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Coeur Mining’s Free Cash Flow Drivers in 2016 and Beyond

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Free cash flow generation

Coeur Mining’s (CDE) management is focused on generating significant free cash flow (or FCF). During the company’s 1Q16 earnings call, management mentioned that it remains on track to generate positive FCF during the second half of the year. In this part of the series, we’ll look at some factors that could lead to this scenario.

Management guidance for capital expenditure (or 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. Moreover, the company is headed toward high-grade ore areas at its Palmarejo and Kensington operations. As production at these two sites ramps up, 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 from 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.

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Royalty obligations

Coeur Mining’s minimum gold royalty obligation to Franco-Nevada (FNV) is also ending in the second half of 2016. This is one of the other significant drivers of FCF generation.

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

Coeur’s silver peer (SIL) 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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