Coeur d'Alene Mines: Compelling Silver Investment

by: Sol Palha August 31, 2008 | about stocks: CDE / SLV    

Sol Palha

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"When one door closes, another opens. But we often look so regretfully upon the closed door that we don't see the one that has opened for us." (Helen Keller - 1880-1968, American Blind/Deaf Author, Lecturer, Amorist)

World Silver Supply and Demand (in millions of ounces)

click to enlarge images

Source: World Silver Survey 2008

A look at the above table reveals that there is a rather huge shortfall in silver production; mines only produced 670.6 million ounces in 2007 while demand came in at 894.5 million ounces.  The balance was supplied from above the ground supplies via direct government sales, and from the recycling of old silver scrap.   Producers reduced their hedging positions by a whopping 30% and this was done in the face of higher silver prices; a total of 25 million ounces of hedged positions were closed. 

Even more interesting was the fact that scrap volumes fell by 3% despite higher prices to 181.6 million ounces.   Given the huge price increase in silver bullion, from a low of roughly 4 dollars to a high of 20.80, one would have thought that mine production and scrap production would have sky rocketed, but that does not seem to be the case; in 1998, mines produced 542.2 million ounces, and in 2007, 670.6 million ounces were produced for an increase of only 23% in roughly 10 years. 

At the same time, silver demand has increased by 8.49%; even if the demand remained constant mined production would still not be enough but to make matters worse demand continues to increase while supplies increase at a mediocre pace.  One has to conclude that one of the reasons it mined production has not increased significantly is due to the fact it takes a very long time to open up a new mine and that not as much money is being deployed into silver exploration as should be given the huge shortfall.

Thus, the silver market is in a unique situation which provides for an incredible long term opportunity.  There are many plays in the silver sector, but we feel that Coeur d'Alene Mines Corporation (CDE) is one of the best plays in this sector and we will list several reasons to substantiate our claim.   

 

Without even looking at this chart, a person who sits down and thinks about the situation can spot a rather huge anomaly that is going on in the precious metals sector right now.  The opposite of this just took place in the oil sector. 

CDE is on the extreme end of this anomaly; all one has to do is ask this question in order to arrive at the correct answer. What was the price of silver bullion in August 2005 and what is the price of silver bullion today? Now do the same thing for CDE and immediately one spots the anomaly. Silver bullion is trading roughly 100% higher than it was back in August of 2005; at its peak this year it was up over 170%.  CDE peaked around April of 2006 at around 6.60, and in the last 3 years has not managed to even come close to re testing this zone.  Incredibly, it put in a new 3 year low when silver has just come of from putting in a series of multi decade new highs.  

Let’s look at some fundamentals which all appear to be strongly favor CDE.

It has two of the biggest silver mines in the world right now and claims to be the world’s largest silver producer and get this none of its silver production is hedged. It thus stands to benefit tremendously as its profits will rise with each up tick in the price of silver and consequently its profits will decline with each down tick. 

A feasibility study on its Palmarejo property in Mexico has boosted its silver reserves by an incredible 29%; this mine is scheduled to come online around the first half of 2009.  It was considering the sale of its Nevada gold and silver mines but because they are producing so much cash management decided it was in their best interests to hold onto them.   CDE does not only produce silver, it also produces a decent amount of Gold.   

Currently, its silver reserves stand at 216 million ounces and its gold reserves come in at 1.5 million ounces.  These figures probably do not take into consideration the 29% boost in their silver reserves.  It currently has a market cap of 999 million. Its silver reserves alone are worth roughly 3 billion dollars at current prices and if we add the Gold reserves in the figure soars significantly higher (roughly 1.3 billion more); based only on its silver reserves we find that the company is currently selling at huge discount.

 In 2007, it produced 11.7 million ounces of silver and it’s anticipated that its 2008 production will come in at roughly 13 million ounces; an increase of 11.1% but its 2009 production is expected to increase to 24 million ounces a whopping 100% increase over its 2007 production.  The increased production will come from the San Bartolome mine in Boliva now believed to be the largest pure silver mine in the world and from the Palmarejo mine in Mexico which will also add to its gold production. For the record its Gold production is also not hedged.  Just these factors alone make CDE a compelling investment.  

So far we have not looked at the technical picture; we have simply focused on an anomaly and on fundamentals.  From a mass psychology perspective, individuals are shunning this stock and many of the precious metals stocks for most stocks in these sectors have not performed as well as the metals have; thus based on the principles of mass psychology one should continue accumulating this chap and various other plays in the precious metals sector that are being treated in a similar manner.

 

CDE appears to be putting in a nice bottoming formation in the 3 year chart (the above chart) and it has put in a double bottom formation in the one year chart (displayed below); it has also flashed 3 back to back positive divergence signals and it’s trading at a new 4 year low when its reserves have increased significantly and bullion has finished coming of a series of new multi decade highs.  

Right now, CDE needs to trade past the 2.90-3.00 ranges for 12-15 days in a row; it will most likely fail to do so in its first 1-3 attempts.  Once it breaks through this obstacle it should be able to trade all the way to the 3.90-4.20 ranges before pulling back.  After this its next major obstacle is 4.80-5.10 ranges; it has not been able to hold above this zone for a sustained period of time in the last 3 years and thus it’s obvious that this zone is going to offer a very strong level of resistance. It will need to break past these ranges on strong volume and trade above them for at least 21 days in a row; once this is achieved it should be in a position to test and then take out its old 3 year high.

As of late, the markets have had a tendency to overshoot both their upside and downside targets. However when a market overshoots to the downside when the fundamentals, technical and the mass psychology outlook are all bullish it will in 9 out of 10 times mount an even stronger counter rally than it would have had it not experienced this situation to begin with.  

We cannot tell you when CDE will start to rally, but we can tell you that from an investment point of view, it makes for a very good long term buy.  The greatest investors have never tried to time the exact bottom; they have always looked to acquire stocks when they have been smashed to pieces for apparently no long term reasons.

Many do with opportunities as children do at the seashore; they fill their little hands with sand, and then let the grains fall through, one by one, till all are gone. (Thomas Jones)

All charts provided courtesy of ProphetFinance.com

Disclosure: Subscribers and officers at Tactical Investor have positions in CDE .

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This article has 22 comments:

  •  
    Aug 31 08:21 AM
    Looking at the demand in 1998 and now, we see little growth. If silver demand is not growing then new production is not needed. The price dropping shows this to be true.
    Reply | Link to Comment
  •  
    Aug 31 08:25 AM
    The disappointing performance of CDE is due to sloppy management. Silver could soar to never before heights and CDE would still be at new lows. A true dog to stay away from.
    Reply | Link to Comment
  •  
    Aug 31 08:56 AM
    what good is an analysis that doesn't factor in cost of production , debt , fully diluted shares outstanding , cap costs , or anything else.

    This is why people lost money in the tech craze , and why I've lost my profits in the metals runup -

    Meaningless analysis based on hype and no math.
    Reply | Link to Comment
  •  
    Aug 31 09:00 AM
    I've followed CDE for several years and can asure you this dog don't hunt.
    If managment started to undo the massive dulution (a buyback) and/or issued a dividend there might be some hope but until then Mr. Market will continue to whip this stock like a "red haired" step-child :)
    Reply | Link to Comment
  •  
    Aug 31 09:13 AM
    What is the cost structure for CDE?

    Given the downward price action of their stock, it would tell that there are some underlying problems with the company which is greater than the higher commodity prices.
    Reply | Link to Comment
  •  
    Aug 31 09:13 AM
    The silver supply and demand figures are very interesting if correct. Where in these figures is the amount of 210,000,000 ounces that SLV now holds? In 2006 SLV added 121 million ounces; 2007 another 28 million ounces and so far in 2008, 61 million ounces.

    Please tell me where, in the figures given, this shows up?
    Reply | Link to Comment
  •  
    Aug 31 09:17 AM
    Over the past two years the market price of silver has gone up and down. CDE stock has remained more or less flat .... for a reason. I suspect you might want to forget all those demand and production numbers and look at the people running CDE. Whatever it is, that stock started dead, stayed dead and will continue so until something in internal to their business changes.
    Reply | Link to Comment
  •  
    Aug 31 09:22 AM
    "CLH" both your doors are open but nobody is home. You have outdone yourself trying to be first with a stupid comment on this article.
    Reply | Link to Comment
  •  
    Aug 31 12:16 PM
    This company does its best to keep the stock down, for some reason.
    Everytime it begins to rise, they put out more shares, thus, diluting the value of the stock.
    I am holding on but don't know if I can trust them.
    Reply | Link to Comment
  •  
    Aug 31 01:45 PM
    This stock is indeed cheap. Factor in the economy, factor in shorting, but why is CDE still the lowest of all the silver stocks, dilution. I wonder why the company would keep the stock down.
    Reply | Link to Comment
  •  
    Aug 31 03:38 PM
    As well noted in the above comment, CDE management has a credibility problem. This along with heavy investment costs has encouraged massive short selling. This will all change if projects coming on line meet expectations. The Author failed to mention the Kensington gold mine that will likely come on line late next year. That will boost total gold production to well above 200,000 oz annually assuming that Palmarejo is producing at the expected rate. With low cost per ounce and solid reserves for both the gold and silver, CDE has the potential to excel in comparison to peers.
    Reply | Link to Comment
  •  
    Aug 31 03:55 PM
    Silver wink_ I have heard it said many times that in calculating the demand figures they simply add every thing up (understanding the demand figures are all rough estimates) and put in the figure for implied investment that is needed to make demand equal to supply. As far as the Silver ETF investment exceeding reported implied demand for a given year, It would be assumed (I supose) that investment silver from other sources would have been moved into the ETF.
    Reply | Link to Comment
  •  
    Aug 31 04:38 PM
    It doesn't matter how much Ag CDE produces if they can't make a profit let along a decent return on capital. How can you analyze a company without looking at financials and management? If you check this out, it goes a long way toward explaining the current price.
    Reply | Link to Comment
  •  
    Aug 31 07:16 PM
    CDEs' stock price is falling because the authors' own statement. They do not hedge their silver production! This means every downtick in the price of silver lowers their profits. I'm just using common sense.
    Reply | Link to Comment
  •  
    Sep 01 03:20 AM
    Purchased CDE in 2002 @ !.28. Sold half of position @ 3.96 in 2003. Watched stock go to to over 7.00 twice as management kept issuing new shares. Finally sold remaining half of position August 05, 2008 for 2.77. In the meantime have purchased physical silver in 100 oz bars and also shares of SLV. Since the author is doing a comparison of the increase in the price of silver in 2005 to now against the price of CDE to now, the increase in number of shares outstanding in CDE from 2005 to now should also be taken into consideration. Since I am now out of CDE, I do not think I will ever be involved with this stock again as I do not believe management has ever acted in the best interests of the shareholders.
    Reply | Link to Comment
  •  
    Sep 01 05:33 AM
    I am an owner and net long position in CDE. This stock is indeed cheap on just almost every fundamental evaluation level. I agree with the author, this is a very much undervalued stock and in the next couple of years should pay off in a tremendous way. If, you look at the total assets they have now compared to 5 years ago and their total liabilities,you can see they have grown substantially with very little debt. Those assets are now and very shortly coming online and with no hedging will greatly increase book value, free cash flow and the sshare price of the stock! The shorts won't be able to hold this stock down then.
    Reply | Link to Comment
  •  
    Sep 01 01:57 PM
    I agree with Ipet2 and Sieromero's comments. My CDE's losses have cost me one half of my metals profits. I believe management has made some mistakes; however,Dennis has vision, and he has a record of execution, and a vested interested in a much higher common stock price for CDE. CDE has the potential to exceed its peers in percentage increase in its stock price within the next 18 months.
    Reply | Link to Comment
  •  
    Sep 01 08:03 PM
    i NEVER THOUGHT OF INEPT MANAGEMENT, BUT SOME PEOPLE MAY HAVE THAT RIGHT.

    I happen to have seen in their annual report of a lawsuit that prevents them from dumping their piosons into a lake!

    I wonder why nobody commented on that.

    Yup, new management is needed in the company.
    Reply | Link to Comment
  •  
    Sep 02 12:38 AM
    The present management team has the talent to execute its business plan. They are not inept, and I believe, they learn from their mistakes. The lawsuit is on appeal, and they have a backup plan to treat the mine tailings if they don't win on appeal. The gold mine in Alaska will go in production.
    The execution of the company business plan, will achieve significant value in the common stock within 18 months.
    Reply | Link to Comment
  •  
    Sep 02 06:31 AM
    Jim Rogers said recently in VAncouver that he was considering a buy in Silver. But probably it is better to buy silver than any silver stock.

    jimrogers-investments....
    Reply | Link to Comment
  •  
    Sep 03 08:59 PM
    Simple test question:
    Which is easy to create:

    a) Stock certificate of mining companies
    b) Fiat currency
    c) Ag metal - mined

    You know the answer, invest first in the rare element.
    Reply | Link to Comment
  •  
    Sep 25 09:27 AM
    Everyone likes to harp on about poor management diluting the shares. Have you considered this: management sold shares to the public directly or via convertible debt at prices well over double where the stock trades now. Those shares were used to raise capital and reduce interest on debt. Given the shares are now trading at a fraction of the issue or conversion price, I would say that makes management quite savvy.

    Fact: any issuance at a price above the current share price adds value to all existing share holders.

    Reply | Link to Comment
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