Coeur D’Alene Mines Executive Insights: Bolivia, Fair Value Adjustment

On Monday, Coeur D’Alene Mines Corporation (NYSE:CDE) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.


Jorge Beristain – Deutsche Bank: Good morning, Mitch. Jorge with DB here. Two questions. One is if you could enhance a little bit your comments that you just made at the end about your return on capital policy when you said defined by mid-year. Is that July, August or kind of in line with your next quarterly results, and what – along what lines are you thinking?

Mitchell J. Krebs – President and CEO: When we say mid-year, yeah, it’s probably most likely in conjunction with our second quarter announcement which will be in early August, and this point in time, subject to the Board’s discretion, right now everything is on the table and we’ll continue to evaluate all of those alternatives between now and then.

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Jorge Beristain – Deutsche Bank: Okay. My second question was, if you could give us some update on the political color in Bolivia in light of their inaugural nationalization of this year in electric utility from the Spanish, what’s your sense is to how the government’s attitude is towards the mining sector through Comibol and there were some attempts made last year that were put down. But if you could just kind of talk about what is it about your structure in Bolivia that makes you think that your assets are secure down there?

Mitchell J. Krebs – President and CEO: Yeah, sure. We continue to operate at San Bartolome efficiently and effectively. The key there like we’ve said before is really how we hold our mining rights through a series of leases and joint ventures leases with Comibol itself and the joint ventures with several of the local cooperatives and that has really been the key to our ability to continue operating at San Bartolome, the way we have and the way we expect to continue operating there. Our relationships there in Bolivia both for the local level and national level remain, I’d call them positive. And in the meantime, we continue to generate a lot of cash flow out of our San Bartolome operation. As far as, the nationalization announced on May 1st of the Spanish utility, kind of like Argentina and that it seems to be a fairly specific, targeted thing that the government has done there that that as far as mining goes, it’s far away from our area of focus, and we believe that we’ll just continue to do what we’ve been doing there.

Jorge Beristain – Deutsche Bank: So, Mitch, I don’t want to just monopolize here, but just to clarify when these – you operate in Bolivia through ownership of these joint ventures with locals; in your filings it says that you own 100% of San Bart’s. But could you quantify through these JVs, what is the real kind of local ownership content of the mine?

Mitchell J. Krebs – President and CEO: Yes. We have leases and joint ventures. We are 100% – we have 100% of the economics, so that might be the 100% you’re referring too. Now, we pay royalties in exchange for those joint venture and leases. So, Comibol and the cooperatives get from us anywhere from 2.5% to 4% royalties from our mining activities. So, we’ve 100% interest in the mining rights through those arrangements and by virtue of those arrangements they get the royalty payments from us.

Fair Value Adjustment

John Bridges – JPMorgan: Just wondered, could you give us a little bit of more background on the fair value adjustment and what triggered that?

Frank L. Hanagarne, Jr. – SVP, CFO: This is Frank. In the fair value market value adjustments, there are three or four key areas. We have concentrate sales, foreign exchange, the Franco-Nevada royalty and also some zero cost collars on gold at the Kensington property. The biggest driver in all of that is the Franco-Nevada royalty. It typically would dominate what’s happening in that account on a quarter-to-quarter basis. It represents nearly 100% of the quarter-over-quarter changes you see between 2011 and 2012. The components that factor into the Franco-Nevada royalty are versus the level of production that we’ve achieved, how gold prices have run quarter-to-quarter, and those two factors if you look at 2011 versus 2012, gold price is up substantially. We increased incrementally a little over 3,000 more ounces in the first quarter 2012 and 2011, and that’s the explanation of that increase.

John Bridges – JPMorgan: But what were the surprise, what were the triggers that caused such a big change?

Frank L. Hanagarne, Jr. – SVP, CFO: There really isn’t a surprise for us. We of course watch this closely quarter-to-quarter and we anticipated that with the higher gold prices that this would be a predictable outcome.

John Bridges – JPMorgan: Okay. So, could you give us a bit of guidance as to whether there would be adjustments like this in coming quarters this year?

Frank L. Hanagarne, Jr. – SVP, CFO: As you watch the price of gold and make your estimates of what gold production will be achieved at Palmarejo, the scenarios that are favorable to our bookings are when gold prices remain flat or decline, and it’s unfavorable prices are on a steep upward trend.

Mitchell J. Krebs – President and CEO: So, John, it’s Mitch here. There is minimum obligation associated with that royalty of I think 240,000 ounces. So, that liability on the balance sheet that changes from quarter-to-quarter is an estimate of what those future royalty payments to Franco-Nevada will be over that minimum obligation. So, as gold prices increase, that estimate of those future payments goes up and that adjustment gets taken through the P&L as a non-cash fair value adjustment. So, as gold prices go down, we would see obviously a non-cash adjustment going the other way, and so that’s one of the reasons we show the adjusted earnings is to back out the noise associated with those changes from quarter-to-quarter and those estimated future payments.

John Bridges – JPMorgan: When does this – just remind me, when does this move out of the cash flow and into the income statement – in a year or two’s time?

Mitchell J. Krebs – President and CEO: So, the 240,000 ounces should roll off here over the next three or four years I think as we have the schedule out. That royalty is tied to 50% of the gold production out of Palmarejo. Last year, Palmarejo produced right at about 125,000 ounces, so in that year 62,500 ounces went towards that minimum. So, if you just do the math there, as far as 240,000 ounces left. I guess that equals about four more years.

John Bridges – JPMorgan: Okay, okay. Well, anyway, best of luck with the rest of the operations which seem to be working nicely to planned.

Mitchell J. Krebs – President and CEO: Yeah, thanks a lot, John.