could lead to lower productivity and higher costs, which would adversely affect results of operations and cash flows.
In addition, acts of civil disobedience are common in certain of the countries where the Company’s operations are located. In recent years, many mining companies have been the targets of actions to restrict their legally-entitled access to mining concessions or property. Such acts of civil disobedience often occur with no warning and can result in significant direct and indirect costs. The Company cannot provide assurance that there will be no disruptions to site access in the future, which could adversely affect the Company’s business.
The Company sells silver and gold doré, gold concentrate, and silver, zinc and lead concentrates in U.S. dollars, but it conducts operations outside the United States in local currency. Currency exchange movements could also adversely affect the Company’s results of operations.
The estimation of mineral reserves and mineralized material is imprecise and depends upon subjective factors. Estimated mineral reserves and mineralized material may not be realized in actual production. The Company’s results of operations and financial position may be adversely affected by inaccurate estimates.
The mineral reserve and mineralized material figures presented in the Company’s public filings are estimates made by the Company’s technical personnel and independent mining consultants with whom the Company contracts. Mineral reserve and mineralized material estimates are a function of geological and engineering analyses that require the Company to make assumptions about production costs, recoveries and gold, silver, zinc and lead market prices. Mineral reserve and mineralized material estimation is an imprecise and subjective process. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation, judgment and experience. Assumptions about gold, silver, zinc and lead market prices are subject to great uncertainty as those prices fluctuate widely and have fallen significantly at times over the past several years. Declines in the market prices of gold, silver, zinc or lead may render mineral reserves and mineralized material containing relatively lower grades of mineralization uneconomic to exploit, and the Company may be required to reduce mineral reserve and mineralized material estimates, discontinue development or mining at one or more of its properties or write down assets as impaired. Should the Company encounter mineralization or geologic formations at any of its mines or projects different from those predicted, it may adjust its mineral reserve and mineralized material estimates and alter its mining plans. Either of these alternatives may adversely affect actual production and financial condition, results of operations and cash flows.
The Company’s estimates of future production, costs, and financial results are imprecise, depend upon subjective factors, may not be realized in actual production and such estimates speak only as of their respective dates.
The Company has in the past, and may in the future, provide estimates and projections of its future production, costs and financial results. Any such information is forward-looking. Neither the Company’s independent registered public accounting firm nor any other independent expert or outside party compiles or examines these forward-looking statements and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Such estimates are made by the Company’s management and technical personnel and are qualified by, and subject to the assumptions, contained or referred in the filing, release or presentation in which they are made, including assumptions about the availability, accessibility, sufficiency and quality of
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mineralized material, the Company’s costs of production, the market prices of gold, silver, zinc and lead, the Company’s ability to sustain and increase production levels, the ability to produce and sell marketable concentrates and dore, the sufficiency of its infrastructure, the performance of its personnel and equipment, its ability to maintain and obtain mining interests and permits, the state of government and community relations, and its compliance with existing and future laws and regulations. The Company sometimes states possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. Actual results and experience may differ materially from these assumptions. Any such production, cost, or financial results estimates speak only as of the date on which they are made, and the Company disclaims any intent or obligation to update such estimates, whether as a result of new information, future events or otherwise. Accordingly, these forward-looking statements should be considered in the context in which they are made and undue reliance should not be placed on them.
The Company’s future operating performance may not generate cash flows sufficient to meet debt payment obligations.
As of February 20, 2019, the Company had approximately $471.3 million of outstanding indebtedness. The Company’s ability to make scheduled debt payments on outstanding indebtedness will depend on future results of operations and cash flows. The Company’s results of operations and cash flows, in part, are subject to economic factors beyond its control, including the market prices of gold, silver, zinc and lead. The Company may not be able to generate enough cash flow to meet obligations and commitments under outstanding debt instruments. If the Company cannot generate sufficient cash flow from operations to service debt, it may need to further refinance debt, dispose of assets or issue equity to obtain the necessary funds.
If the Company’s cash flows and capital resources are insufficient to fund its debt service obligations, the Company could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance its indebtedness. The Company cannot predict whether it would be able to refinance debt, issue equity or dispose of assets to raise funds on a timely basis or on satisfactory terms. In a rising interest rate environment, the costs of borrowing additional funds or refinancing outstanding indebtedness would also be expected to increase. In addition, the Facility’s interest rate is determined, at the Company’s option, by the London Interbank Offered Rate (“LIBOR”), and the Company and its lenders may not be able to agree to a new benchmark interest rate before LIBOR is eliminated by the end of 2021, which may result in higher interest costs for the Company. The agreements governing the Company’s outstanding indebtedness restrict the Company’s ability to dispose of assets and use the proceeds from those dispositions and may also restrict its ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. The Company may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. If the Company raises additional funds by issuing equity securities or securities convertible into equity securities, holders of its common stock could experience significant dilution of their ownership interest, and these securities could have rights senior to those of the holders of common stock.
The terms of the Company’s debt impose restrictions on its operations.
The agreements governing the Company’s outstanding indebtedness include a number of significant negative covenants. These covenants, among other things:
•limit the Company’s ability to obtain additional financing, repurchase outstanding equity or issue debt securities;
•require the Company to meet certain financial covenants consisting of a consolidated net leverage ratio and a consolidated interest coverage ratio;
•require a portion of the Company’s cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•limit the Company’s ability to sell, transfer or otherwise dispose of assets, enter into transactions with and invest capital in affiliates, enter into agreements restricting our subsidiaries’ ability to pay dividends, consolidate, amalgamate, merge or sell all or substantially all of the Company’s assets;
•increase our vulnerability to general adverse economic and industry conditions;
•limit the Company’s flexibility in planning for and reacting to changes in the industry in which we compete; and
•place the Company at a disadvantage compared to other, less leveraged competitors.
A breach of any of these covenants could result in an event of default under the applicable agreement governing the Company’s outstanding indebtedness that, if not cured or waived, could cause all amounts outstanding with respect to the debt to be due and payable immediately. Acceleration of any debt could result in cross-defaults under the Company’s other debt instruments.
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The Company’s assets and cash flow may be insufficient to repay borrowings fully under all of its outstanding debt instruments if any of its debt instruments are accelerated upon an event of default, which could force the Company into bankruptcy or liquidation.
Any downgrade in the credit ratings assigned to the Company or its debt securities could increase future borrowing costs, adversely affect the availability of new financing and may result in increased collateral requirements under the Company’s existing surety bond portfolio.
There can be no assurance that any rating currently assigned by Standard & Poor’s Rating Services or Moody’s Investors Service to the Company or its debt securities will remain unchanged for any given period of time or that a rating will not be lowered if, in that rating agency’s judgment, future circumstances relating to the basis of the rating so warrant. If the Company is unable to maintain its outstanding debt and financial ratios at levels acceptable to the credit rating agencies, or should the Company’s business prospects or financial results deteriorate, including as a result of declines in gold and silver prices or other factors beyond our control, our ratings could be downgraded by the rating agencies. A downgrade by the rating agencies could adversely affect the value of the Company’s outstanding debt securities, its existing debt, and its ability to obtain new financing on favorable terms, if at all, increase borrowing costs, and may result in increased collateral requirements under the Company’s existing surety bond portfolio, which in turn may adversely affect the Company’s results of operations and financial position.
The Company’s business is subject to anti-bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm.
The Company operates in certain jurisdictions that have experienced governmental and private sector corruption to some degree. The U.S. Foreign Corrupt Practices Act, as well as Canadian and Mexican anti-bribery laws generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage the Company’s reputation, which could have a material adverse effect on the Company’s business, financial position and results of operations. The Company’s Code of Business Conduct and Ethics and other corporate policies mandate compliance with these anti-bribery laws; however, there can be no assurance that the Company’s internal control policies and procedures always will protect it from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by the Company’s affiliates, employees or agents. As such, the Company’s corporate policies and processes may not prevent all potential breaches of law or other governance practices.
A significant delay or disruption in sales of concentrates or doré as a result of the unexpected disruption in services provided by smelters or refiners could have a material adverse effect on results of operations.
The Company relies on refiners and smelters to refine and process and, in some cases, purchase, the gold and silver doré and gold, silver, zinc and lead concentrate produced by the Company’s mines. Access to refiners and smelters on economical terms is critical to the Company’s ability to sell its products to buyers and generate revenues. The Company periodically enters into agreements with refiners and smelters, some of which operate their refining or smelting facilities outside the United States, and the Company believes it currently has contractual arrangements with a sufficient number of refiners and smelters so that the loss of any one refiner or smelter would not significantly or materially impact the Company’s operations or its ability to generate revenues. Nevertheless, services provided by a refiner or smelter may be disrupted by new or increased tariffs, duties or other cross-border trade barriers, the bankruptcy or insolvency of one or more refiners or smelters or the inability to agree on acceptable commercial or legal terms with a refiner or smelter. Such an event or events may disrupt an existing relationship with a refiner or smelter or result in the inability to create a contractual relationship with a refiner or smelter, which may leave the Company with limited, uneconomical or no access to refining or smelting services for short or long periods of time. Any such delay or loss of access may significantly impact the Company’s ability to sell its doré and concentrate products. The Company cannot ensure that alternative refiners or smelters would be available or offer comparable terms if the need for them were to arise or that it would not experience delays or disruptions in sales that would materially and adversely affect results of operations. In November 2018, one of the refiners of the Company's dore, RMC, filed for protection under Chapter 11 of the United States Bankruptcy Code. Approximately 0.4 million ounces of the Company's silver and 6,500 ounces of the Company's gold were impacted by RMC's bankruptcy filing, and Coeur cannot guarantee it will be able to recover all or a portion of the value of this material.
There are significant hazards associated with mining activities, some of which may not be fully covered by insurance.
The mining business is subject to risks and hazards, including environmental hazards, industrial accidents, the encountering of unusual or unexpected geological formations, cave-ins, flooding, earthquakes and periodic interruptions due to inclement or hazardous weather conditions. These occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, reduced production and delays in mining, asset write-downs, monetary losses and possible legal liability.
Insurance fully covering many environmental risks, including potential liability for pollution or other hazards as a result of disposal of waste products occurring from exploration and production, is not generally available. Any liabilities that the Company
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incurs for these risks and hazards could be significant and could adversely affect results of operations, cash flows and financial condition.
The Company is subject to significant governmental regulations, including the U.S. Mine Safety and Health Act, and related costs and delays may negatively affect its business.
Mining activities are subject to extensive federal, state, local and foreign laws and regulations governing environmental protection, natural resources, prospecting, development, production, post-closure reclamation, taxes, labor standards and occupational health and safety laws and regulations, including mine safety, toxic substances and other matters. The costs associated with compliance with such laws and regulations are substantial. Changes in existing laws (including recent changes to U.S. tax laws), possible future laws and regulations, or more restrictive interpretations of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of operations and delays in the development of new properties.
U.S. surface and underground mines like the Kensington, Rochester and Wharf mines and Sterling Project are continuously inspected by the U.S. Mine Safety and Health Administration (“MSHA”), which inspections often lead to notices of violation. Recently, MSHA has been conducting more frequent and more comprehensive inspections of mining operations in general.
Failure to comply with applicable laws, regulations and permitting requirements may result in temporary or extended shutdowns, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, which may require corrective measures including the payment of fines or penalties, capital expenditures, installation of additional equipment or remedial actions, any of which could have a material, adverse effect on the Company’s business and results of operations.
Compliance with environmental regulations and litigation based on environmental regulations could require significant expenditures.
Environmental regulations mandate, among other things, the maintenance of air and water quality standards, land development and land reclamation, and set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner that may require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for mining companies and their officers, directors and employees. The Company may incur environmental costs that could have a material adverse effect on financial condition and results of operations. Any failure to remedy an environmental problem could require it to suspend operations or enter into interim compliance measures pending completion of the required remedy. The environmental standards that ultimately may be imposed at a mine site affect the cost of remediation and could exceed the financial accruals that the Company has made for such remediation. The potential exposure may be significant and could have a material adverse effect on the Company’s financial condition and results of operations.
Moreover, governmental authorities and private parties may bring lawsuits based upon damage to property and injury to persons resulting from the environmental, health and safety impacts of prior and current operations, including operations conducted by other mining companies many years ago at sites located on properties that the Company currently or formerly owned. These lawsuits could lead to the imposition of substantial fines, remediation costs, penalties and other civil and criminal sanctions. Substantial costs and liabilities, including for restoring the environment after the closure of mines, are inherent in the Company’s operations. The Company cannot assure that any such law, regulation, enforcement or private claim would not have a material adverse effect on its financial condition, results of operations or cash flows.
Some of the mining wastes from the Company’s U.S. mines currently are exempt to a limited extent from the extensive set of EPA regulations governing hazardous waste under the Resource Conservation and Recovery Act (“RCRA”). If the EPA were to repeal this exemption, and designate these mining wastes as hazardous under RCRA, the Company would be required to expend additional amounts on the handling of such wastes and to make significant expenditures to construct hazardous waste storage or disposal facilities. In addition, if any of these wastes causes contamination in or damage to the environment at a U.S. mining facility, that facility could be designated as a “Superfund” site under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Under CERCLA, any present owner or operator of a Superfund site or the owner or operator at the time of contamination may be held jointly and severally liable regardless of fault, and may be forced to undertake extensive remedial cleanup action or to pay for the cleanup efforts. The owner or operator also may be liable to federal, state and tribal governmental entities for the cost of damages to natural resources, which could be substantial. Additional regulations or requirements also are imposed on the Company’s tailings and waste disposal areas in Alaska under the federal Clean Water Act (“CWA”), in Nevada under the Nevada Water Pollution Control Law which implements the CWA, and in South Dakota under the South Dakota Water Pollution Control Act and the Administrative Rules of the State of South Dakota. In addition, proposed CERCLA regulations requiring mining companies to obtain supplemental financial assurance could, if adopted, have a material adverse effect on results of operations and cash flows.
Airborne emissions are subject to controls under air pollution statutes implementing the Clean Air Act in Nevada, Alaska
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and South Dakota. In addition, there are numerous legislative and regulatory initiatives related to climate change, reductions in greenhouse gas emissions, or energy policy and adoption of these initiatives through legislative actions or administrative policy could have a material adverse effect on results of operations and cash flows.
In addition, U.S. environmental conservation efforts could result in the withdrawal of certain federal lands from mineral entry under the Mining Law, which could have the effect of restricting the Company’s current or future planned activities involving its unpatented mining claims on the affected public lands.
The Company is required to obtain and renew governmental permits in order to conduct operations, a process which is often costly and time-consuming. The Company’s ability to obtain necessary government permits to expand operations or begin new operations can be materially affected by third party activists.
In the normal course of its business, the Company is required to obtain and renew governmental permits for exploration, operations and expansion of existing operations and for the development of new projects. Obtaining and renewing governmental permits is a complex and time-consuming process. The timeliness and success of permitting efforts are contingent upon many variables not within the Company’s control, including the interpretation of permit approval requirements administered by the applicable permitting authority. The Company may not be able to obtain or renew permits that are necessary to its operations or the cost and time required to obtain or renew permits may exceed the Company’s expectations. Any unexpected delays or costs associated with the permitting process could delay the development or impede the operation of a mine, which in turn could materially adversely affect the Company’s revenues and future growth. In addition, key permits and approvals may be revoked or suspended or may be changed in a manner that adversely affects the Company’s operations.
Private parties such as environmental activists frequently attempt to intervene in the permitting process and to persuade regulators to deny necessary permits or seek to overturn permits that have been issued. Obtaining the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and costly undertakings. These third party actions can materially increase the costs and cause delays in the permitting process and could cause the Company to not proceed with the development or expansion of a mine. In addition, the Company’s ability to successfully obtain key permits and approvals to explore for, develop, operate and expand mines and to conduct its operations will likely depend on the Company’s ability to develop, operate, expand and close mines in a manner that is consistent with the creation of social and economic benefits in the surrounding communities, which may or may not be required by law. The Company’s ability to obtain permits and approvals and to successfully operate in particular communities may be adversely impacted by real or perceived detrimental events associated with its activities or those of other mining companies affecting the environment, human health and safety of communities in which it operates.
If future permitting applications or amendments are not approved on a timely basis or at all, or if the permitting process is delayed for any reason, including to address public comments, the Company’s plans for continued operations and future growth could be materially adversely affected, which could have a material adverse effect on the Company’s financial condition and results of operations.
Like any mining company, our mining assets are subject to geotechnical and hydrological risks, and a related incident could materially and adversely impact our production, profitability and financial condition and the value of our common stock.
Our mining assets are subject to geotechnical and hydrological risks which could impact the structural integrity of our mines, stockpiles, leach pads and tailings storage facilities. No assurances can be given that unanticipated adverse geotechnical and hydrological conditions, such as landslides, pit wall failures or tailings dam instability will not occur in the future or that such events will be detected in advance. Geotechnical and hydrological instabilities can be difficult to predict and are often affected by risks and hazards outside of our control, such as severe weather and considerable rainfall, which may lead to periodic floods, mudslides, wall instability and seismic activity, which may result in slippage of material. Geotechnical or hydrological failures could result in limited or restricted access to mine sites, suspension of operations, government investigations, increased monitoring costs, remediation costs, loss of mineralized material and other impacts, which could have a material adverse effect on our results of operations and financial position as well as the value of our common stock.
The Company is dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration.
The Company’s information technology systems used in its operations are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyberattacks, natural disasters and defects in design. Cybersecurity incidents, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data or machines and equipment, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information, the corruption of data or the disabling, misuse or malfunction of machines and equipment. Various measures have been implemented to manage the
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Company’s risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of information or operational technology disruptions, the Company could potentially be subject to production downtimes, operational delays, operating accidents, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on cash flows, financial condition or results of operations.
The Company could also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into operations. Various measures have been implemented to manage the risks related to the system implementation and modification, but system modification failures could have a material adverse effect on the Company’s business, financial position and results of operations.
Significant investment risks and operational costs are associated with exploration and development activities. These risks and costs may result in lower economic returns and may adversely affect the Company’s business.
The Company’s ability to sustain or increase its present production levels depends in part on successful exploration and development of new ore bodies and expansion of existing mining operations. Substantial expenditures are required to establish ore reserves, to extract metals from ores and, in the case of new properties, to construct mining and processing facilities.
Our plans include several significant projects to construct or upgrade mining and processing facilities at our existing mining operations. These projects can take up to several months or years to complete, are complex and require significant capital expenditures. These projects are subject to significant risks, including delays, extreme weather events, unexpected increases in the cost of required materials, and disputes with third party providers of materials, equipment or services, and a completed project may not yield the anticipated operational or financial benefit, any of which may have a material negative impact on returns on invested capital, operating costs or cash flows.
Mineral exploration involves many risks and is frequently unproductive. Even if mineral deposits are found, those deposits may be insufficient in quantity and quality to return a profit from production, or it may take a number of years until production is possible, during which time the economic viability of the project may change. Few properties that are explored are ultimately developed into producing mines. The commercial viability of a mineral deposit, once developed, depends on a number of factors, including: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; government regulations including taxes, royalties and land tenure; land use; importing and exporting of minerals; environmental protection; mineral prices; and issuance and maintenance of necessary permits. Factors that affect adequacy of infrastructure include: reliability of roads, bridges, power sources and water supply; unusual or infrequent weather phenomena; sabotage; and government or other interference in the maintenance or provision of such infrastructure. All of these factors are highly cyclical. The exact effect of these factors cannot be accurately predicted, but the combination may result in not receiving an adequate return on invested capital.
In addition, exploration projects, such as the Company’s La Preciosa project, may have no operating history upon which to base estimates of future operating costs and capital requirements. Exploration project items such as estimates of reserves, metal recoveries and cash operating costs are to a large extent based upon the interpretation of geologic data, obtained from a limited number of drill holes and other sampling techniques, and feasibility studies. Estimates of cash operating costs are then derived based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, actual operating costs and economic returns of any and all exploration projects may materially differ from the costs and returns estimated, and accordingly, the Company’s financial condition, results of operations and cash flows may be negatively affected.
The Company’s business depends on good relations with, and the retention and hiring of, employees.
The Company may experience labor disputes, work stoppages or other disruptions in production that could adversely affect its business and results of operations. Labor disruptions may be used to advocate labor, political or social goals, particularly at non-U.S. mines. For example, labor disruptions may occur in sympathy with strikes or labor unrest in other sectors of local economies. The Company cannot assure that work stoppages, union organizing activities or other disruptions will not occur in the future. Any such work stoppage or disruption could expose the Company to significant costs and have a material adverse effect on its business, results of operations or financial condition.
We compete with other mining companies to attract and retain key executives, skilled labor, contractors and other employees. We may be unable to continue to attract and retain skilled and experienced employees, which could have an adverse effect on our competitive position or adversely impact our results of operations or financial condition.
The significant and sustained decline in gold and silver prices in recent years caused the Company to write down certain of its long-lived assets and, in the future, declines in relevant metal prices could cause one or more of the Company’s mining properties to become less profitable, which could require the Company to record additional write-downs of long-lived assets. Such write- downs may adversely affect the Company’s results of operations and financial condition.
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The Company reviews its long-lived assets for recoverability pursuant to the Financial Accounting Standard Board’s Accounting Standards Codification Section 360. Under that standard, the Company reviews the recoverability of its long-lived assets, such as its mining properties, upon a triggering event. Such review involves the Company estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment, measured by comparing an asset’s carrying value to its fair value, must be recognized when the carrying value of the asset exceeds these cash flows. The Company conducts a review of the financial performance of its mines in connection with the preparation of its financial statements for each reported period and determines whether any triggering events are indicated.
In prior years, the Company’s assessment of the recoverability of its long-lived assets resulted in write-downs in the Company's Statement of Comprehensive Income (Loss) and reduced the carrying value of Mining properties and Property, plant, and equipment on the Company’s balance sheet. See Note 4 -- Write-Downs in the notes to the Consolidated Financial Statements for further detail.
If there are further significant and sustained declines in relevant metal prices, or if the Company fails to control production and operating costs or realize the mineable ore reserves at its mining properties, the Company may terminate or suspend mining operations at one or more of its properties. These events could require a further write-down of the carrying value of the Company’s assets. Any such actions would adversely affect the Company’s results of operations and financial condition.
The Company may record other types of charges in the future if it sells a property for a price less than its carrying value or has to increase reclamation liabilities in connection with the closure and reclamation of a property. Any additional write-downs of mining properties could adversely affect the Company’s results of operations and financial condition.
The Company’s use of derivative contracts to protect against market price volatility exposes it to risk of opportunity loss, mark- to-market fair value adjustments and exposure to counterparty credit risk.
From time to time, the Company may enter into price risk management contracts to protect against fluctuations in the price of gold, silver, zinc and lead, foreign currency rates and changes in the prices of fuel and other input costs. These contracts could include forward sales or purchase contracts, futures contracts, purchased or sold put and call options and other derivative instruments.
The use of derivative instruments can expose the Company to risk of an opportunity loss and may also result in significant mark-to-market fair value adjustments, which may have a material adverse impact on reported financial results. The Company is exposed to credit risk with contract counterparties, including, but not limited to, sales contracts and derivative contracts. In the event of nonperformance in connection with a contract, the Company could be exposed to a loss of value for that contract.
Forward sales, royalty arrangements, and certain derivative instruments can result in limiting the Company’s ability to take advantage of increased metal prices while increasing its exposure to lower metal prices.
The Company has in the past entered into, and may in the future enter into, arrangements under which it (or a mine acquired by the Company) has agreed to make royalty or similar payments to lenders or other third parties in amounts that are based on expected production and price levels for gold or silver. The Company enters into such arrangements when it concludes that they provide it with necessary capital to develop a specific mining property or to achieve other business objectives. Royalty or similar payment obligations, however, can limit the Company’s ability to realize the full effects of rising metal prices and may, depending on the terms of the agreement, require the Company to make potentially significant cash payments if the mine fails to achieve specified minimum production levels.
Disputes regarding the Company’s mining claims, concessions or surface rights to land in the vicinity of the Company’s mining projects could adversely impact operations.
The validity of mining or exploration claims, concessions or rights, which constitute most of the Company’s property holdings, is often uncertain and may be contested. The Company has used commercially reasonable efforts, in accordance with industry standard, to investigate its title or claims to its various properties, however, no assurance can be given that applicable governments will not revoke or significantly alter the conditions of the applicable exploration and mining claims, concessions or rights or that such exploration and mining claims, concessions or rights will not be challenged by third parties. Although the Company has attempted to acquire satisfactory title to undeveloped properties, in accordance with mining industry practice it does not generally obtain title opinions until a decision is made to develop a property. As a result, some titles, particularly titles to undeveloped properties may be defective. Defective title to any of the Company’s exploration and mining claims, concessions or rights could result in litigation, insurance claims and potential losses affecting its business as a whole. There may be challenges to the title of any of the claims comprising the Company’s projects that, if successful, could impair development and operations. A defect could result in the Company losing all or a portion of its right, title, estate and interest in and to the properties to which the title defect relates.
In Mexico, while mineral rights are administered by the federal government through federally issued mining concessions,
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federally recognized agrarian communities called ejidos control surface or surface access rights to the land. An ejido may sell or lease lands directly to a private entity. While the Company has agreements or is in the process of negotiating agreements with the ejidos that impact all of its projects in Mexico, some of these agreements may be subject to renegotiation.
Continuation of the Company’s mining operations is dependent on the availability of sufficient and affordable water supplies.
The Company’s mining operations require significant quantities of water for mining, ore processing and related support facilities. In particular, the Company’s properties in Mexico and Nevada are in areas where water is scarce and competition among users for continuing access to water is significant. Continuous production and mine development is dependent on the Company’s ability to acquire and maintain water rights and claims and to defeat claims adverse to current water uses in legal proceedings. Although each of the Company’s operating mines currently has sufficient water rights and claims to cover its operational demands, the Company cannot predict the potential outcome of pending or future legal proceedings relating to water rights, claims and uses. Water shortages may also result from weather or environmental and climate impacts out of the Company’s control. Shortages in water supply could result in production and processing interruptions. In addition, the scarcity of water in certain regions could result in increased costs to obtain sufficient quantities of water to conduct the Company’s operations. The loss of some or all water rights, in whole or in part, or ongoing shortages of water to which we have rights or significantly higher costs to obtain sufficient quantities of water (or the failure to procure sufficient quantities of water) could result in the Company’s inability to maintain production at current or expected levels, require the Company to curtail or shut down mining production and could prevent the Company from pursuing expansion or development opportunities, which could adversely affect the Company’s results of operations and financial condition. Laws and regulations may be introduced in some jurisdictions in which the Company operates which could also limit access to sufficient water resources, thus adversely affecting the Company’s operations.
The Company is subject to litigation and may be subject to additional litigation in the future.
The Company is currently, and may in the future become, subject to other litigation, arbitration or proceedings with other parties. If decided adversely to the Company, these legal proceedings, or others that could be brought against the Company in the future, could have a material adverse effect on our financial position or prospects. In the event of a dispute arising at the Company’s foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or arbitral panels, or may not be successful in subjecting foreign persons to the jurisdiction of courts or arbitral panels in the United States. The Company’s inability to enforce its rights and the enforcement of rights on a prejudicial basis by foreign courts or arbitral panels could have an adverse effect on the Company’s results of operations and financial position.
The Company has the ability to issue additional equity securities, including in connection with an acquisition of other companies, which would lead to dilution of its issued and outstanding common stock and may materially and adversely affect the price of its common stock.
The issuance of additional equity securities or securities convertible into equity securities, whether to acquire new companies or businesses or for other strategic benefits, would result in dilution of the Company’s existing stockholders’ equity ownership. The Company is authorized to issue, without stockholder approval, 10.0 million shares of preferred stock in one or more series, to establish the number of shares to be included in each series and to fix the designation, powers, preferences and relative participating, optional, conversion and other special rights of the shares of each series as well as the qualification, limitations or restrictions on each series. Any series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of its common stock. If the Company issues additional equity securities, the price of its common stock may be materially and adversely affected.
Holders of our common stock may not receive dividends.
We have not historically declared cash dividends on our common stock. Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. We are incorporated in Delaware and governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under Delaware law, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. Our ability to pay dividends will be subject to our future earnings, capital requirements and financial condition, as well as our compliance with covenants related to existing or future indebtedness and would only be declared in the discretion of our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
MINING PROPERTIES
Coeur Mining’s significant production and development properties are described below. Operating statistics are presented in the section entitled “Operating Statistics” below.
Mexico — Palmarejo
The Palmarejo complex consists of (1) the Palmarejo processing facility; (2) the Guadalupe underground mine, located about eight kilometers southeast of the Palmarejo mine; (3) the Independencia underground mine, located approximately 800 meters northeast of the Guadalupe underground mine; and (4) other nearby deposits and exploration targets. The Palmarejo complex is located in the state of Chihuahua, Mexico. Access to the property is provided by air, rail, and all-weather paved and gravel roads from the state capitol of Chihuahua. Gold and silver production from the Palmarejo complex was approximately 122,722 ounces and 7.5 million ounces in 2018, respectively. At December 31, 2018, we reported 693,000 ounces of gold reserves and 50.2 million ounces of silver reserves at the Palmarejo complex.
The Palmarejo complex consists of 71 wholly-owned mining concessions, covering approximately 67,296 acres (27,233 hectares) of land. In total, the Palmarejo complex covers over 105 square miles. All mining concessions owned by Coeur Mexicana are valid until at least 2029.
The Palmarejo complex is located on the western flank of the Sierra Madre Occidental, a mountain range that comprises the central spine of northern Mexico. The north-northwest trending Sierra Madre Occidental is composed of a relatively flat-lying sequence of Tertiary volcanic rocks that forms a volcanic plateau, cut by numerous igneous intrusive rocks. This volcanic plateau is deeply incised in the Palmarejo mine area, forming steep-walled canyons. The Sierra Madre Occidental gives way to the west to an extensional terrain that represents the southward continuation of the Basin and Range Province of the western United States, and then to the coastal plain of western Mexico.
The gold and silver deposits at the Palmarejo complex, typical of many of the other gold and silver deposits in the Sierra Madre, are classified as epithermal deposits and are hosted in multiple veins, breccias, and fractures. These geologic structures trend generally northwest to southeast and dip either southwest or northeast. The dip on the structures ranges from
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about 45 degrees to 70 degrees. In the mineralized portions of the structures, gold and silver are zoned from top to bottom with higher silver values occurring in the upper parts of the deposit and higher gold values in the lower parts, sometimes accompanied by base metal mineralization, though local variations are common. The Palmarejo complex contains a number of mineralized zones or areas of interest. The most important of these to date is the Palmarejo zone in the north of the mining concessions, which covers the old Palmarejo gold-silver mine formed at the intersection of the northwest-southeast trending La Prieta and La Blanca gold-and-silver bearing structures. In addition to the Palmarejo zone, other mineralized vein and alteration systems in the district area have been identified all roughly sub-parallel to the Palmarejo zone. The most significant of these additional targets are the Guadalupe (including Animas), Independencia, and La Patria vein systems in the southern part of the property, which are currently under development (Guadalupe and Independencia) and exploration (La Patria) by the Company.
A portion of the Palmarejo complex is subject to a gold stream agreement with a subsidiary of Franco-Nevada Corporation pursuant to which Coeur Mexicana sells 50% of applicable gold production for the lesser of $800 or spot price per ounce.
USA (Nevada) — Rochester
The Rochester mine, and associated heap leach facilities, is an open pit silver and gold mine located in Pershing County, Nevada, approximately thirteen miles northeast of the city of Lovelock. The Company owns 100% of the Rochester mine through Coeur Rochester. The mine consists of the main Rochester deposit and the adjacent Nevada Packard deposit, southwest of the Rochester mine. In November 2018, Coeur Rochester acquired the Lincoln Hill and related assets adjacent to Rochester from Alio Gold. This land package, includes the Lincoln Hill, Gold Ridge and Wilco projects. The Rochester mine is fully supported with electricity, supplied by a local power company on their public grid, telephone and radio communications, production water wells, and processing, maintenance, warehouse, and office facilities. Ore is mined using conventional open pit methods, with gold and silver recovered by heap leaching of crushed open-pit ore placed on pads located within the Rochester mining area. Based upon actual operating experience and metallurgical testing, the Company estimates ultimate recovery rates from the crushed ore of 61.5% for silver, depending on the ore being leached, and 92.5% for gold. Gold and silver production from Rochester was approximately 54,388 ounces and 5.0 million ounces ounces in 2018, respectively. At December 31, 2018, we reported 684,000 ounces of gold reserves and 106.2 million ounces of silver reserves at the Rochester mine.
Coeur Rochester lands, including the Lincoln Hill and related assets, consist of approximately 43,541 net acres, which encompasses 1,478 Federal unpatented lode claims, appropriating approximately 30,038 net acres of Public Land, 23 patented lode claims, consisting of approximately 392 acres, interests owned in approximately 6,929 gross acres of additional real property and certain rights in and to approximately 6,182 acres, held either through lease, letter agreement or license.
The Company acquired the Rochester property from ASARCO in 1983 and commenced mining in 1986. No mining or processing was conducted at Rochester by the prior owner. The Company acquired its initial interest in the adjacent Nevada Packard property in 1996, completed the full purchase in 1999 and commenced mining in 2003. However, mining of the Nevada Packard property has since ceased. The prior owner conducted very limited mining and processing at Nevada Packard. Collectively, the Rochester and Nevada Packard properties, together with other adjacent and contiguous lands subsequently acquired, comprise the Rochester silver and gold processing operation. The Federal unpatented lode claims are maintained via annual filings and timely payment of claim maintenance fees to the BLM, which acts as administrator of the claims.
At Rochester, silver and gold mineralization is hosted in folded and faulted volcanic rocks of the Rochester Formation and overlying Weaver Formation. Silver and gold, consisting of silver sulfosalt minerals, argentite, silver-bearing tetrahedrite and minor native gold, are contained in zones of multiple quartz veins and veinlets (vein, vein swarms and stockworks) with variable amounts of pyrite.
The Company is obligated to pay an NSR royalty to ASARCO, the prior owner, when the average quarterly market price of silver equals or exceeds $23.60 per ounce indexed for inflation up to a maximum rate of 5% with the condition that the Rochester mine achieves positive cash flow for the applicable year. If cash flow is negative in any calendar year, the maximum royalty payable is $250,000.
USA (Alaska) — Kensington
The Kensington underground gold mine and associated milling facilities are located on the east side of the Lynn Canal about 45 miles north-northwest of Juneau, Alaska. The Company controls 100% of the mine through Coeur Alaska. The mine is accessed by a horizontal tunnel and utilizes conventional and mechanized underground mining methods. Ore is processed in a flotation mill that produces a concentrate that is sold to third party smelters. Waste material is deposited in an impoundment facility on the property. Power is supplied by on-site diesel generators. Access to the mine is by either a combination of road vehicles, boat, helicopter, floatplane, or by boat direct from Juneau. Gold production at Kensington was 113,778 ounces of gold in 2018, which includes 8,208 ounces of gold from the Jualin underground mine before commercial production was declared in December 2018. At December 31, 2018, we reported 552,000 ounces of gold reserves at the Kensington mine.
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Coeur Alaska controls two contiguous property groups: the Kensington Group and Jualin Group. The Kensington Group, totaling approximately 3,969 net acres, consists of 51 patented lode and patented mill site claims comprising approximately 766 net acres, 284 Federal unpatented lode claims covering approximately 3,108 net acres, and 13 State of Alaska mining claims covering approximately 95 net acres. The Jualin Group, totaling approximately 8,366 net acres, is comprised of 23 patented lode and patented mill site claims covering approximately 388 net acres, 471 Federal unpatented lode claims and 1 Federal unpatented mill site claim appropriating approximately 7,916 net acres, a State of Alaska upland mining lease comprising approximately 682 acres, one State of Alaska mining claim comprising approximately three acres and four State-selected mining claims covering approximately 70 acres. 14 of the 23 patented lode claims cover private surface estate only. The mineral estate to these 14 patented lode claims is owned by the State of Alaska, the mineral rights to which are secured by a State of Alaska upland mining lease. The Company controls properties comprising the Jualin Group, under a lease agreement with Hyak Mining Company, which is valid until August 5, 2035 and thereafter, provided mining and production are actively occurring within and from the leased premises.
The Federal unpatented lode and Federal unpatented mill site claims are maintained via annual filings and timely payment of claim maintenance fees to the BLM, which acts as administrator of the claims. State of Alaska mining claims and upland mining leases are maintained via fees and filings to the Alaska Department of Natural Resources, Division of Mining, Land and Water and the Juneau Recorder’s Office. Real property taxes are paid annually to the City and Borough of Juneau for the patented lode claims. Private lease payments are paid annually and all leases are in good standing.
The Kensington ore deposit consists of multiple gold bearing mesothermal, quartz, carbonate and pyrite vein swarms and discrete quartz-pyrite veins hosted in Cretaceous-aged Jualin diorite. Most of the gold is contained in calaverite (AuTe2) that occurs in association with native gold as inclusions in and interstitial to pyrite grains and in microfractures in pyrite.
USA (South Dakota) — Wharf
The Wharf mine is located in the northern Black Hills of western South Dakota, approximately four miles south and west of the city of Lead, South Dakota. Access is established by paved road with power supplied by a local power company. Coeur acquired the Wharf mine in 2015 and owns all of the issued and outstanding equity interests in Wharf and its wholly-owned subsidiary, Golden Reward Mining Limited Partnership (“Golden Reward”), the owners of the Wharf mine. Gold production from the Wharf mine was 76,840 ounces in 2018. At December 31, 2018, we reported 882,000 ounces of gold reserves at Wharf.
There are two contiguous property groups located at the Wharf mine; the Wharf Group and the Golden Reward Group, owned or controlled by wholly-owned subsidiaries of Coeur and Wharf Resources. The Wharf Group is generally described as the northern and western portions of the project, while the Golden Reward Group is generally described as the southern and eastern portion of the project.
The Wharf Group comprises 362 patented lode claims, 35 government lots, 123 subdivided lots, and 59 federal unpatented lode claims. The Wharf Group is comprised of approximately 3,591 net acres of surface, 652 net mineral acres where both the Precambrian and younger formations are owned or controlled, 3,243 net mineral acres of non-Precambrian mineral estate, and 1,603 net mineral acres of Precambrian mineral estate and 287 net acres of federal unpatented lode claims. The Golden Reward Group encompasses 218 patented lode claims, 14 government lots, 19 subdivided lots and 34 federal unpatented lode claims. The Golden Reward Group is comprised of approximately 1,564 net acres of surface estate, 2,988 net mineral acres of mineral estate where both the Precambrian and younger formations are owned or controlled, 357 net mineral acres of Non-Precambrian mineral estate, 153 net mineral acres of Precambrian mineral estate and 25 net acres of federal unpatented lode claims.
The federal unpatented lode claims are maintained by the timely annual payment of claim maintenance fees, payable to the BLM. The patented lands are private land and therefore not subject to federal claim maintenance requirements. However, as private land, they are subject to ad valorem property taxes assessed by Lawrence County, South Dakota, which may be paid semi-annually.
The Wharf mine is a structurally controlled disseminated gold deposit, hosted by Paleozoic sedimentary rocks and Tertiary alkalic intrusive rocks. Mining has occurred at Wharf for over 30 years as an open pit heap leach operation. Host rocks are sandstones of the upper and lower members of the Cambrian Deadwood Formation and Tertiary alkalic intrusive sills. Alteration styles as well as age dates in the deposit demonstrate both lithological and structural control, which are completely unrelated to the nearby gold deposits at the Homestake Gold Mine in Lead, South Dakota.
Wharf and Golden Reward are obligated to pay a sliding scale production royalty to Royal Gold, Inc. The royalty encumbers the majority of the land comprising the Wharf Group, together with a small portion of the lands encompassing the Golden Reward Group, and wholly excludes the Precambrian Mineral Estate. The sliding scale provides for a 2.0% royalty on the gross value less state severance taxes with a monthly average PM LBMA Gold Price of $500 or more per ounce.
Wharf and Golden Reward are also obligated to pay a 3.0% non-participating royalty to Donald D. Valentine, et al, on gold that is produced from ores mined and delivered to heap leach pads or recovered from tailings. This royalty encumbers the mineral estate, including the Precambrian Mineral Estate, of much of the lands comprising the Wharf Group, together with a small portion
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of the lands encompassing the Golden Reward Group. Wharf holds a right of first refusal to purchase this royalty upon any proposed transfer by the royalty holder.
Canada (British Columbia) — Silvertip
The Silvertip mine is located in British Columbia, Canada and consists of sixty-four (64) contiguous mineral claims containing approximately 39,375 hectares (97,298 acres) and two mining leases containing approximately 1,528 hectares (3,777 acres). In total, the Silvertip mine covers an area of approximately 40,904 hectares (101,076 acres). All mineral claims are valid for one year after recording. To maintain a claim, the recorded holder must, on or before the expiry date of the claim, either perform exploration and development work on that claim (or contiguous block of claims) and register such work online, or register a payment instead of exploration and development work. Silver, zinc and lead production from Silvertip was approximately 0.3 million ounces, 6.8 million pounds and 3.9 million in 2018, respectively, which includes 0.2 million ounces of silver, 2.6 million pounds of zinc and 1.8 million pounds of lead related to production before commercial production was declared in September 2018. At December 31, 2018, we reported 14.9 million ounces of silver reserves, 291.2 million pounds of zinc reserves and 197.5 million pounds of lead reserves at the Silvertip mine.
Silvertip maintains two mining leases which are also subject to the Mineral Tenure Act regulations. Coeur Silvertip’s mining leases cover 1,528.79 hectares (3,777.72 acres). Mining leases are held by making an annual rental payment of CAD20 per hectare. The mining leases expire 30 years after the grant date, and all leases held by Coeur Silvertip are valid until 2045 or later.
The Silvertip mine is a carbonate-hosted massive sulfide deposit. Economic mineralization occurs at the top of the McDame limestone, at or near the contact with the upper Earn Group sediments. Mineable massive sulfides form gently plunging tubes or cape-shaped mantos up to about 20 meters thick and 30 meters wide, and in places extend for at least 200 meters. Discordant, high-angle chimney feeders are also present and have been the target of recent underground exploration. Geologic contact between the massive sulfide and the host limestone can be sharp and easy to see in both drill core and underground mining. Mineralization consists of pyrite, pyrrhotite, sphalerite and argentiferous galena. Additionally, silver-bearing phases can include pyrargyrite-proustite, boulangerite-jamesonite and tetrahedrite (freibergite). The mineralizing event is assumed to be Late Cretaceous, which is consistent with other ore deposits in a belt that extends through the Yukon to southern Alaska.
Coeur Silvertip is obligated to pay a 2.5% net smelter returns royalty payable to Maverix Metals, Inc. on all mineral products produced from the Silvertip mine. Coeur Silvertip is also obligated to pay to Silvertip Resources Investment Cayman Ltd. a net smelter returns royalty of 1.429% on the first 1,434,000 tons of mineralized material mined, and 1.00% thereafter, on all mineral leases that underlie the Silvertip mine and that were in existence at April 11, 2016. The Company is party to a formal agreement with the Kaska Nation dated December 12, 2013, under which the Company is obligated to make an annual payment to the Kaska Nation that is calculated based on financial performance of the Silvertip mine and can increase or decrease based on the average price of silver for the relevant calendar year.
Bolivia — San Bartolomé
In February 2018, the Company completed the Manquiri Divestiture. The San Bartolomé silver mine, and associated milling operation, operated by Manquiri, is located on the flanks of the Cerro Rico mountain bordering the town of Potosí, in the department of Potosí, Bolivia. Access to the property and Manquiri’s processing facilities is by paved and all-weather gravel roads leading south-southwest from Potosí. Silver was first discovered in the area around 1545. Mining of silver and lesser amounts of tin and base metals has been conducted nearly continuously since that time from multiple underground mines driven into Cerro Rico. Silver production from the San Bartolomé mine was approximately 0.6 million ounces through February 28, 2018, the completion date of the Manquiri Divestiture.
NEAR-MINE EXPLORATION
Exploration expense from continuing operations was $25.4 million, $30.3 million, and $12.9 million in 2018, 2017 and 2016, respectively. Capitalized drilling from continuing operations was $18.6 million in 2018 and $11.6 million in 2017. Coeur’s exploration program completed over 691,779 feet (210,857 meters) of combined core and reverse circulation drilling in 2018.
Mexico - Palmarejo
In 2018, exploration expense of $7.4 million was incurred, related to mapping, sampling, drill target generation, and drilling new silver and gold mineralization (142,441 feet or 43,416 meters). Expansion drilling focused primarily on Guadalupe, Independencia, La Nación underground mines, and several new discoveries including the Zapata, Madero, Hidalgo and Reforma veins. Capitalized drilling of $4.1 million related to infill resource conversion drilling in the Guadalupe, Independencia and La Nación ore bodies (110,655 feet or 33,728 meters). In 2017, exploration expense of $11.9 million related to mapping, sampling,
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drill target generation, and drilling new silver and gold mineralization (216,662 feet or 66,039 meters). Capitalized drilling of $3.7 million related to infill resource conversion drilling in the Guadalupe and Independencia ore bodies (72,061 feet or 21,694 meters).
In 2019, the Company expects to incur $4.0 million of exploration investment focused on discovery and expansion of mineralization at the northwestern and northern portion of Guadalupe Vein, northern Independencia, Hidalgo and Barrera Veins, northern La Bavisa vein, and discovery of Valentina and La Aurelia veins, located west of the Guadalupe mine. Additionally, the Company is planning for $5.0 million of conversion drilling in the Palmarejo, Nación, Guadalupe and Independencia ore bodies.
USA (Nevada) - Rochester
In 2018, resource expansion drilling expense was $0.3 million and capitalized resource infill drilling was $1.3 million. Exploration expense consisted of 4,070 feet (1,241 meters) testing areas in the Packard and South Charlie target areas, while resource conversion drilling consisted of 37,330 feet (11,378 meters) mainly within the Sunflower Resource and the main Rochester Pit. In 2017, exploration expense was $1.4 million and capitalized drilling was $1.3 million. Exploration expense consisted of 25,620 feet (7,809 meters) testing areas near Packard Pit, in the South Charlie target area and the new East Rochester deposit, while conversion drilling consisted of 23,238 feet (7,083 meters) mainly within the main Rochester Pit deposit. In 2019, the Company expects $0.9 million of exploration investment to drill testing several targets around Rochester, including condemnation drilling in support of the next planned leach pads. Additionally, $1.0 million in conversion drilling is planned to infill East Rochester and Sunflower-Southwest Rochester areas.
USA (Alaska) - Kensington
In 2018, exploration expense of $5.9 million consisted of 57,942 feet (17,661 meters) while $4.4 million of conversion drilling completed 35,294 feet (10,758 meters) to expand and define mineralization in the main Kensington and Raven deposits. Resource expansion drilling focused on testing new Ophir and Seward veins in the district, as well as expansion of Raven and main Kensington. In 2017, exploration expense of $8.6 million consisted of 77,730 feet (23,692 meters), while $5.7 million of conversion drilling completed 61,939 feet (18,879 meters) to expand and define mineralization in the main Kensington and Raven deposits. In 2019, the Company expects $2.0 million in exploration investment for additional discovery or expansion of mineralized material at Comet-Seward, upper and lower Elmira, upper Raven and the new Johnson Vein, and $3.2 million of resource conversion drilling at Elmira, Raven, lower and upper Kensington.
USA (South Dakota) - Wharf
In 2018, resource conversion drilling of $0.8 million completed 23,310 feet (7,105 meters) of drilling primarily within the Portland Ridge Main deposit with only a limited amount of exploration discovery drilling (3,750 feet or 1,143 meters) at Bald Mountain. In 2017, conversion drilling of $1.0 million completed 30,490 feet (9,293 meters) of drilling primarily within the Portland Main deposit with only a limited amount of exploration discovery drilling (1,290 feet or 393 meters) at Bald Mountain. In 2019, the Company does not plan on conducting on exploration drilling at Wharf.
Canada (British Columbia) - Silvertip
Exploration expense of $2.4 million consisted of 48,118 feet (14,666 meters) and capitalized resource infill drilling consisting of $8.0 million consisted of 143,094 feet (43,615 meters). In 2019, the Company expects to spend $4.3 million of exploration investment focused on resource expansion.
ADVANCED-STAGE EXPLORATION PROPERTIES
USA (Nevada) — Sterling Project
After closing the acquisition of Northern Empire in October 2018, the Company continued drilling the Sterling Mine area, expending $0.9 million and completing 20,760 feet (6,328 meters) of expansion drilling, focused near the historic Sterling Mine and on areas considered for future mine infrastructure. The Sterling project is located near Beatty, Nevada and consists of two major clusters of resources, the Sterling Mine area and the northern Crown area, which contains the Daisy, Secret Pass and SNA historic resources. In 2019, the Company plans to spend $4.4 million on resource expansion drilling and $0.7 million on resource infill drilling.
EARLY-STAGE EXPLORATION PROPERTIES
In 2018, the Company invested $6.6 million in greenfields exploration, completing target analysis and regional exploration with a focus on projects in Wyoming, South Dakota and Nevada, USA and Sonora and Chihuahua, Mexico. A total of 17,330 feet (5,282 meters) of drilling was completed on two projects in the USA; Tonopah and Crow Springs, Nevada. A total of 47,686 feet (14,535 meters) were drilled at the La Morita Project, Chihuahua, Mexico. In 2017, the Company invested $5.5 million completing target analysis and regional exploration with a focus on projects in Nevada, USA and La Morita, Mexico. A total of 29,185 feet
27
(8,895 meters) of drilling was completed on two projects in the USA; Arabia, Nevada and Astoria, South Dakota, near Wharf. A total of 26,462 feet (8,066 meters) were drilled in Mexico at two projects; Todos Los Santos and La Morita, both in the state of Chihuahua. In 2019, the Company expects to invest $2.0 million in 2019 focused on new project reviews in the USA and Canada as well as drilling the El Sarape project, located in Sonora, Mexico.
OPERATING STATISTICS
Palmarejo | Rochester | ||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
Ore tons milled/placed | 1,382,471 | 1,498,421 | 1,078,888 | 16,169,807 | 16,440,270 | 19,555,998 | |||||||||||||||||
Ore grade gold (oz./ton) | 0.10 | 0.09 | 0.08 | 0.004 | 0.003 | 0.003 | |||||||||||||||||
Ore grade silver (oz./ton) | 6.49 | 5.62 | 4.66 | 0.52 | 0.53 | 0.57 | |||||||||||||||||
Recovery/Au oz. (%) | 88.9 | 90.0 | 86.5 | — | — | — | |||||||||||||||||
Recovery/Ag oz. (%) | 83.8 | 86.0 | 88.4 | — | — | — | |||||||||||||||||
Gold produced (oz.) | 122,722 | 121,569 | 73,913 | 54,388 | 51,051 | 50,751 | |||||||||||||||||
Silver produced (oz.) | 7,516,390 | 7,242,082 | 4,442,164 | 5,037,983 | 4,713,574 | 4,564,138 | |||||||||||||||||
Costs applicable to sales per silver equivalent oz.(1) | $ | 8.48 | $ | 9.44 | $ | 10.72 | $ | 13.17 | $ | 13.15 | $ | 11.90 | |||||||||||
Costs applicable to sales per average spot silver equivalent oz.(1) | $ | 7.25 | $ | 8.45 | $ | 9.73 | $ | 11.59 | $ | 12.04 | $ | 10.97 | |||||||||||
Kensington | Wharf | ||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
Ore tons milled/placed | 641,058 | 668,727 | 620,209 | 4,923,774 | 4,560,441 | 4,268,105 | |||||||||||||||||
Ore grade gold (oz./ton) | 0.18 | 0.18 | 0.21 | 0.02 | 0.03 | 0.03 | |||||||||||||||||
Recovery/Au oz. (%) | 92.3 | 93.5 | 94.8 | — | — | — | |||||||||||||||||
Gold produced (oz.) (2) | 105,570 | 115,094 | 124,331 | 76,840 | 95,372 | 109,175 | |||||||||||||||||
Costs applicable to sales per gold equivalent oz.(1) | $ | 1,055 | $ | 922 | $ | 795 | $ | 880 | $ | 697 | $ | 606 | |||||||||||
Silvertip | Endeavor | ||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
Ore tons milled | 49,454 | — | — | — | 133,904 | 219,430 | |||||||||||||||||
Ore grade silver (oz./ton) | 6.19 | — | — | — | 1.58 | 2.48 | |||||||||||||||||
Ore grade zinc | 6.2 | — | — | — | — | — | |||||||||||||||||
Ore grade lead | 4.0 | — | — | — | — | — | |||||||||||||||||
Recovery/Ag oz. (%) | 59.6 | — | — | — | 50.6 | 45.6 | |||||||||||||||||
Recovery/Zn lb. (%) | 67.8 | — | — | — | — | — | |||||||||||||||||
Recovery/Pb lb. (%) | 52.5 | — | — | — | — | — | |||||||||||||||||
Silver produced (oz.) (3) | 182,254 | — | — | — | 107,026 | 247,998 | |||||||||||||||||
Zinc produced (lb.) (3) | 4,181,033 | — | — | — | — | — | |||||||||||||||||
Lead produced (lb.) (3) | 2,072,013 | — | — | — | — | — | |||||||||||||||||
Costs applicable to sales per silver equivalent oz.(1) | $ | 57.64 | $ | — | $ | — | $ | — | $ | 6.96 | $ | 6.56 | |||||||||||
Costs applicable to sales per average spot silver equivalent oz.(1) | $ | 48.66 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
(1) See Non-GAAP Financial Performance Measures
(2) Excludes 8,208 ounces of gold which are excluded form the production numbers presented, unless otherwise noted.
(3) Excludes 0.2 million ounces of silver, 2.6 million pounds of zinc, 1.8 million pounds of lead which are excluded form the production numbers presented, unless otherwise noted.
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OPERATING STATISTICS OF DISCONTINUED OPERATIONS
San Bartolomé | |||||||||||
2018 | 2017 | 2016 | |||||||||
Ore tons milled | 221,171 | 1,509,708 | 1,666,787 | ||||||||
Ore grade silver (oz./ton) | 3.36 | 3.17 | 3.69 | ||||||||
Recovery/Ag oz. (%) | 86.5 | 89.3 | 88.8 | ||||||||
Silver produced (oz.) | 643,078 | 4,269,649 | 5,468,898 | ||||||||
Costs applicable to sales per silver equivalent oz.(1) | $ | 16.99 | $ | 17.44 | $ | 13.71 | |||||
(1) See Non-GAAP Financial Performance Measures
PROVEN AND PROBABLE RESERVES
Silver Reserves at December 31, 2018(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Metallurgical Recovery | |||||||||||||||||||
Palmarejo(4) | 1,283 | 4.97 | 6,376 | 8,118 | 5.39 | 43,788 | 9,401 | 5.34 | 50,164 | 84% | ||||||||||||||||||
Rochester(5) | 228,413 | 0.44 | 101,058 | 13,166 | 0.39 | 5,141 | 241,579 | 0.44 | 106,199 | 70% | ||||||||||||||||||
Silvertip(6) | 280 | 10.81 | 3,026 | 1,489 | 7.98 | 11,885 | 1,769 | 8.43 | 14,911 | 81% | ||||||||||||||||||
Total Silver | 229,976 | 110,460 | 22,773 | 60,814 | 252,749 | 171,274 | ||||||||||||||||||||||
Gold Reserves at December 31, 2018(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Metallurgical Recovery | |||||||||||||||||||
Kensington(7) | 1,600 | 0.186 | 298 | 986 | 0.258 | 254 | 2,586 | 0.213 | 552 | 95% | ||||||||||||||||||
Palmarejo(4) | 1,283 | 0.084 | 108 | 8,118 | 0.072 | 585 | 9,401 | 0.074 | 693 | 90% | ||||||||||||||||||
Rochester(5) | 228,413 | 0.003 | 657 | 13,166 | 0.002 | 27 | 241,579 | 0.003 | 684 | 92% | ||||||||||||||||||
Wharf(8) | 34,043 | 0.026 | 877 | 153 | 0.035 | 5 | 34,196 | 0.026 | 882 | 79% | ||||||||||||||||||
Total Gold | 265,339 | 1,940 | 22,423 | 871 | 287,762 | 2,811 | ||||||||||||||||||||||
Zinc Reserves at December 31, 2018(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (%) | Pounds (000s) | Tons (000s) | Grade (%) | Pounds (000s) | Tons (000s) | Grade (%) | Pounds (000s) | Metallurgical Recovery | |||||||||||||||||||
Silvertip(6) | 280 | 9.83 | 55,039 | 1,489 | 7.93 | 236,200 | 1,769 | 8.23 | 291,239 | 82% | ||||||||||||||||||
Lead Reserves at December 31, 2018(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (%) | Pounds (000s) | Tons (000s) | Grade (%) | Pounds (000s) | Tons (000s) | Grade (%) | Pounds (000s) | Metallurgical Recovery | |||||||||||||||||||
Silvertip(6) | 280 | 7.53 | 42,156 | 1,489 | 5.22 | 155,305 | 1,769 | 5.58 | 197,461 | 88% | ||||||||||||||||||
Silver Reserves at December 31, 2017(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Metallurgical Recovery | |||||||||||||||||||
Palmarejo(4) | 1,571 | 3.81 | 5,978 | 9,414 | 4.36 | 41,033 | 10,985 | 4.28 | 47,011 | 88% | ||||||||||||||||||
Rochester(5) | 195,724 | 0.45 | 87,518 | 77,703 | 0.39 | 30,105 | 273,427 | 0.43 | 117,623 | 61% | ||||||||||||||||||
San Bartolomé(9) | 1,640 | 2.52 | 4,429 | 162 | 2.98 | 482 | 1,802 | 2.55 | 4,911 | 88% | ||||||||||||||||||
Total Silver | 198,935 | 97,925 | 87,279 | 71,620 | 286,214 | 169,545 | ||||||||||||||||||||||
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Gold Reserves at December 31, 2017(1)(2)(3) | ||||||||||||||||||||||||||||
Proven Reserves | Probable Reserves | Proven and Probable Reserves | ||||||||||||||||||||||||||
Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Tons (000s) | Grade (oz./ton) | Ounces (000s) | Metallurgical Recovery | |||||||||||||||||||
Kensington(7) | 1,284 | 0.202 | 254 | 1,389 | 0.197 | 266 | 2,673 | 0.199 | 520 | 95% | ||||||||||||||||||
Palmarejo(4) | 1,571 | 0.073 | 115 | 9,414 | 0.063 | 591 | 10,985 | 0.064 | 706 | 89% | ||||||||||||||||||
Rochester(5) | 195,724 | 0.003 | 598 | 77,703 | 0.002 | 159 | 273,427 | 0.003 | 757 | 92% | ||||||||||||||||||
Wharf(8) | 18,125 | 0.027 | 483 | 16,560 | 0.023 | 386 | 34,685 | 0.025 | 869 | 79% | ||||||||||||||||||
Total Gold | 216,704 | 1,450 | 105,066 | 1,402 | 321,770 | 2,852 | ||||||||||||||||||||||
(1) | Certain definitions: |
The term “reserve” means that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination.
The term “proven (measured) reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established.
The term “probable (indicated) reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. Proven and probable reserves include silver attributable to Coeur’s ownership or economic interest in the Endeavor project.
The term “cutoff grade” means the lowest grade of mineralized material considered economic to process. Cutoff grades vary between deposits depending upon prevailing economic conditions, mineability of the deposit, by-products, amenability of the mineralized material to silver or gold extraction and type of milling or leaching facilities available.
(2) | Assumed metal prices for Mineral Reserves were $17.00 per ounce of silver, $1,250 per ounce of gold, $1.25 per pound zinc, $1.00 per pound lead. |
(3) | Mineral reserve estimates were prepared by the Company’s technical staff. |
(4) | The cutoff grade for mineral reserves is 2.5 to 2.6 g/tonne AuEq. |
(5) | The cutoff grade for mineral reserves is 0.53 oz/ton AgEq. |
(6) | The cutoff grade for mineral reserves is $130 to $160 net smelter return. |
(7) | The cutoff grade for mineral reserves is 0.15 to 0.23 oz/ton Au. |
(8) | The cutoff grade for mineral reserves is 0.012 oz/ton Au. |
(9) | The cutoff grades for mineral reserves range from 81 to 107 g/tonne Ag based on material. |
MINERALIZED MATERIAL
Mineralized Material at December 31, 2018(1)(2)(3)(4) | ||||||||||||||
Tons (000s) | Silver Grade (oz./ton) | Gold Grade (oz./ton) | Lead Grade (percent) | Zinc Grade (percent) | ||||||||||
Palmarejo Mine, Mexico(5) | 8,149 | 4.30 | 0.056 | — | — | |||||||||
Kensington Mine, USA(7) | 2,681 | — | 0.250 | — | — | |||||||||
Wharf Mine, USA(8) | 8,696 | — | 0.034 | — | — | |||||||||
Rochester Mine, USA(9) | 198,994 | 0.35 | 0.002 | — | — | |||||||||
Silvertip Mine, Canada(10) | 1,292 | 6.47 | — | 4.07 | 8.58 | |||||||||
La Preciosa Project, Mexico(11) | 28,677 | 3.67 | 0.006 | — | — | |||||||||
Lincoln Hill Project, USA(12) | 32,310 | 0.32 | 0.011 | — | — | |||||||||
Total Mineralized Material | 280,799 | |||||||||||||
Mineralized Material at December 31, 2017(1)(2)(3)(4) | ||||||||||||||
Tons (000s) | Silver Grade (oz./ton) | Gold Grade (oz./ton) | Lead Grade (percent) | Zinc Grade (percent) | ||||||||||
Palmarejo Mine, Mexico(5) | 8,074 | 3.35 | 0.046 | — | — | |||||||||
San Bartolomé Mine, Bolivia(6) | 4,087 | 3.42 | — | — | — | |||||||||
Kensington Mine, USA(7) | 2,878 | — | 0.271 | — | — | |||||||||
Wharf Mine, USA(8) | 7,710 | — | 0.023 | — | — | |||||||||
Rochester Mine, USA(9) | 179,885 | 0.36 | 0.002 | — | — | |||||||||
Silvertip Mine, Canada(10) | 2,589 | 10.26 | — | 6.74 | 9.41 | |||||||||
La Preciosa Project, Mexico(11) | 28,677 | 3.67 | 0.006 | — | — | |||||||||
Total Mineralized Material | 233,900 | |||||||||||||
(1) | Assumed metal prices for estimated mineralized material were $20.00 per ounce of silver, $1,400 per ounce of gold, $1.30 per pound zinc, $1.05 per pound lead, and Sterling at $1,200 per ounce of gold. |
(2) | Estimated with mining cost parameters and initial metallurgical test results. |
(3) | Resource estimates were completed by company technical staff, except for La Preciosa which was completed by an external consultant supervised by technical company staff. |
(4) | Estimated using 3-dimensional geologic modeling and geostatistical evaluation of the exploration drill data. Mineralized material is reported exclusive of reserves. “Mineralized material” as used in this Annual Report on Form 10-K, although permissible under Guide 7, does not indicate “reserves” by SEC standards. There is no certainty that any part of the reported mineralized material will ever be confirmed or converted into Guide 7 compliant “reserves”. |
(5) | Cutoff grades for mineralized material is 2.4 to 2.5 g/tonne AuEq. |
(6) | Cutoff grades for mineralized material is 95 g/tonne. |
(7) | The cutoff grade for mineralized material is 0.13 to 0.20 oz/ton Au. |
(8) | The cutoff grade for mineralized material is 0.010 oz/ton Au. |
(9) | The cutoff grade for mineralized material is 0.45 oz/ton AgEq. |
(10) | The cutoff grade for mineralized material is $130 net smelter return. |
(11) | The cutoff grade for mineralized material is 121.71 g/ton AgEq for underground, and 71.86 g/t for surface mining. |
(12) | The cutoff grade for mineralized material 0.10 g/t AuEq for oxide and 0.20 g/t AuEg for sulfide material. |
30
Item 3. Legal Proceedings
See Note 20 -- Commitments and Contingencies in the notes to the Consolidated Financial Statements included herein.
Item 4. Mine Safety Disclosures
Information pertaining to mine safety matters is reported in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act in Exhibit 95.1 attached to this Form 10-K.
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol CDE.
On February 15, 2019, there were 203,305,545 outstanding shares of the Company’s common stock which were held by approximately 1,354 stockholders of record.
31
STOCK PERFORMANCE CHART
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG COEUR MINING, S&P 500 INDEX AND PEER GROUP INDEX
The following performance graph compares the performance of the Company’s common stock during the period beginning December 31, 2013 and ending December 31, 2018 to the S&P 500 and a Peer Group Index consisting of the following companies: Agnico-Eagle Mines Limited, Alamos Gold Inc., B2Gold Corp., Centerra Gold Inc., Detour Gold Corporation, Eldorado Gold Corporation, First Majestic Silver Corp., Hecla Mining Company, Hochschild Mining plc, IAMGOLD Corporation, New Gold, Inc., OceanaGold Corporation, Pan American Silver Corporation, Royal Gold, Inc., SSR Mining Inc., Tahoe Resources Inc., and Yamana Gold Inc. (“Peer Group”).
The graph assumes a $100 investment in the Company's common stock and in each of the indexes at the beginning of the period, and a reinvestment of dividends paid on such investments throughout the five-year period.
Dec. 2014 | Dec. 2015 | Dec. 2016 | Dec. 2017 | Dec. 2018 | ||||||
Coeur Mining | 47.10 | 22.86 | 83.78 | 69.12 | 41.20 | |||||
S&P 500 Index | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | |||||
Peer Group | 97.15 | 86.21 | 132.61 | 146.04 | 141.08 | |||||
32
The following performance graph compares the performance of the Company's common stock during the period beginning December 31, 2015 and ending December 31, 2018 to the S&P 500 and the Peer Group. The graph assumes a $100 investment in the Company's common stock and in each of the indexes at the beginning of the period, and a reinvestment of dividends paid on such investments throughout the period.
Dec. 2016 | Dec. 2017 | Dec. 2018 | ||||
Coeur Mining | 366.53 | 302.42 | 180.24 | |||
S&P 500 Index | 111.96 | 136.40 | 130.42 | |||
Peer Group | 180.12 | 210.45 | 183.35 | |||
This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.
33
Item 6. | Selected Financial Data |
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and accompanying Notes.
Year ended December 31, | |||||||||||||||||||
In thousands except share data | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Revenue | $ | 625,904 | $ | 709,598 | $ | 571,897 | $ | 561,407 | $ | 517,993 | |||||||||
Costs applicable to sales | 440,950 | 440,260 | 335,375 | 403,827 | 388,286 | ||||||||||||||
Income (loss) from continuing operations | (48,955 | ) | 10,925 | 22,435 | (287,811 | ) | (1,097,650 | ) | |||||||||||
Income (loss) from discontinued operations | 550 | (12,244 | ) | 32,917 | (79,372 | ) | (89,224 | ) | |||||||||||
Net income (loss) | $ | (48,405 | ) | $ | (1,319 | ) | $ | 55,352 | $ | (367,183 | ) | $ | (1,186,874 | ) | |||||
Basic income (loss) per share: | |||||||||||||||||||
Income (loss) from continuing operations | $ | (0.26 | ) | $ | 0.06 | $ | 0.14 | $ | (2.22 | ) | $ | (10.72 | ) | ||||||
Income (loss) from discontinued operations | $ | — | $ | (0.07 | ) | $ | 0.21 | $ | (0.61 | ) | $ | (0.87 | ) | ||||||
Basic | $ | (0.26 | ) | $ | (0.01 | ) | $ | 0.35 | $ | (2.83 | ) | $ | (11.59 | ) | |||||
Diluted income (loss) per share: | |||||||||||||||||||
Income (loss) from continuing operations | $ | (0.26 | ) | $ | 0.06 | $ | 0.14 | $ | (2.22 | ) | $ | (10.72 | ) | ||||||
Income (loss) from discontinued operations | $ | — | $ | (0.07 | ) | $ | 0.20 | $ | (0.61 | ) | $ | (0.87 | ) | ||||||
Diluted | $ | (0.26 | ) | $ | (0.01 | ) | $ | 0.34 | $ | (2.83 | ) | $ | (11.59 | ) | |||||
At December 31, | |||||||||||||||||||
In thousands | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Total assets | $ | 1,712,500 | $ | 1,701,175 | $ | 1,318,909 | $ | 1,332,489 | $ | 1,436,569 | |||||||||
Reclamation and mine closure liabilities | $ | 135,546 | $ | 120,832 | $ | 88,701 | $ | 74,958 | $ | 63,042 | |||||||||
Debt, including current portion | $ | 458,826 | $ | 411,322 | $ | 210,637 | $ | 485,505 | $ | 453,358 | |||||||||
Stockholders’ equity | $ | 852,512 | $ | 814,977 | $ | 768,487 | $ | 421,476 | $ | 554,328 | |||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Coeur Mining, Inc. and its subsidiaries (collectively the “Company”, “our”, or “we”). We use certain non-GAAP financial performance measures in our MD&A. For a detailed description of these measures, please see “Non-GAAP Financial Performance Measures” at the end of this item. We provide certain operational and financial data on a silver equivalent basis, converting gold to silver at a historical 60:1 ratio of silver ounces to gold ounces, zinc is converted at a historical 0.06:1 ratio of silver ounces to zinc pounds and lead is converted at a historical 0.05:1 ratio of silver ounces to lead pounds, unless otherwise noted. We also provide realized silver equivalent data determined by average spot gold, silver, zinc and lead prices during the relevant period.
Overview
We are primarily a gold and silver producer with five operating mines located in the United States, Canada and Mexico and several exploration projects in North America.
2018 Highlights
• | Higher gold and silver grades contributed to increased gold and silver production and lower costs applicable to sales per ounce at Palmarejo. Palmarejo’s higher grade La Nacion deposit, located between the Independencia and Guadalupe underground mines, is expected to commence production in the second half of 2019. |
• | Rochester gold and silver production increased in 2018 driven by higher gold grades and the timing of recoveries. Rochester commenced construction of crushing system upgrades which includes the addition of a high-pressure grinding roll, or HPGR, that are expected to increase the timing and overall recovery of silver from heap leach activities, while lowering operating costs. Construction will be completed in the second quarter of 2019 with improved recoveries positively impacting production in the second half of 2019. |
• | Kensington production declined and costs applicable to sales per gold ounce increased in the year primarily driven by lower throughput and recoveries. The higher grade Jualin mine reached commercial production in December and will supplement existing ore sources at Kensington in 2019 and is expected to contribute to increased production and lower costs applicable to sales per gold ounce in 2019. |
• | Wharf gold production decreased and costs applicable to sales per gold ounce increased in 2018 as a result of unplanned weather-related downtime in the third quarter, the timing of leach pad recoveries and lower gold grades. Increased tons placed in 2018 are expected to increase production levels in 2019. |
• | Silvertip achieved commercial production in September 2018, however, lower than expected production levels, grades and recovery rates as well as reduced plant availability contributed to unfavorable operating results at Silvertip and resulted in $26.7 million write-down of metal inventory. Progress towards a 1,100 ton per day (1,000 metric tonne per day) continues as the company is focused on improvements in four key areas: mill projects targeting higher availability, maintenance procedures and systems, supply chain and procurement and employee training and development. Recovery rates continued to improve throughout the fourth quarter and are expected to trend higher as mill consistency improves and the flotation circuit is optimized. |
• | In October 2018, the Company acquired all of the issued and outstanding securities of Northern Empire not owned by the Company, for total consideration valued at approximately $73.6 million based on the issuance of approximately 12.1 million shares of Coeur common stock. Northern Empire’s principal asset is the Sterling Gold Project located in Nevada. |
• | In November 2018, Coeur Rochester, Inc. acquired Lincoln Hill and related assets. Approximately 4.3 million Coeur shares were issued to Alio Gold shareholders upon closing of the acquisition, representing total consideration of approximately $19.0 million. |
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Selected Financial and Operating Results
Year ended December 31, | |||||||||||
In thousands | 2018 | 2017 | 2016 | ||||||||
Financial Results from Continuing Operations: | |||||||||||
Metal sales | $ | 625,904 | $ | 709,598 | $ | 568,617 | |||||
Net income (loss) | $ | (48,955 | ) | $ | 10,925 | $ | 22,435 | ||||
Net income (loss) per share, diluted | $ | (0.26 | ) | $ | 0.06 | $ | 0.14 | ||||
Adjusted net income (loss)(1) | $ | (2,165 | ) | $ | 4,223 | $ | 15,601 | ||||
Adjusted net income (loss) per share, diluted(1) | $ | (0.01 | ) | $ | 0.02 | $ | 0.10 | ||||
EBITDA(1) | $ | 87,102 | $ | 202,912 | $ | 142,612 | |||||
Adjusted EBITDA(1) | $ | 157,309 | $ | 203,340 | $ | 194,880 | |||||
Operating Results from Continuing Operations: | |||||||||||
Gold ounces produced (4) | 359,520 | 383,086 | 358,170 | ||||||||
Silver ounces produced(3) | 12,787,203 | 12,126,217 | 9,359,444 | ||||||||
Zinc pounds produced(3) | 4,181,033 | — | — | ||||||||
Lead pounds produced(3) | 2,072,013 | — | — | ||||||||
Silver equivalent ounces produced | 34,712,866 | 35,111,377 | 30,849,644 | ||||||||
Silver equivalent ounces produced (average spot price) | 42,284,437 | 40,374,979 | 35,498,691 | ||||||||
Gold ounces sold | 350,508 | 410,604 | 338,131 | ||||||||
Silver ounces sold | 12,354,817 | 12,698,635 | 8,933,749 | ||||||||
Zinc pounds sold | 4,375,995 | — | — | ||||||||
Lead pounds sold | 2,648,920 | — | — | ||||||||
Silver equivalent ounces sold | 33,780,278 | 37,334,889 | 29,221,609 | ||||||||
Silver equivalent ounces sold (average spot price) | 41,174,363 | 42,976,574 | 33,610,549 | ||||||||
Average realized price per gold ounce | $ | 1,218 | $ | 1,204 | $ | 1,230 | |||||
Average realized price per silver ounce | $ | 15.65 | $ | 16.96 | $ | 17.08 | |||||
Average realized price per zinc pound | $ | 1.12 | $ | — | $ | — | |||||
Average realized price per lead pound | $ | 0.90 | $ | — | $ | — | |||||
Costs applicable to sales per silver equivalent ounce(1) | $ | 11.46 | $ | 10.70 | $ | 11.23 | |||||
Costs applicable to sales per average spot silver equivalent ounce(1) | $ | 9.89 | $ | 9.66 | $ | 10.29 | |||||
Costs applicable to sales per gold equivalent ounce(1) | $ | 982 | $ | 822 | $ | 705 | |||||
All-in sustaining costs per silver equivalent ounce(1) | $ | 18.59 | $ | 15.95 | $ | 16.16 | |||||
All-in sustaining costs per average spot silver equivalent ounce(1) | $ | 15.25 | $ | 13.86 | $ | 14.05 | |||||
Financial and Operating Results from Discontinued Operations:(2) | |||||||||||
Income (loss) from discontinued operations | $ | 550 | $ | (12,244 | ) | $ | 32,917 | ||||
Silver ounces produced | 643,078 | 4,269,649 | 5,468,898 | ||||||||
Gold ounces produced | 78 | 358 | — | ||||||||
Silver equivalent ounces produced | 647,758 | 4,291,129 | 5,468,898 | ||||||||
Silver ounces sold | 704,479 | 4,240,901 | 5,411,057 | ||||||||
Gold ounces sold | 292 | 111 | — | ||||||||
Silver equivalent ounces sold | 721,999 | 4,247,561 | 5,411,057 | ||||||||
(1) | See “Non-GAAP Financial Performance Measures.” |
(2) | Reported production and financial results include operations through February 28, 2018. |
(3) | Prior to September 2018 commercial production date the Silvertip mine produced 0.2 million ounces of silver, 2.6 million pounds of zinc, and 1.8 million pounds of lead which are excluded from production numbers presented, unless otherwise noted. |
(4) | Prior to December 2018 commercial production date the Jualin deposit at the Kensington mine produced 8,208 ounces of gold which are excluded from the production numbers presented, unless otherwise noted. |
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Consolidated Financial Results
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Revenue
Revenue decreased by $83.7 million as a result of fewer gold (15%) and silver (3%) ounces sold and an 8% decrease in average realized silver prices, partially offset by an increase in average realized gold prices (1%) and sales from Silvertip, which commenced commercial production in September 2018. The Company sold 12.4 million silver ounces, 350,508 gold ounces, 4.4 million zinc pounds and 2.6 million lead pounds compared to 12.7 million silver ounces and 410,604 gold ounces in the prior year. Gold contributed 68% of sales, silver contributed 31%, zinc contributed 1% and lead contributed less than 1% , compared to 70% of sales from gold and 30% from silver.
Costs Applicable to Sales
Costs applicable to sales remained comparable despite lower silver equivalent ounces sold due to a $26.7 million write-down of inventory at Silvertip, higher costs applicable to sales per gold ounce at Wharf and Kensington, partially offset by lower costs applicable to sales per silver ounce at Palmarejo. For a complete discussion of costs applicable to sales, see Results of Operations below.
Amortization
Amortization decreased $18.1 million, or 12%, due to fewer silver equivalent ounces sold at all operating sites.
Expenses
General and administrative expenses decreased $2.3 million, or 7%, primarily due to lower compensation costs.
Exploration expense decreased $4.9 million, or 16%, as a result of lower exploration costs at Palmarejo, Rochester, Kensington and La Preciosa as the Company focused its exploration efforts on capitalized infill resource conversion drilling in 2018.
Pre-development, reclamation, and other expenses increased $1.1 million, or 6%, of which $3.4 million is attributable to the write-down of property, plant and equipment at Rochester.
Other Income and Expenses
Fair value adjustments, net, were a gain of $3.6 million due to a a net gain on equity securities of $3.0 million coupled with favorable fair value adjustment of zinc options. Effective January 1, 2018, as a result of ASU 2016-01, changes in the fair value of equity investments are recognized as fair value adjustments instead of other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Interest expense (net of capitalized interest of $1.2 million) increased to $24.4 million from $16.4 million, due to higher average debt levels related to the 2024 Senior Notes and the Facility.
Other, net was an expense of $24.7 million, as a result of the $18.6 million write-down of the receivable consideration from the Manquiri Divestiture, unfavorable foreign exchange rate movements, a write-down of $6.5 million related to the RMC receivable, partially offset by gains on the sale of non-core assets and investments in 2017.
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Income and Mining Taxes
The Company’s Income and mining tax (expense) benefit consisted of:
Year ended December 31, | |||||||
In thousands | 2018 | 2017 | |||||
Income and mining tax (expense) benefit at statutory rate | $ | 14,052 | $ | (14,037 | ) | ||
State tax provision from continuing operations | 2,284 | 26 | |||||
Change in valuation allowance | 2,471 | 86,712 | |||||
Effect of tax legislation | — | (88,174 | ) | ||||
Percentage depletion | 89 | 703 | |||||
Uncertain tax positions | 1,830 | 2,596 | |||||
U.S. and foreign permanent differences | 3,314 | 2,348 | |||||
Foreign exchange rates | (3,973 | ) | (14,180 | ) | |||
Foreign inflation and indexing | (2,374 | ) | (2,346 | ) | |||
Foreign tax rate differences | (24 | ) | 2,929 | ||||
Mining, foreign withholding, and other taxes | (3,857 | ) | (11,274 | ) | |||
Other, net | 2,968 | 5,699 | |||||
Income and mining tax (expense) benefit | $ | 16,780 | $ | (28,998 | ) | ||
Income and mining tax benefit of approximately $16.8 million results in an effective tax rate of 26% for 2018. This compares to income tax expense of $29.0 million or effective tax rate of 73% for 2017. The Company’s effective tax rate is impacted by multiple factors as illustrated above. The comparability of the Company’s income and mining tax (expense) benefit for the reported periods was primarily impacted by (i) variations in our income before income taxes; (ii) geographic distribution of that income; (iii) foreign exchange rates; (iv) mining taxes; (v) the non-recognition of tax assets and (vi) the impact of specific transactions. Therefore, the effective tax rate will fluctuate, sometimes significantly, year to year.
The following table summarizes the components of the Company’s income (loss) before tax and income and mining tax (expense) benefit:
Year ended December 31, | |||||||||||||
2018 | 2017 | ||||||||||||
In thousands | Income (loss) before tax | Tax (expense) benefit | Income (loss) before tax | Tax (expense) benefit | |||||||||
United States | $ | (50,522 | ) | $ | 16,819 | $ | 10,099 | $ | (5,635 | ) | |||
Canada | (43,793 | ) | 16,436 | (3,176 | ) | 979 | |||||||
Mexico | 32,073 | (16,092 | ) | 28,631 | (25,958 | ) | |||||||
Other jurisdictions | (3,493 | ) | (383 | ) | 4,369 | 1,616 | |||||||
$ | (65,735 | ) | $ | 16,780 | $ | 39,923 | $ | (28,998 | ) | ||||
A valuation allowance is provided for deferred tax assets for which it is more likely than not that the related benefits will not be realized. The Company analyzes its deferred tax assets and if it is determined that the Company will not realize all or a portion of its deferred tax assets, it will record or increase a valuation allowance. Conversely, if it is determined that the Company will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced. There are a number of risk factors that could impact the Company’s ability to realize its deferred tax assets.
The utilization of U.S. net operating loss carryforwards, tax credit carryforwards, and recognized built-in losses may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code and state tax laws. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of net operating loss carryforwards, tax credit carryforwards, and certain built-in losses upon an ownership change as defined under that Section. Generally, an ownership change may result from transactions that increase the aggregate ownership of certain shareholders in the Company’s stock by more than 50 percentage points over a three-year testing period. If the Company experiences an ownership change, an annual limitation would be imposed on certain of the Company’s tax attributes, including net operating losses and certain other losses, credits, deductions or tax basis. Management has determined that the Company experienced ownership changes, for purposes of 382, during 2002, 2003, 2007, and 2015. Based on management’s calculations, the Company
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does not expect any of its U.S. tax attributes to expire unused as a result of the Section 382 annual limitations. However, the annual limitations may impact the timeframe over which the net operating loss carryforwards can be used, potentially impacting cash tax liabilities in a future period. The U.S. federal tax credits and state net operating losses may potentially be limited as well. We continue to maintain a full valuation allowance on our U.S. net deferred tax assets since it is more likely than not that the related tax benefits will not be realized.
The Company may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if the Company earns U.S. federal taxable income, it may be limited in the ability to (1) recognize current deductions on built-in loss assets and (2) offset this income with our pre-change net operating loss carryforwards and other tax credit carryforwards, which may be subject to limitations, potentially resulting in increased future tax liability to us. Under the new U.S. federal income tax law, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited to 80% of future taxable income.
Net Income (Loss) from Continuing Operations
Net loss from continuing operations was $49.0 million, or $0.26 per share, compared to net income of $10.9 million, or $0.06 per share. The decrease in net income from continuing operations was impacted by lower operating margin per consolidated silver equivalent ounce that includes a write-down of $26.7 million at Silvertip of metal inventory as a result of lower than expected production levels, grades and recovery rates as well as reduced process plant availability and unfavorable changes in average realized silver prices, a write-down of $18.6 million on the consideration received from the Manquiri Divestiture, a receivable write-down of $6.5 million related to the RMC bankruptcy, a write-down of $3.4 million of property, plant and equipment at Rochester and higher interest expense.
Net Income (loss) from Discontinued Operations
In respect of San Bartolomé’s operating results, income increased $12.8 million, due to a $1.5 million gain on the sale of San Bartolomé in 2018, partially offset by lower production and higher unit costs.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Revenue
Revenue was higher resulting from a reduction of gold inventories carried over from 2016 that were sold in the first quarter of 2017 and a decrease in average realized silver and gold prices of 1% and 2%, respectively. The Company sold 12.7 million silver ounces and 410,604 gold ounces, compared to sales of 8.9 million silver ounces and 338,131 gold ounces. Gold contributed 70% of sales and silver contributed 30% compared to 73% of sales from gold and 27% from silver.
Costs Applicable to Sales
Costs applicable to sales increased due to higher silver and gold ounces sold and higher costs applicable to sales per gold ounce. For a complete discussion of costs applicable to sales, see Results of Operations below.
Amortization
Amortization increased $30.0 million or 26%, primarily due to higher silver and gold ounces produced at Palmarejo.
Expenses
General and administrative expenses increased $4.3 million or 15% due to higher compensation, severance and professional service costs.
Exploration increased $17.4 million as a result of the Company’s expansion of near-mine drilling at Palmarejo, Kensington and Rochester, and regional exploration focused on projects in Nevada and Mexico.
Pre-development, reclamation, and other expenses increased $4.5 million or 31%, due to additional work at La Preciosa and Silvertip acquisition costs.
Other Income and Expenses
In 2017, the Company incurred a $9.3 million loss in connection with the repurchase of the 7.875% Senior Notes due 2021 (the “2021 Senior Notes”) concurrent with the completed offering of the 5.875% Senior Notes due 2024 (the “2024 Senior Notes”) compared to losses of $21.4 million on extinguishment of debt in 2016.
Fair value adjustments, net, were a loss of $0.9 million compared to a loss of $11.6 million due to diminishing effects related to the Palmarejo gold production royalty which was terminated in the third quarter of 2016 and the Rochester royalty obligation which was terminated in the second quarter of 2017.
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Interest expense (net of capitalized interest of $1.9 million) decreased to $16.4 million from $36.9 million, primarily due to lower average debt levels and the lower 2024 Senior Notes interest rate.
Other, net was a gain of $26.6 million, primarily due to a $21.1 million gain on the sale of the Joaquin project in Argentina and a $2.3 million gain on the repurchase of the Rochester royalty obligation.
Income and Mining Taxes
The Company’s Income and mining tax (expense) benefit consisted of:
Year ended December 31, | |||||||
In thousands | 2017 | 2016 | |||||
Income and mining tax (expense) benefit at statutory rate | $ | (14,037 | ) | $ | 3,718 | ||
State tax provision from continuing operations | 26 | 336 | |||||
Change in valuation allowance | 86,712 | 40,517 | |||||
Effect of tax legislation | (88,174 | ) | — | ||||
Percentage depletion | 703 | 983 | |||||
Uncertain tax positions | 2,596 | (8,829 | ) | ||||
U.S. and foreign permanent differences | 2,348 | (2,652 | ) | ||||
Foreign exchange rates | (14,180 | ) | 19,701 | ||||
Foreign inflation and indexing | (2,346 | ) | (670 | ) | |||
Foreign tax rate differences | 2,929 | 120 | |||||
Mining, foreign withholding, and other taxes | (11,274 | ) | (11,052 | ) | |||
Other, net | 5,699 | — | |||||
Legal entity reorganization | — | (8,925 | ) | ||||
Income and mining tax (expense) benefit | $ | (28,998 | ) | $ | 33,247 | ||
Income and mining tax expense of approximately $29.0 million results in an effective tax rate of 73% for 2017. This compares to income tax benefit of $33.2 million or effective tax rate of 308% for 2016. The Company’s effective tax rate is impacted by multiple factors as illustrated above. The comparability of the Company’s income and mining tax (expense) benefit for the reported periods was primarily impacted by (i) variations in our income before income taxes; (ii) geographic distribution of that income; (iii) foreign exchange rates; (iv) mining taxes; (v) the non-recognition of tax assets (vi) the impact of specific transactions and (vii) the 2016 completion of a legal entity reorganization to integrate recent acquisitions. Therefore, the effective tax rate will fluctuate, sometimes significantly, year to year.
The following table summarizes the components of the Company’s income (loss) before tax and income and mining tax (expense) benefit:
Year ended December 31, | |||||||||||||
2017 | 2016 | ||||||||||||
In thousands | Income (loss) before tax | Tax (expense) benefit | Income (loss) before tax | Tax (expense) benefit | |||||||||
United States | $ | 10,099 | $ | (5,635 | ) | $ | (13,299 | ) | $ | (10,525 | ) | ||
Canada | (3,176 | ) | 979 | (1,355 | ) | (503 | ) | ||||||
Mexico | 28,631 | (25,958 | ) | ||||||||||