Consider This Silver Miner That Trades at a Discount to Book

Consider This Silver Miner That Trades at a Discount to Book

Precious metals have been under pressure this year, and silver is not an exception. The weakness of the global economy and uncertainty about Chinese growth have sent silver from $30 at the beginning of the year to under $20 in July. Since then, prices have shown more positive signs. The silver mining stocks have been punished even more than the metal itself. Now that the price environment has seen some changes, is it time to look at silver stocks?

Battling costs
As the price of silver has dropped, miners have looked for ways to cut their expenditures. Coeur d'Alene cut its cash operating costs by $19 million in the first half of this year, though the move didn't help the company to report a second-quarter profit as lower silver prices outweighed cost-cutting initiatives.

The company stated that it has reduced second-half exploration budget by 17%. In addition, Coeur d'Alene reduced its second-half capital expenditure plan by 18% in a move the miner out of the red.

On the operational side, things were good in the second quarter. The company's biggest mine, Palmarejo, which is situated in Mexico, delivered a 24% increase in silver production in comparison with the previous quarter. Overall, Coeur d'Alene saw a 21% increase in silver production and a 7% increase in gold production.

Other miners with primary assets in Mexico have also made moves to battle costs. Endeavour Silver made decisive layoffs in the second quarter, firing 176 people. The company has stated that it plans similar actions in the third quarter. Endeavour's El Cubo mine is operating at a loss, and the company plans to turn things on this mine.

Endeavour has stated that it would have to close the mine for care and maintenance if it does not see an improvement in its performance. However, the company has stated that in July all three Endeavour's mines contributed to cash flow. This means the layoffs are working.

First Majestic Silver recently reported record production of over 3.2 million ounces of silver equivalent. The company expects a 5%-10% reduction in the cash cost per ounce in the second half of the year. In an interesting way to battle the fall of the silver prices, the company has suspended the sale of 700,000 ounces of silver in the second quarter. This helped the company sell its silver for no less than $22.80 an ounce.

The fact that Coeur d'Alene is not profitable could worry investors. However, the company has $250 million in cash on its balance sheet. In addition to that, Coeur d'Alene has $100 million of undrawn credit facility. The company has lost $35 million in the second quarter, and has a sufficient cushion to turn itself to profitability.

Coeur d'Alene has just $300 million of long-term debt. The absolute majority of its debt portfolio consists of 7.875% notes due 2021. This is a relatively light debt load.

In the meantime, Coeur d'Alene trades at 0.65 times book value. In comparison, Endeavour Silver trades at 1.48 P/B and First Majestic Silver trades at 2.77 P/B. Coeur d'Alene looks cheap compared to its peers.

Bottom Line
Coeur d'Alene has suffered a hefty drop this year, leading shares to trade at a significant discount to book value. If you believe that silver prices will continue to rebound, Coeur d'Alene could be a cheap option.

It's important to notice that silver miners are overwhelmingly dependent upon the price of silver, so if the price continues to fall, there's little they can do to prevent their shares from depreciating further.

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