The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. It helps investors compare companies with various capital structures.
Companies with high financial and operational leverages typically outperform ones with low leverages in times of high gold prices. For fundamental investors, the best strategy is to go for mining companies with healthy balance sheets, rising production profiles, low costs, and good cash flows.
Coeur’s relative valuation
Coeur Mining (CDE) is trading at a 2017 EV-to-EBITDA of 8.8x. This is the lowest among its peer group (SIL). Hecla Mining (HL), Tahoe Resources (TAHO), Pan American Silver (PAAS), and First Majestic Silver (AG) are trading at multiples of 10.5x, 10.6x, 11.3x, and 18.5x, respectively.
Coeur’s low EV-to-EBITDA multiple is probably due to its higher-than-average all-in sustaining costs and concerns regarding production falls in the medium term. As you can see in the above graph, Coeur’s EBITDA margin is only higher than PAAS. This is mainly due to higher costs, which results in a lower valuation multiple.
There has been a huge upward revision in Coeur’s EBITDA estimates since the start of the year. It comes on the back of firmer precious metal prices as well as Coeur’s cost-cutting efforts.
What’s the key going forward?
Coeur Mining’s Rochester expansion is expected to realize cost reductions and positive free cash flow generation. Its open pit mining operations at Independencia were finished in 2Q16, which will increase underground production levels.
Mining rates from Independencia will accelerate to 1,000 tpd (tons per day) by the end of the year. By mid-2017, the daily underground mining rates should reach a combined 4,000 tpd from higher-grade and higher-margin deposits, resulting in lower costs. Any positive revision to guidance by management in 3Q16 could lead to a stock rerating.