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CDE > SEC Filings for CDE > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for COEUR MINING, INC.

Form 10-K for COEUR MINING, INC.


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Coeur Mining and its subsidiaries (collectively, "Coeur", "the Company", "our", and "we"). We use certain non-GAAP financial performance measures in our MD&A. For a detailed description of each of the non-GAAP measures, please see "Non-GAAP Financial Performance Measures" at the end of this item.
Overview
The Company is a large primary silver producer with significant gold production and mines located in the United States, Mexico, and Bolivia; development projects in Mexico and Argentina; and streaming and royalty interests in Australia, Mexico, Ecuador, and Chile. The Palmarejo, San Bartolomé, Kensington, and Rochester mines, each of which is operated by the Company, and Coeur Capital, primarily comprised of the Endeavor silver stream and other precious metal royalties, constitute the Company's principal sources of revenues.


The Company's business strategy is to discover, acquire, develop and operate low-cost silver and gold operations and streaming and royalty interests that will produce long-term cash flow, provide opportunities for growth through continued exploration, and generate superior and sustainable returns for stockholders. The Company's management focuses on maximizing net cash flow through identifying and implementing revenue enhancement opportunities at existing operations, reducing operating and non-operating costs, consistent capital discipline, and efficient management of working capital. As part of this strategy, in late 2013, the Company formed Coeur Capital to hold its streaming and royalty interests, along with its portfolio of strategic equity investments. 2013 Highlights
• Metal sales of $746 million

• Silver production of 17.0 million ounces and record gold production of 262,217 ounces

• Cash operating costs were $9.84 per silver ounce and $950 per gold ounce
(see "Non-GAAP Financial Performance Measures")

• All-in sustaining costs were $18.94 per silver equivalent ounce (see "Non-GAAP Financial Performance Measures)

• Adjusted net income of $(76.2) million or $(0.78) per share (see "Non-GAAP Financial Performance Measures)

• Net cash provided by operating activities of $113.5 million

• The Company spent $100.8 million in capital expenditures in 2013, a 12.8% decrease from 2012

Consolidated Performance
The Company produced 17.0 million ounces of silver and a record 262,217 ounces of gold in 2013, compared to 18.0 million ounces of silver and 226,486 ounces of gold in 2012. Silver production decreased in 2013 compared to 2012 due to lower silver grade at Palmarejo and the cessation of mining activities at Martha in 2012. Gold production increased in 2013 compared to 2012 due to higher throughput at Kensington and higher gold grade at Palmarejo, partially offset by lower gold grade at Rochester. Cash operating costs were $9.84 per silver ounce and $950 per gold ounce in 2013, compared to $7.57 per silver ounce and $1,358 per gold ounce in 2012 due to lower silver production and higher mining and milling costs, partially offset by higher gold production. For a complete discussion on production and operating costs, see "Results of Operations" and "Non-GAAP Financial Performance Measures" section below.
Sales of metal decreased 16.7% in 2013 to $746 million due to lower average realized prices for silver and gold and lower silver ounces sold, partially offset by higher gold ounces sold. The average realized silver price declined 25% to $23.14 and the average realized gold price declined 17% to $1,387 per ounce in 2013. Gold ounces sold in 2013 increased due to record gold production at Kensington, which increased 40% to approximately 114,800 ounces in 2013.

                                                     2013             2012            2011
Silver ounces produced                            17,011,193       18,025,206      19,078,251
Gold ounces produced                                 262,217          226,486         220,382
Cash operating costs/oz.(1) - silver            $       9.84     $       7.57     $      6.31
Cash operating costs/oz.(1) - gold              $        950     $      1,358     $     1,088
All-in sustaining costs per silver equivalent
ounce(1)                                        $      18.94     $      19.48     $     17.51
Silver ounces sold                                17,188,539       17,965,383      19,057,503
Gold ounces sold                                     264,493          213,185         238,551
Average realized price per silver ounce         $      23.14     $      30.92     $     35.15
Average realized price per gold ounce           $      1,387     $      1,665     $     1,558
Metal sales                                     $    745,994     $    895,492     $ 1,021,200

(1) See "Non-GAAP Financial Performance Measures."

Looking Forward
We will continue to focus on operational excellence in 2014 to deliver on our plans and advance the La Preciosa development project, resulting in the following expectations for 2014:
• Silver production of approximately 17.0 to 18.2 million ounces

• Gold production of 220,000 to 238,000 ounces


• Production costs applicable to sales of $500 to $530 million

• Capital expenditures of $65 to $80 million, 80% related to sustaining capital

• Exploration expense of $13 to $18 million

• General and administrative expenses of $43 to $48 million

• Amortization of approximately $150 million

Critical Accounting Policies and Accounting Developments Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates and assumptions involved and the magnitude of the asset, liability, revenue, and expense being reported. For a discussion of recent accounting pronouncements, see Note 2 -- Summary of Significant Accounting Policies in the notes to the consolidated financial statements.
Revenue Recognition
Revenue includes sales value received for the Company's principal products, silver, and gold. Revenue is recognized when title to silver and gold passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Product pricing is determined at the point revenue is recognized by reference to active and freely traded commodity markets; for example, the London Bullion Market for both gold and silver. Under the Company's concentrate sales contracts with third-party smelters, final gold and silver prices are set on a specified future quotational period, typically one to three months, after the shipment date based on market prices. Revenues are recorded under these contracts at the time title passes to the buyer based on the forward price for the expected settlement period. The contracts, in general, provide for provisional payment based upon provisional assays and quoted metal prices. Final settlement is based on the average applicable price for the specified future quotational period and generally occurs from three to six months after shipment. Final sales are settled using smelter weights and settlement assays (average of assays exchanged and/or umpire assay results) and are priced as specified in the smelter contract. The Company's provisionally priced sales contracts contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates at the forward price at the time of sale. The embedded derivative does not qualify for hedge accounting and is adjusted to fair value through revenue each period until the date of final gold and silver settlement. Reserve Estimates
The preparation of the Company's consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of its financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The most critical accounting principles upon which the Company's financial status depends are those requiring estimates of recoverable ounces from proven and probable reserves and/or assumptions of future commodity prices. There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond the Company's control. Ore reserve estimates are based upon engineering evaluations of samplings of drill holes and other openings. These estimates involve assumptions regarding future silver and gold prices, the geology of its mines, the mining methods it uses and the related costs it incurs to develop and mine its reserves. Changes in these assumptions could result in material adjustments to the Company's reserve estimates. The Company uses reserve estimates in determining the units-of-production depreciation and amortization expense, as well as in evaluating mine asset impairments. Impairments
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if total estimated future cash flows or probability-weighted cash flows on an undiscounted basis are less than the carrying amount of the assets, including property, plant and equipment, mineral property, development property, and any deferred costs. Estimated future cash flows are used to determine whether an impairment exists is dependent on reserve estimates and other assumptions, including silver and gold prices, production levels, and capital and reclamation costs, all of which are based on detailed engineering life-of-mine plans. Amortization
The Company depreciates its property, plant and equipment, mining properties and mine development using the units-of-production method over the estimated life of the ore body based on its proven and probable reserves or the straight-line method over the useful life, whichever is shorter. The accounting estimates related to depreciation and amortization are critical accounting estimates because 1) the determination of reserves involves uncertainties with respect to the ultimate geology of its reserves and


the assumptions used in determining the economic feasibility of mining those reserves and 2) changes in estimated proven and probable reserves and useful asset lives can have a material impact on net income. Ore on Leach Pads
The heap leach process is a process of extracting silver and gold by placing ore on an impermeable pad and applying a diluted cyanide solution that dissolves a portion of the contained silver and gold, which are then recovered in metallurgical processes.
The Company uses several integrated steps to scientifically measure the metal content of ore placed on the leach pads. As the ore body is drilled in preparation for the blasting process, samples are taken of the drill residue which were assayed to determine estimated quantities of contained metal. The Company estimates the quantity of ore by utilizing global positioning satellite survey techniques. The Company then processes the ore through crushing facilities where the output is again weighed and sampled for assaying. A metallurgical reconciliation with the data collected from the mining operation is completed with appropriate adjustments made to previous estimates. The crushed ore is then transported to the leach pad for application of the leaching solution. As the leach solution is collected from the leach pads, it is continuously sampled for assaying. The quantity of leach solution is measured by flow meters throughout the leaching and precipitation process. After precipitation, the product is converted to doré, which is the final product produced by the mine. The inventory is stated at lower of cost or market, with cost being determined using a weighted average cost method.
The Company reported ore on leach pad of $82.0 million as of December 31, 2013. Of this amount, $50.5 million is reported as a current asset and $31.5 million is reported as a non-current asset. The historical cost of the metal that is expected to be extracted within twelve months is classified as current. Ore on leach pad is valued based on actual production costs incurred to produce and place ore on the leach pads, less costs allocated to minerals recovered through the leach process.
The estimate of both the ultimate recovery expected over time and the quantity of metal that may be extracted relative to the time the leach process occurs requires the use of estimates which are inherently inaccurate since they rely upon laboratory testwork. Testwork consists of 60 day leach columns from which the Company projects metal recoveries up to five years in the future. The quantities of metal contained in the ore are estimated based upon actual weights and assay analysis. The rate at which the leach process extracts gold and silver from the crushed ore is based upon laboratory column tests and actual experience occurring over more than twenty years of leach pad operations at the Rochester mine. The assumptions used by the Company to measure metal content during each stage of the inventory conversion process includes estimated recovery rates based on laboratory testing and assaying. The Company periodically reviews its estimates compared to actual experience and revises its estimates when appropriate. The ultimate recovery will not be known until leaching operations cease. Historically, our operating results have not been materially impacted by variations between the estimated and actual recoverable quantities of silver and gold on our leach pads.
Reclamation and remediation costs
The Company recognizes obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. An accretion cost, representing the increase over time in the present value of the liability, is recorded each period in depreciation, depletion and amortization expense. As reclamation work is performed or liabilities are otherwise settled, the recorded amount of the liability is reduced. Future remediation costs for inactive mines are accrued based on management's best estimate at the end of each period of the undiscounted costs expected to be incurred at the site. Such cost estimates include, where applicable, ongoing care and maintenance and monitoring costs. Changes in estimates are reflected in earnings in the period an estimate is revised. Derivatives accounting
The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. Changes in the value of derivative instruments are recorded each period in fair value adjustments, net. Management applies judgment in estimating the fair value of instruments that are highly sensitive to assumptions regarding commodity prices, market volatilities, and foreign currency exchange rates. Income taxes
The Company computes income taxes using an asset and liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences or benefits of temporary differences between the financial reporting bases and the tax bases of assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse.


In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance has been provided for the portion of the Company's net deferred tax assets for which it is more likely than not that they will not be realized.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
Consolidated Financial Results
2013 Compared to 2012
Sales of Metal
Sales of metal decreased by $149.5 million, or 16.7%, due to lower silver production at Palmarejo and lower average realized silver and gold prices, partially offset by higher gold production at Kensington and Palmarejo. The Company sold 17.2 million ounces of silver and 264,493 ounces of gold, compared to sales of 18.0 million ounces of silver and 213,185 ounces of gold. The Company realized average silver and gold prices of $23.14 per ounce and $1,387 per ounce, respectively, compared with realized average prices of $30.92 per ounce and $1,665 per ounce, respectively. Silver contributed 53% of sales and gold contributed 47%, compared to 61% of sales from silver and 39% from gold. Production Costs Applicable to Sales
Production costs applicable to sales increased by $9.1 million, or 2.0%, to $463.7 million. The increase in production costs applicable to sales is primarily due to higher production at Kensington and higher mining and milling costs, partially offset by lower consumption of materials, supplies, and other consumables.
Amortization
Amortization increased by $14.0 million, or 6.4%, primarily the result of increased gold production at Kensington, partially offset by lower silver production at Palmarejo.
Costs and Expenses
General and administrative expenses increased $22.4 million or 67.8%, primarily due to higher business development expenses and related legal costs, and one-time expenditures associated with the corporate office relocation. Exploration expenses decreased by $3.9 million or 14.9% primarily as a result of lower exploration activity near the Company's existing properties. Litigation settlement of $32.0 million relates to the settlement of the Rochester claims dispute in 2013. In connection with the settlement, Coeur Rochester acquired all mining claims in dispute in exchange for a one-time $10.0 million cash payment and granting a 3.4% net smelter returns royalty on up to 39.4 million silver equivalent ounces from the Rochester mine beginning January 1, 2014.
Write-downs totaled $773.0 million compared to $5.8 million. The 2013 write-down was primarily due to an impairment of the Palmarejo and Kensington mines due to a decrease in the Company's long-term silver and gold price assumptions. The decrease in silver and gold price assumptions represented significant changes in the business, requiring the Company to evaluate for impairment. For purposes of this evaluation, estimates of future cash flows of the individual reporting units were used to determine fair value.
Pre-development, care and maintenance and other expenses were $11.9 million, an increase of $10.6 million over 2012, primarily due to feasibility expenditures at La Preciosa and settlement of a royalty dispute at San Bartolomé. Other Income and Expenses
Non-cash fair value adjustments, net were a gain of $82.8 million compared to a loss of $23.5 million, primarily due to the impact of changing gold prices on the Palmarejo gold production royalty obligation.
Interest income and other, net decreased by $1.7 million to $13.3 million, compared to $15.0 million, primarily due to lower foreign currency gains and a business interruption insurance recovery at San Bartolomé in 2012, partially offset by gains on the commutation of certain reclamation bonding arrangements and the sale of other miscellaneous assets.
Interest expense, net of capitalized interest, increased to $41.3 million from $26.2 million due to interest paid on the 7.875% Senior Notes issued in January 2013.


Income Taxes
The Company reported an income tax benefit of approximately $158.1 million
compared to a provision of $70.8 million. The following table summarizes the
components of the Company's income tax provision:

                                           Year Ended December 31,
                                             2013            2012
Current:
United States                           $          4      $    (257 )
United States - State mining taxes              (714 )       (2,195 )
United States - Foreign withholding tax          397           (736 )
Argentina                                       (137 )          976
Australia                                       (914 )       (1,760 )
Mexico                                        (9,046 )       (7,814 )
Bolivia                                       (6,716 )      (43,546 )
Canada                                        (1,936 )            -
Deferred:
Argentina                                      8,062              -
Australia                                         (2 )         (223 )
Bolivia                                       (4,222 )       (1,087 )
Mexico                                        94,851        (10,579 )
United States                                 78,489         (3,586 )
Income tax benefit (expense)            $    158,116      $ (70,807 )

In 2013, the Company recognized a current provision in the U.S. and certain foreign jurisdictions primarily related to inflationary adjustments on non-monetary assets and the Company being subject to the state mining tax and Mexico IETU tax, which is a form of alternative minimum tax. The Company has recognized $3.0 million of expenses, including interest and penalties, for uncertain tax positions for the years ended 2008, 2009, 2010, 2011, and 2012 and an additional $2.2 million of expense for the year ended 2013. Finally, the Company recognized a deferred tax benefit of $177.2 million in 2013. The significant components of this benefit include the impacts of the impairment of mineral interests in Mexico, the change in the Company's permanent reinvestment assertion related to Mexico, and the recognition of deferred taxes on current year temporary differences, partially offset by tax rate changes in Mexico and an increase in the Company's valuation allowance. 2012 Compared to 2011
Sales of Metal
Sales of metal from continuing operations decreased by $125.7 million, or 12.3%, to $895.5 million due to lower silver and gold ounces sold and lower average realized silver prices. The Company sold 18.0 million ounces of silver and 213,185 ounces of gold, compared to sales of 19.1 million ounces of silver and 238,551 ounces of gold. The Company realized average silver and gold prices of $30.92 per ounce and $1,665 per ounce, respectively, compared with realized average prices of $35.15 per ounce and $1,558 per ounce, respectively. Silver contributed 61% of sales and gold contributed 39%, compared to 65% of sales from silver and 35% from gold.
Production Costs Applicable to Sales
Production costs applicable to sales from continuing operations increased by $35.0 million, or 8.4%, to $454.6 million. The increase in production costs applicable to sales is primarily due to higher equipment maintenance costs due to major component rebuilds and rehabilitation and ground control expenses. Amortization
Amortization decreased by $5.6 million, or 2.5%, primarily due to lower silver production, partially offset by the completion of capital projects and Kensington and Rochester.


Costs and Expenses
Administrative and general expenses increased $1.6 million or 5.1%, primarily due to higher legal and finance related expenses and salaries.
Exploration expenses increased by $7.1 million, or 37.3%, primarily as a result of increased exploration activity at and around the Company's existing properties.
Pre-development, care and maintenance and other expenses were $1.3 million, a decrease of $18.2 million, primarily due to costs related to the expansion at the Rochester mine in 2011.
Other Income and Expenses
Non-cash fair value adjustments, net were a loss of $23.5 million compared to a loss of $52.1 million, primarily due to the impact of changing gold prices on the Palmarejo gold production royalty obligation.
Interest income and other increased by $21.0 million to $14.4 million, compared with net expense of $6.6 million due to higher foreign currency gains and a $2.5 million business interruption insurance recovery at San Bartolomé. Interest expense, net of capitalized interest, decreased to $26.2 million from $34.8 million, primarily due to lower outstanding debt and capital lease obligations.
Income Taxes
The Company reported an income tax provision of approximately $70.8 million compared to an income tax provision of $114.7 million. The following table summarizes the components of the Company's income tax provision.

                                           Years Ended December 31,
                                             2012             2011
Current:
United States - Alternative minimum tax $       (257 )    $    2,015
United States - State mining taxes            (2,195 )          (409 )
United States - Foreign withholding tax         (736 )          (842 )
Argentina                                        976          (1,219 )
Australia                                     (1,760 )        (1,755 )
Mexico                                        (7,814 )        (1,084 )
Bolivia                                      (43,546 )       (59,660 )
Deferred:
Australia                                       (223 )          (661 )
Bolivia                                       (1,087 )          (207 )
Mexico                                       (10,579 )       (28,022 )
United States                                 (3,586 )       (22,902 )
Income tax benefit (provision)          $    (70,807 )    $ (114,746 )

In 2012, the Company recognized a current provision in the U.S. and certain foreign jurisdictions primarily related to inflationary adjustments on non-monetary assets and the Company being subject to the Mexico IETU tax, which is a form of alternative minimum tax. Further, the Company accrued foreign withholding taxes of approximately $0.7 million on inter-company transactions between the U.S. parent and the Argentina, Mexico and Australia subsidiaries. Also, as a result of an audit of the 2009 Bolivian tax return, the Company has recognized an additional $7.8 million of expenses, including interest and penalties for uncertain tax positions for the years ending 2008, 2009, 2010, and 2011 and an additional $3.9 million of expense for the year ended 2012. Finally, the Company recognized a $15.5 million deferred tax provision for the recognition of deferred taxes on deductible temporary differences, utilization of net operating loss carryforwards and deferred withholding taxes in various jurisdictions (principally U.S. and Mexico).
In 2011, the Company recognized a current provision in the U.S. and certain foreign jurisdictions primarily related to higher metals prices, inflationary adjustments on non-monetary assets and unrealized foreign exchange gains on U.S. dollar denominated liabilities in Bolivia. The Company intends to carry . . .

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