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 you compare companies with various capital structures.
The chart below compares silver miners’ EV-to-forward-EBITDA ratios to their EBITDA margins for 2017.
Is Coeur Mining’s discount justified?
Coeur Mining (CDE) is trading at a forward EV-to-EBITDA of 7.1x. That’s 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 9.9x, 7.3x, 7.3x, and 10.0x, respectively.
The lower 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 chart above, Coeur’s EBITDA margin is only higher than Pan American Silver’s (PAAS). The difference is mainly due to higher costs, which result in a lower valuation multiple. In a weaker precious metal environment, that gap is likely to continue.
Coeur Mining’s (CDE) Rochester expansion is expected to realize cost reductions and positive free cash flow generation. Its recent exploration update also implies an upside going forward, which could lead to higher production at lower costs. CDE’s upside to guidance for 2017 and beyond could lead to a stock rerating.