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Can Coeur Generate Free Cash Flow Going Forward?

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Apr. 26 2016, Updated 7:04 p.m. ET

FCF generation

Coeur Mining’s (CDE) management is focused on generating significant free cash flow (or FCF). During the company’s 4Q15 earnings call, its management mentioned that it expects to generate significant FCF starting in 2017. In this article, we’ll discuss the factors that could lead to such a scenario.

CDE’s management’s guidance for capital expenditure (capex) is $90 million–$100 million for 2016, almost the same as 2015’s $95.2 million. The company expects ~70% of its guided capex to take place during the first half of 2016.

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However, the company expects to build cash during the second half of the year as capex falls. About $40 million worth of its guided capex for 2016 is for Palmarejo, to facilitate underground development at Guadalupe and Independencia. As the production at these two sites ramp up coupled with higher grades, costs should fall. This should lead to strong FCF generation.

Drivers for FCF

Coeur acquired the Wharf mine from Goldcorp (GG) in April 2015. It has been a cash flow–generating asset since the start. During its ten months under Coeur’s ownership, the asset has already generated $28.8 million in FCF, making it the company’s largest source of FCF.

As discussed above, lower capex during 2H16 should drive Coeur Mining’s cash flows. In addition, rising production rates from the higher grade, higher margin Independencia deposit at Palmarejo should help Coeur generate cash flows. The company’s minimum gold royalty obligation to Franco-Nevada (FNV) is also ending in 2H16. This is one of the other significant drivers of its FCF generation.

Coeur’s management expects the company to become a significant FCF generator starting in 2017 on the back of the factors discussed above. Analysts are expecting negative FCF for 1Q16, mainly due to higher capex. For 2Q16 and beyond, analysts project positive FCF, mainly due to lower costs, higher realized prices, and lower capex requirements.

Coeur’s silver peer Fresnillo (FNLPF) had positive FCF in 2015. Pan American Silver (PAAS), on the other hand, was FCF negative. Unlike many of its peers, PAAS is going for growth capex, which is leading to its negative FCFs. Hecla Mining (HL) was FCF negative in 2015. It’s trying to turn FCF positive.

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