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.
The above chart compares silver miners’ EV-to-forward-EBITDA multiples to their EBITDA margins from 2017. EV is the total market value of a company’s debt, equity, preferred shares, and minority interests, net of cash and equivalents, and investments in associates. EBITDA is a fundamental measure for the company’s stakeholders. Based on an investor’s risk appetite and various silver price scenarios, investors could consider some possibilities, which we’ll take a look at next.
Coeur’s relative valuation
Coeur Mining (CDE) is trading at a 2017 EV-to-EBITDA of 7x. 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 falls in production 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.
What’s the key going forward?
Coeur Mining’s Rochester expansion is expected to realize cost reductions and positive free cash flow generation. Its recent exploration update also implies an upside going forward.
Mining rates from Independencia will rise to 1,000 tpd (tons per day) by the end of the year. By mid-2017, 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.