UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly
period ended June 30, 2008
OR
[ ] Transition Report
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the
transition period from ______ to ______
Commission file number
1-8641
_________________
COEUR DALENE MINES CORPORATION
|
(Exact name of registrant as specified in its charter)
|
Idaho
|
82-0109423
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
PO Box I,
|
|
505 Front Ave.
|
Coeur dAlene, Idaho
|
83816
|
(Address of principal executive offices)
|
(Zip Code)
|
(208) 667-3511
|
(Registrants telephone number, including area code)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.
Large accelerated filer |X|
|
Accelerated filer |_|
|
Non-accelerated filer |_|
|
Smaller reporting company |_|
|
Indicate by check mark if the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_|
No |X|
Applicable only to corporate
issuers: Indicate the number of shares outstanding of each of the Issuers classes of
common stock, as of the latest practicable date: Common stock, par value $1.00, of which
551,917,299 shares were issued and outstanding as of August 5, 2008.
COEUR DALENE
MINES CORPORATION
INDEX
|
|
Page No.
|
Part I.
|
Financial Information
|
|
Item 1.
|
Financial Statements
|
|
Consolidated Balance Sheets - Unaudited
|
3
|
|
June 30, 2008 and December 31, 2007
|
|
Consolidated Statements of Operations and
|
5
|
|
Comprehensive Income - Unaudited
|
|
Three and Six Months Ended June 30, 2008 and 2007
|
|
Consolidated Statements of Cash Flows - Unaudited
|
6
|
|
Three and Six Months Ended June 30, 2008 and 2007
|
|
Notes to Consolidated Financial Statements - Unaudited
|
7
|
Item 2.
|
Managements Discussion and Analysis of
|
|
Financial Condition and Results of Operations
|
30
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
54
|
Item 4.
|
Controls and Procedures
|
54
|
Part II.
|
Other Information
|
55
|
Item 1.
|
Legal Proceedings
|
55
|
Item 1A.
|
Risk Factors
|
55
|
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
60
|
Item 6.
|
Exhibits
|
61
|
2
COEUR DALENE MINES
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(Unaudited)
|
June 30,
2008
|
December 31,
2007
|
ASSETS
|
(In thousands)
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
97,842
|
|
$
|
98,671
|
|
Short-term investments
|
|
|
|
88,665
|
|
|
53,039
|
|
Receivables
|
|
|
|
76,556
|
|
|
56,121
|
|
Ore on leach pad
|
|
|
|
19,219
|
|
|
25,924
|
|
Metal and other inventory
|
|
|
|
28,439
|
|
|
18,918
|
|
Deferred tax assets
|
|
|
|
2,745
|
|
|
3,573
|
|
Prepaid expenses and other
|
|
|
|
8,293
|
|
|
7,821
|
|
|
|
|
|
|
|
|
|
|
321,759
|
|
|
264,067
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
Property, plant and equipment
|
|
|
|
415,563
|
|
|
322,733
|
|
Less accumulated depreciation
|
|
|
|
(80,074
|
)
|
|
(69,937
|
)
|
|
|
|
|
|
|
|
|
|
335,489
|
|
|
252,796
|
|
MINING PROPERTIES
|
|
|
Operational mining properties
|
|
|
|
217,921
|
|
|
143,324
|
|
Less accumulated depletion
|
|
|
|
(128,002
|
)
|
|
(124,401
|
)
|
|
|
|
|
|
|
|
|
|
89,919
|
|
|
18,923
|
|
Mineral interests
|
|
|
|
1,758,226
|
|
|
1,731,715
|
|
Less accumulated depletion
|
|
|
|
(13,978
|
)
|
|
(11,639
|
)
|
|
|
|
|
|
|
|
|
|
1,744,248
|
|
|
1,720,076
|
|
Non-producing and development properties
|
|
|
|
299,019
|
|
|
311,469
|
|
|
|
|
|
|
|
|
|
|
2,133,186
|
|
|
2,050,468
|
|
OTHER ASSETS
|
|
|
Ore on leach pad, non-current portion
|
|
|
|
15,520
|
|
|
24,995
|
|
Restricted assets
|
|
|
|
25,926
|
|
|
25,760
|
|
Receivables, non-current
|
|
|
|
22,021
|
|
|
18,708
|
|
Debt issuance costs, net
|
|
|
|
13,122
|
|
|
4,848
|
|
Deferred tax assets
|
|
|
|
775
|
|
|
1,109
|
|
Other
|
|
|
|
8,905
|
|
|
8,943
|
|
|
|
|
|
|
|
|
|
|
86,269
|
|
|
84,363
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
$
|
2,876,703
|
|
$
|
2,651,694
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
3
COEUR DALENE
MINES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
June 30,
2008
|
December 31,
2007
|
|
(In thousands, except
share data)
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
Accounts payable
|
|
|
$
|
52,950
|
|
$
|
49,642
|
|
Accrued liabilities and other
|
|
|
|
9,687
|
|
|
9,072
|
|
Accrued income taxes
|
|
|
|
7,512
|
|
|
7,547
|
|
Accrued payroll and related benefits
|
|
|
|
7,469
|
|
|
9,342
|
|
Accrued interest payable
|
|
|
|
3,144
|
|
|
1,060
|
|
Credit facility, current portion of long-term debt and capital lease obligations
|
|
|
|
27,055
|
|
|
30,831
|
|
Current portion of reclamation and mine closure
|
|
|
|
4,909
|
|
|
4,183
|
|
|
|
|
|
|
|
|
|
|
112,726
|
|
|
111,677
|
|
LONG-TERM LIABILITIES
|
|
|
3 1/4% Convertible Senior Notes due March 2028
|
|
|
|
230,000
|
|
|
--
|
|
1 1/4% Convertible Senior Notes due January 2024
|
|
|
|
180,000
|
|
|
180,000
|
|
Reclamation and mine closure
|
|
|
|
29,970
|
|
|
30,629
|
|
Deferred income taxes
|
|
|
|
568,750
|
|
|
573,681
|
|
Obligations under capital leases
|
|
|
|
20,648
|
|
|
23,661
|
|
Other long-term liabilities
|
|
|
|
6,391
|
|
|
4,679
|
|
|
|
|
|
|
|
|
|
|
1,035,759
|
|
|
812,650
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
(See Notes F, I, J, K, L, M, N and O)
|
|
|
SHAREHOLDERS EQUITY
|
|
|
Common Stock, par value $1.00 per share; authorized 750,000,000
|
|
|
shares in 2008 and 2007, issued 551,923,705 shares in 2008 and
|
|
|
551,512,230 shares in 2007 (1,059,211 shares held in treasury)
|
|
|
|
551,924
|
|
|
551,512
|
|
Additional paid-in capital
|
|
|
|
1,609,160
|
|
|
1,607,737
|
|
Accumulated deficit
|
|
|
|
(419,987
|
)
|
|
(419,331
|
)
|
Shares held in treasury
|
|
|
|
(13,190
|
)
|
|
(13,190
|
)
|
Accumulated other comprehensive income
|
|
|
|
311
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
1,728,218
|
|
|
1,727,367
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
$
|
2,876,703
|
|
$
|
2,651,694
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
4
COEUR DALENE
MINES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
REVENUES
|
(In thousands except per share data)
|
Sales of metal
|
|
|
$
|
50,024
|
|
$
|
51,664
|
|
$
|
107,310
|
|
$
|
102,524
|
|
COSTS AND EXPENSES
|
|
|
Production costs applicable to sales
|
|
|
|
24,873
|
|
|
26,740
|
|
|
50,158
|
|
|
47,760
|
|
Depreciation and depletion
|
|
|
|
6,306
|
|
|
5,753
|
|
|
11,969
|
|
|
12,774
|
|
Administrative and general
|
|
|
|
7,032
|
|
|
5,710
|
|
|
15,557
|
|
|
11,884
|
|
Exploration
|
|
|
|
4,725
|
|
|
2,549
|
|
|
8,468
|
|
|
5,430
|
|
Pre-development
|
|
|
|
10,657
|
|
|
--
|
|
|
16,441
|
|
|
--
|
|
Litigation settlement
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
|
53,593
|
|
|
40,752
|
|
|
102,593
|
|
|
78,355
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
|
(3,569
|
)
|
|
10,912
|
|
|
4,717
|
|
|
24,169
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSE
|
|
|
Interest and other income
|
|
|
|
177
|
|
|
4,316
|
|
|
1,507
|
|
|
8,866
|
|
Interest expense, net of capitalized interest
|
|
|
|
(867
|
)
|
|
(83
|
)
|
|
(1,687
|
)
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
Total other income and expense
|
|
|
|
(690
|
)
|
|
4,233
|
|
|
(180
|
)
|
|
8,696
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
|
(4,259
|
)
|
|
15,145
|
|
|
4,537
|
|
|
32,865
|
|
Income tax provision
|
|
|
|
(1,118
|
)
|
|
(3,227
|
)
|
|
(5,193
|
)
|
|
(6,928
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
|
(5,377
|
)
|
|
11,918
|
|
|
(656
|
)
|
|
25,937
|
|
Other comprehensive income (loss)
|
|
|
|
(1,040
|
)
|
|
688
|
|
|
(328
|
)
|
|
516
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
|
$
|
(6,417
|
)
|
$
|
12,606
|
|
$
|
(984
|
)
|
$
|
26,453
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED INCOME (LOSS) PER SHARE
|
|
|
Basic
|
|
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
$
|
0.00
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
$
|
0.00
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock
|
|
|
Basic
|
|
|
|
550,096
|
|
|
277,763
|
|
|
550,030
|
|
|
277,720
|
|
Diluted
|
|
|
|
550,096
|
|
|
302,240
|
|
|
550,030
|
|
|
302,205
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
COEUR DALENE
MINES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
(In thousands)
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
(5,377
|
)
|
$
|
11,918
|
|
$
|
(656
|
)
|
$
|
25,937
|
|
Add (deduct) non-cash items:
|
|
|
Depreciation and depletion
|
|
|
|
6,306
|
|
|
5,753
|
|
|
11,969
|
|
|
12,774
|
|
Deferred taxes
|
|
|
|
(2,972
|
)
|
|
901
|
|
|
(3,900
|
)
|
|
1,274
|
|
Unrealized loss on embedded derivative, net
|
|
|
|
4,698
|
|
|
1,125
|
|
|
3,524
|
|
|
1,090
|
|
Share based compensation
|
|
|
|
297
|
|
|
1,044
|
|
|
1,888
|
|
|
1,606
|
|
Other
|
|
|
|
(830
|
)
|
|
(252
|
)
|
|
496
|
|
|
(231
|
)
|
Changes in Operating Assets and Liabilities:
|
|
|
Receivables and other assets
|
|
|
|
(12,178
|
)
|
|
(1,780
|
)
|
|
(26,659
|
)
|
|
5,784
|
|
Prepaid and other current assets
|
|
|
|
257
|
|
|
(3,004
|
)
|
|
440
|
|
|
(3,160
|
)
|
Inventories
|
|
|
|
2,062
|
|
|
(404
|
)
|
|
6,659
|
|
|
(5,446
|
)
|
Accounts payable and accrued liabilities
|
|
|
|
5,162
|
|
|
(3,757
|
)
|
|
(3,985
|
)
|
|
(5,417
|
)
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
|
(2,575
|
)
|
|
11,544
|
|
|
(10,224
|
)
|
|
34,211
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Capital expenditures
|
|
|
|
(104,127
|
)
|
|
(57,701
|
)
|
|
(168,636
|
)
|
|
(99,704
|
)
|
Purchases of short-term investments
|
|
|
|
(153,943
|
)
|
|
(17,267
|
)
|
|
(245,622
|
)
|
|
(50,578
|
)
|
Proceeds from sales of short-term investments
|
|
|
|
157,911
|
|
|
22,101
|
|
|
209,709
|
|
|
82,261
|
|
Other
|
|
|
|
(89
|
)
|
|
(41
|
)
|
|
(38
|
)
|
|
427
|
|
|
|
|
|
|
|
|
|
|
CASH USED IN INVESTING ACTIVITIES
|
|
|
|
(100,248
|
)
|
|
(52,908
|
)
|
|
(204,587
|
)
|
|
(67,594
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Proceeds from issuance of convertible notes
|
|
|
|
--
|
|
|
--
|
|
|
230,000
|
|
|
--
|
|
Repayment of credit facility, long-term debt and capital leases
|
|
|
|
(5,338
|
)
|
|
(392
|
)
|
|
(7,826
|
)
|
|
(778
|
)
|
Proceeds from short-term borrowings
|
|
|
|
--
|
|
|
--
|
|
|
694
|
|
|
--
|
|
Payment of debt issuance costs
|
|
|
|
(166
|
)
|
|
--
|
|
|
(8,550
|
)
|
|
--
|
|
Common stock repurchased
|
|
|
|
--
|
|
|
--
|
|
|
(372
|
)
|
|
(277
|
)
|
Other
|
|
|
|
(9
|
)
|
|
--
|
|
|
36
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
|
(5,513
|
)
|
|
(392
|
)
|
|
213,982
|
|
|
(1,057
|
)
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
(108,336
|
)
|
|
(41,756
|
)
|
|
(829
|
)
|
|
(34,440
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
|
206,178
|
|
|
277,988
|
|
|
98,671
|
|
|
270,672
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$
|
97,842
|
|
$
|
236,232
|
|
$
|
97,842
|
|
$
|
236,232
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
6
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share, per ounce amounts)
NOTE A BASIS OF
PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim
financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating
results for the three and six-month period ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008. The
balance sheet at December 31, 2007 has been derived from the audited financial statements
at that date. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Coeur dAlene Mines Corporation (Coeur
or the Company) Annual Report on Form 10-K for the year ending December 31,
2007.
NOTE B SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation:
The consolidated financial statements include the wholly-owned
subsidiaries of the Company, the most significant of which are Coeur Rochester, Inc.,
Coeur Alaska, Inc., CDE Cerro Bayo Ltd., Coeur Argentina, CDE Australia, Empressa Minera
Manquiri S.A., Bolnisi Gold N.L. and Palmarejo Silver and Gold Corporation. The
consolidated financial statements also include all entities in which voting control of
more than 50% is held by the Company. The Company has no investments in entities in which
it has greater than 50% ownership interest accounted for using the equity method.
Intercompany balances and transactions have been eliminated in consolidation. Investments
in corporate joint ventures where the Company has ownership of 50% or less and funds its
proportionate share of expenses are accounted for under the equity method. The Company has
no investments in entities in which it has a greater than 20% ownership interest accounted
for using the cost method.
Revenue
Recognition
: Pursuant to guidance in Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition for Financial Statements, revenue is recognized, net
of treatment and refining charges, from a sale when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable, no obligations remain
and collectability is probable. The passing of title to the customer is based on the 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, in an identical form to the product sold.
Under
our 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 metal prices. Revenues and production costs applicable to
sales are recorded on a gross basis 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 a provisional payment based upon provisional assays and quoted metal
prices. Final settlement is based on the average applicable price for a specified future
period, and generally occurs from three to six months after shipment. Final sales are
settled using smelter weights, settlement assays (average of assays exchanged and/or
umpire assay results) and are priced as specified in the smelter contract. The
Companys provisionally priced sales 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 measured at the forward price at the time of
sale. The embedded derivative does not qualify for hedge accounting. The embedded
derivative is recorded as a derivative asset, in prepaid expenses and other assets or as a
derivative liability in accrued liabilities and other on the balance sheet and is adjusted
to fair value through revenue each period until the date of final gold and silver
settlement. The form of the material being sold, after deduction for smelting and refining
is in an identical form to that sold on the London Bullion Market. The form of the product
is metal in flotation concentrate, which is the final process for which the Company is
responsible.
7
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
The
effects of forward sales contracts are reflected in revenue at the date the related
precious metals are delivered or the contracts expire. Third party smelting and refining
costs of $3.2 million and $2.0 million and $5.7 million and $3.7 million during the three
and six months ended June 30, 2008 and 2007, respectively, were recorded as a reduction of
revenue.
At
June 30, 2008, the Company had outstanding provisionally priced sales of $63.4 million,
consisting of 2.7 million ounces of silver and 16,700 ounces of gold. For each one cent
per ounce change in realized silver price, revenue would vary (plus or minus)
approximately $27,000; and for each one dollar per ounce change in realized gold price,
revenue would vary (plus or minus) approximately $16,700. At June 30, 2007, the Company
had outstanding provisionally priced sales of $73.1 million, consisting of 3.8 million
ounces of silver and 34,159 ounces of gold. For each one cent per ounce change in realized
silver price, revenue would vary (plus or minus) approximately $38,300; and for each one
dollar per ounce change in realized gold price, revenue would vary (plus or minus)
approximately $34,200.
Short-term
Investments:
Short-term investments principally consist of highly-liquid United
States, foreign government, and corporate securities and all are classified as
available-for-sale and are reported at fair value with maturities that range from three
months to forty years. Unrealized gains and losses on these investments are recorded in
accumulated other comprehensive income as a separate component of shareholders
equity. Any decline in market value considered to be other than temporary is recognized in
determining net income/loss. Realized gains and losses from the sale of these investments
are included in determining net income/loss. The Company maintains a pledge of collateral
agreement to reserve $1.0 million against the investment portfolio to cover credit
exposure related to ACH transactions.
Ore
on Leach Pad
: 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 is 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 dorè, 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 $34.7 million as of June 30, 2008. Of this amount,
$19.2 million was reported as a current asset and $15.5 million was reported as a
non-current asset. The distinction between current and non-current is based upon the
expected length of time necessary for the leaching process to remove the metals from the
broken ore. The historical cost of the metal that is expected to be extracted within
twelve months is classified as current and the historical cost of metals contained within
the broken ore that will be extracted beyond twelve months is classified as non-current.
Inventories of ore on leach pad are valued based on actual production costs incurred to
produce and place ore on the leach pad, adjusted for effects on monthly production of
costs of abnormal production levels, less costs allocated to minerals recovered through
the leach process.
8
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
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 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 approximately 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. In August 2007, the
Company terminated mining and crushing operations at the Rochester mine as ore reserves
were fully mined. Residual heap leach activities are expected to continue through 2011.
Metal
and Other Inventory:
Inventories include concentrate ore, dorè, ore in
stockpiles and operating materials and supplies. The classification of inventory is
determined by the stage at which the ore is in the production process. To the extent there
is work in process inventories at the Endeavor and Broken Hill mines, such amounts will be
carried as inventories. Inventories of ore in stock piles are sampled for gold and silver
content and are valued based on the lower of actual costs incurred or estimated net
realizable value based upon the period ending prices of gold and silver. Material that
does not contain a minimum quantity of gold and silver to cover estimated processing
expense to recover the contained gold and silver is not classified as inventory and is
assigned no value. All inventories are stated at the lower of cost or market, with cost
being determined using a weighted average cost method. Concentrate and dorè
inventory includes product at the mine site and product held by refineries and are also
valued at lower of cost or market value. Concentrate inventories associated with the
Endeavor and Broken Hill mines are held by third parties. Metal inventory costs include
direct labor, materials, depreciation, depletion and amortization as well as
administrative overhead costs relating to mining activities.
Property,
Plant, and Equipment:
Expenditures for new facilities, assets acquired pursuant to
capital leases, new assets or expenditures that extend the useful lives of existing
facilities are capitalized and depreciated using the straight-line method at rates
sufficient to depreciate such costs over the shorter of estimated productive lives of such
facilities or the useful life of the individual assets. Productive lives range from 7 to
31 years for buildings and improvements, 3 to 13 years for machinery and equipment and 3
to 7 years for furniture and fixtures. Certain mining equipment is depreciated using the
units-of-production method based upon estimated total proven and probable reserves.
Maintenance and repairs are expensed as incurred.
Operational
Mining Properties and Mine Development:
Capitalization of mine development costs that
meet the definition of an asset begins once all operating permits have been secured,
mineralization is classified as proven and probable reserves and a final feasibility study
has been completed. Mine development costs include engineering and metallurgical studies,
drilling and other related costs to delineate an ore body, the removal of overburden to
initially expose an ore body at open pit surface mines and the building of access ways,
shafts, lateral access, drifts, ramps and other infrastructure at underground mines. Costs
incurred during the start-up phase of a mine are expensed as incurred. Costs incurred
before mineralization is classified as proven and probable reserves are expensed and
classified as Exploration or Pre-development expense. All capitalized costs are amortized
using the units of production method over the estimated life of the ore body based on
recoverable ounces to be mined from proven and probable reserves. Interest expense
allocable to the cost of developing mining properties and to construct new facilities is
capitalized until assets are ready for their intended use. Gains or losses from sales or
retirements of assets are included in other income or expense.
9
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Drilling
and related costs incurred at our operating mines are expensed as incurred as exploration
expense, unless we can conclude with a high degree of confidence, prior to the
commencement of a drilling program, that the drilling costs will result in the conversion
of a mineral resource into proven and probable reserves. Our assessment is based on the
following factors: results from previous drill programs; results from geological models;
results from a mine scoping study confirming economic viability of the resource; and
preliminary estimates of mine inventory, ore grade, cash flow and mine life. In addition,
the Company must have all permitting and/or contractual requirements necessary to have the
right to and/or control of the future benefit from the targeted ore body. The costs of a
drilling program that meet these criteria are capitalized as mine development costs. All
other drilling and related costs, including those beyond the boundaries of the development
and production stage properties, are expensed as incurred.
Drilling
and related costs of approximately $0.3 million and $1.1 million, respectively, for the
three and six months ended June 30, 2008 and $0.8 million and $1.7 million, respectively,
for the three and six months ended June 30, 2007, met the criteria for capitalization
listed above at our properties that are in the development and production stages.
The
cost of removing overburden and waste materials to access the ore body at an open pit mine
prior to the production phase are referred to as pre-stripping costs.
Pre-stripping costs are capitalized during the development of an open pit mine. Stripping
costs incurred during the production phase of a mine are variable production costs that
are included as a component of inventory to be recognized in production costs applicable
to sales in the same period as the revenue from the sale of inventory.
Mineral
Interests:
Significant payments related to the acquisition of the land and mineral
rights are capitalized as incurred. Prior to acquiring such land or mineral rights, the
Company generally makes a preliminary evaluation to determine that the property has
significant potential to develop an economic ore body. The time between initial
acquisition and full evaluation of a propertys potential is variable and is
determined by many factors including: location relative to existing infrastructure, the
propertys stage of development, geological controls and metal prices. If a mineable
ore body is discovered, such costs are amortized when production begins using the
units-of-production method based on recoverable ounces to be mined from proven and
probable reserves. If no mineable ore body is discovered, such costs are expensed in the
period in which it is determined the property has no future economic value. The Company
amortizes its mineral interests in the Endeavor and Broken Hill mines using the units of
production method.
Asset
Impairment:
The Company follows Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to evaluate the recoverability of its assets. Management reviews and
evaluates its long-lived assets for impairment when events and changes in circumstances
indicate that the related carrying amounts of its assets may not be recoverable.
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. An impairment loss is measured and recorded
based on the difference between book value and discounted estimated future cash flows or
the application of an expected present value technique to estimate fair value in the
absence of a market price. Future cash flows include estimates of recoverable ounces, gold
and silver prices (considering current and historical prices, price trends and related
factors), production levels and capital, all based on life-of-mine plans and projections.
Assumptions underlying future cash flow estimates are subject to risks and uncertainties.
If the assets are impaired, a calculation of fair value is performed and if the fair value
is lower than the carrying value of the assets, the assets are reduced to their fair
market value. Any differences between significant assumptions and market conditions and/or
the Companys operating performance could have a material effect on the
Companys determination of ore reserves, or its ability to recover the carrying
amounts of its long-lived assets resulting in impairment charges. In estimating future
cash flows, assets are grouped at the lowest level for which there are identifiable cash
flows that are largely independent of cash flows from other asset groups. Generally, in
estimating future cash flows, all assets are grouped at a particular mine for which there
is identifiable cash flow.
10
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Restricted
Cash and Cash Equivalents:
The Company, under the terms of its lease, self insurance,
and bonding agreements with certain banks, lending institutions and regulatory agencies,
is required to collateralize certain portions of the Companys obligations. The
Company has collateralized these obligations by assigning certificates of deposit that
have maturity dates ranging from three months to a year, to the respective institutions or
agency. At June 30, 2008 and December 31, 2007, the Company held certificates of deposit
and cash under these agreements of $25.9 million and $25.8 million, respectively,
restricted for this purpose. The ultimate timing for the release of the collateralized
amounts is dependent on the timing and closure of each mine. In order to release the
collateral, the Company must seek approval from certain government agencies responsible
for monitoring the mine closure status. Collateral could also be released to the extent
the Company was able to secure alternative financial assurance satisfactory to the
regulatory agencies. The Company believes there is a reasonable probability that the
collateral will remain in place beyond a twelve-month period and has therefore classified
these investments as long-term.
Reclamation
and Remediation Costs:
The Company follows SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction,
development and normal use of the asset. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation 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 managements 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.
Foreign
Currency:
Substantially all assets and liabilities of foreign subsidiaries are
translated at exchange rates in effect at the end of each period. Revenues and expenses
are translated at the average exchange rate for the period. Foreign currency transaction
gains and losses are included in the determination of net income.
11
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Derivative
Financial Instruments
: The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, (as amended by SFAS No. 137) and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. These Statements
require recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. Appropriate accounting for
changes in the fair value of derivatives held is dependent on whether the derivative
instrument is designated and qualifies as an accounting hedge and on the classification of
the hedge transaction.
For
derivative instruments that are designated and qualify as cash flow hedges, the effective
portions of changes in fair value of the derivative are recorded in other comprehensive
income (loss), and are recognized in the Statement of Consolidated Operations when the
hedged item affects net income (loss) for the period. Ineffective portions of changes in
the fair value of cash flow hedges are recognized currently in earnings. Refer to Note J
Derivative Financial Instruments and Fair Value of Financial Instruments.
Stock-based
Compensation Plans
: Effective January 1, 2006, the Company began recording
compensation expense associated with awards of equity instruments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment. Prior to January 1, 2006, the Company accounted for
awards of equity instruments according to the provisions of SFAS No. 123 and related
interpretations, and therefore no related compensation expense was recorded for awards
granted with no intrinsic value. The Company adopted the modified prospective transition
method provided for under SFAS No. 123(R), and, consequently, has not retroactively
adjusted results from prior periods. Under this transition method, compensation cost
associated with awards of equity instruments recognized includes: 1) amortization related
to the remaining unvested portion of all awards granted for the fiscal years 1995 to 2005,
based on the grant date fair value, estimated in accordance with the original provisions
of SFAS No. 123, Accounting for Stock-Based Compensation; and 2) amortization
related to all equity instrument awards granted subsequent to December 31, 2005, based on
the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).
The compensation costs are included in administrative and general expenses, production
costs applicable to sales and the cost of self-constructed property, plant and equipment
as deemed appropriate.
The
Company continues to estimate the fair value of each stock option award using the
Black-Scholes option valuation model. In addition, the Company estimates the fair value of
performance share grants using a Monte Carlo simulation valuation model. The Company
estimates forfeitures of stock based awards on historical data and periodically adjusts
the forfeiture rate. The adjustment of the forfeiture rate will result in a cumulative
adjustment in the period the forfeiture estimate is changed.
Income
Taxes
: The Company computes income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires 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 basis and the tax basis 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 the 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 Companys net deferred
tax assets for which it is more likely than not that they will not be realized.
12
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
During
the second quarter of 2008, the Company provided liabilities for uncertain tax positions
in accordance with the requirements of FASB Interpretation No. 48, or FIN 48, Accounting
for Uncertainty in Income Taxes. FIN 48 requires that we evaluate positions taken
or expected to be taken in our income tax filings under jurisdictions where we are
required to file tax returns and provide liability for any positions that do not meet a
more likely than not likelihood of being sustained if examined by tax
authorities. At June 30, 2008, the Company recorded an accrual of $0.7 million to correct
for immaterial errors related to uncertain tax positions, and we expect this liability
to increase by approximately $0.1 million by December 31, 2008. The Company has
substantially concluded all U.S. Federal Income tax matters for years through 1999.
Federal Income tax returns for 2000 through 2007 are subject to examination. The Company
recognizes potential incurred interest and penalties related to unrecognized tax benefits
in income tax expense. The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of multiple state and foreign jurisdictions.
Comprehensive
Income:
Comprehensive income includes net income as well as changes in
stockholders equity that result from transactions and events other than those with
stockholders. Items of comprehensive income include the following:
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Net income (loss)
|
|
|
$
|
(5,377
|
)
|
$
|
11,918
|
|
$
|
(656
|
)
|
$
|
25,937
|
|
Unrealized gain (loss) on marketable securities
|
|
|
|
(21
|
)
|
|
66
|
|
|
(115
|
)
|
|
161
|
|
Change in fair value of cash flow hedges,
|
|
|
net of settlements
|
|
|
|
(1,019
|
)
|
|
622
|
|
|
(213
|
)
|
|
349
|
|
Other
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,417
|
)
|
$
|
12,606
|
|
$
|
(984
|
)
|
$
|
26,453
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share:
The Company follows SFAS No. 128, Earnings Per
Share, which requires the presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into
common stock. The effect of potentially dilutive stock options and convertible Senior
Notes outstanding in the three and six month periods ended June 30, 2008 and 2007 are as
follows:
|
Three Months Ended
June 30, 2008
|
Six Months Ended
June 30, 2008
|
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
$
|
(5,377
|
)
|
|
550,096
|
|
$
|
(0.01
|
)
|
$
|
(656
|
)
|
|
550,030
|
|
$
|
--
|
|
Effect of Dilutive Securities
|
|
|
Equity awards
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
1.25% Convertible Notes
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
Net income (loss) available to common stockholders
|
|
|
$
|
(5,377
|
)
|
|
550,096
|
|
$
|
(0.01
|
)
|
$
|
(656
|
)
|
|
550,030
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Three Months Ended
June 30, 2008
|
Six Months Ended
June 30, 2008
|
(In thousands except for EPS)
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
$
|
11,918
|
|
|
277,763
|
|
$
|
0.04
|
|
$
|
25,937
|
|
|
277,720
|
|
$
|
0.09
|
|
Effect of Dilutive Securities
|
|
|
Equity awards
|
|
|
|
--
|
|
|
793
|
|
|
--
|
|
|
--
|
|
|
801
|
|
|
--
|
|
1.25% Convertible Notes
|
|
|
|
74
|
|
|
23,684
|
|
|
--
|
|
|
148
|
|
|
23,684
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
Net income available to common stockholders
|
|
|
$
|
11,992
|
|
|
302,240
|
|
$
|
0.04
|
|
$
|
26,085
|
|
|
302,205
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares
(23,684,211 shares attributed to the 1.25% Convertible Senior Notes and 3,124,062 shares
attributed to outstanding options and non-vested shares) have been excluded from the
earnings per share calculation for the three and six months ended June 30, 2008 as their
effect was anti-dilutive. The 3 ¼% Convertible Senior Notes were not included in
the computation of diluted EPS because there is no excess conversion value over the
principal amount of the notes.
Debt
Issuance Costs:
Costs associated with the issuance of debt are included in other
noncurrent assets and are amortized over the term of the related debt.
Use
of Estimates:
The preparation of the Companys consolidated financial statements
in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the amounts
reported in their consolidated financial statements and accompanying notes. The areas
requiring the use of managements estimates and assumptions relate to recoverable
ounces from proven and probable reserves that are the basis of future cash flow estimates
and units-of-production depreciation and amortization calculations; useful lives utilized
for depreciation, depletion and amortization; estimates of future cash flows for long
lived assets; estimates of recoverable gold and silver ounces in ore on leach pad; the
amount and timing of reclamation and remediation costs; valuation allowance for deferred
tax assets; and other employee benefit liabilities.
Reclassifications:
Certain reclassifications of prior year balances have been made to conform to the current
year presentation. These reclassifications had no impact on the Companys
consolidated financial position, results of operations or cash flows for the periods
presented. On June 27, 2008 the Company reclassified approximately $71.8 million from
non-producing and development properties to operational mining properties related to the
commencement of operations at the San Bartolomé mine.
Recent
Accounting Pronouncements and Developments:
Accounting
for Convertible Debt Instruments
In
May 2008, the FASB issued FSP No. APB 14-a Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (the FSP). The FSP applies to convertible debt instruments
that, by their stated terms, may be settled in cash (or other assets) upon conversion,
including partial cash settlement, unless the embedded conversion option is required to be
separately accounted for as a derivative under FASB Statement No. 133. Convertible
debt instruments within the scope of the FSP are not addressed by the existing APB 14. The
FSP would require that the liability and equity components of convertible debt instruments
within the scope of the FSP shall be separately accounted for in a manner that reflects
the entitys nonconvertible debt borrowing rate. This will require an allocation of
the convertible debt proceeds between the liability component and the embedded conversion
option (i.e., the equity component). The difference between the principal amount of the
debt and the amount of the proceeds allocated to the liability component would be reported
as a debt discount and subsequently amortized to earnings over the instruments
expected life using the effective interest method. FSP APB 14-1 is effective for the
Companys fiscal year beginning January 1, 2009 and will be applied retrospectively
to all periods presented. The Company estimates that approximately $140.1 million of debt
discount will be recorded and the effective interest rate on the Companys 3 1/4%
Convertible Senior Notes will increase by approximately 7.6 percentage points to 10.8% for
the amortization of the debt discount.
14
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
NOTE C- RECENTLY ADOPTED
ACCOUNTING STANDARDS
On
January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (fair value option) with
changes in fair value reported in earnings. The Company already records marketable
securities at fair value in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and derivative instruments and hedging
activities at fair value in accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS 133). The adoption of SFAS 159
had no impact on the financial statements as management did not elect the fair value
option for any other financial instruments or certain other assets and liabilities.
On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements as
it relates to financial assets and financial liabilities. In February 2008, the FASB staff
issued Staff Position No. 157-2 Effective Date of FASB Statement
No. 157" (FSP FAS 157-2). FSP FAS 157-2 delayed the effective date
of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). The provisions of FSP FAS 157-2 are effective for the Companys
fiscal year beginning January 1, 2009. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements.
SFAS
157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. This standard is now the single source in GAAP for the definition of
fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157
establishes a fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable
inputs) and (2) an entitys own assumptions about market participant assumptions
developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of
the fair value hierarchy under SFAS 157 are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities.
|
|
Level 2
|
Inputs
other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
|
15
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Level 3
|
Inputs that are both significant to the fair value measurement and unobservable.
|
The
following table sets forth the Companys financial assets and liabilities measured at
fair value by level within the fair value hierarchy. As required by SFAS 157, assets and
liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
|
Fair Value at June 30, 2008
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
$
|
40,929
|
|
$
|
40,929
|
|
$
|
--
|
|
$
|
--
|
|
Marketable equity securities
|
|
|
|
701
|
|
|
701
|
|
|
--
|
|
|
--
|
|
Marketable debt securities
|
|
|
|
86,847
|
|
|
86,847
|
|
|
--
|
|
|
--
|
|
Asset-backed commercial paper
|
|
|
|
5,289
|
|
|
--
|
|
|
--
|
|
|
5,289
|
|
Derivative instruments, net
|
|
|
|
(1,351
|
)
|
|
--
|
|
|
(1,351
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,415
|
|
$
|
128,477
|
|
$
|
(1,351
|
)
|
$
|
5,289
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
1.25% debentures
|
|
|
$
|
151,650
|
|
$
|
151,650
|
|
$
|
--
|
|
$
|
--
|
|
3.25% debentures
|
|
|
|
187,450
|
|
|
187,450
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
339,100
|
|
$
|
339,100
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
The
Companys cash equivalents are classified within Level 1 of the fair value hierarchy
because they are valued using quoted market prices. The cash equivalents that are valued
based on quoted market prices in active markets are primarily comprised of commercial
paper and U.S. Treasury securities.
The
Companys marketable debt and equity securities are valued using quoted market prices
in active markets and as such are classified within Level 1 of the fair value hierarchy.
The fair value of the marketable equity securities is calculated as the quoted market
price of the marketable equity security multiplied by the quantity of shares held by the
Company.
The
asset backed commercial paper falls within Level 3 of the fair value hierarchy because
there are no observable market quotes. For these instruments, management uses significant
other observable inputs adjusted for various factors such as liquidity or
managements best estimate of fair value.
The
Companys derivative instruments are valued using quoted market prices and other
significant observable inputs. Such financial instruments consist of foreign currency
contracts and commodities. Such instruments are typically classified within Level 2 of the
fair value hierarchy.
The
Companys outstanding debentures are classified within level 1 of the fair value
hierarchy because they are valued using quoted market prices in active markets.
NOTE D- INVESTMENTS AND
OTHER MARKETABLE SECURITIES
The
Company classifies its investment securities as available-for-sale securities. Pursuant to
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
such securities are measured at fair market value in the financial statements with
unrealized gains or losses recorded in other comprehensive income. At the time securities
are sold or otherwise disposed of, gains or losses are included in net income. The
following is a summary of available-for-sale securities (In thousands):
16
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Available-For-Sale Securities
|
|
Cost
|
Gross
Unrealized
Losses
|
Gross
Unrealized
Gains
|
Estimated
Fair
Value
|
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Corporate
|
|
|
$
|
35,175
|
|
$
|
(9
|
)
|
$
|
2
|
|
$
|
35,168
|
|
U.S. Government
|
|
|
|
53,497
|
|
|
--
|
|
|
--
|
|
|
53,497
|
|
|
|
|
|
|
|
|
|
|
Total current available for sale securities
|
|
|
|
88,672
|
|
|
(9
|
)
|
|
2
|
|
|
88,665
|
|
ABCP
|
|
|
|
5,286
|
|
|
--
|
|
|
3
|
|
|
5,289
|
|
Equity securities
|
|
|
|
99
|
|
|
(1
|
)
|
|
603
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
|
$
|
94,057
|
|
$
|
(10
|
)
|
$
|
608
|
|
$
|
94,655
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
U.S. Corporate
|
|
|
$
|
2,000
|
|
$
|
--
|
|
$
|
--
|
|
$
|
2,000
|
|
U.S. Government
|
|
|
|
51,031
|
|
|
--
|
|
|
8
|
|
|
51,039
|
|
|
|
|
|
|
|
|
|
|
Total current available for sale
|
|
|
|
53,031
|
|
|
--
|
|
|
8
|
|
|
53,039
|
|
securities
|
|
|
ABCP
|
|
|
|
5,286
|
|
|
--
|
|
|
--
|
|
|
5,286
|
|
Equity securities
|
|
|
|
99
|
|
|
--
|
|
|
702
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,416
|
|
$
|
--
|
|
$
|
710
|
|
$
|
59,126
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains and losses are based on the carrying value (cost, net of discount or
premium) of short-term investments sold or adjusted for other than temporary decline in
market value. Short-term investments mature at various dates. There were no realized gains
or losses in the 2008 or 2007 periods.
Asset-Backed
Commercial Paper (ABCP)
The
Company acquired certain asset-backed securities in connection with the Bolnisi and
Palmarejo acquisition. Palmarejo has investments in non-bank sponsored ABCP, of which $6.3
million is invested in Apsley Trust Class E and $0.5 million in Aurora Trust Class A.
Since
a portion of the assets supporting the commercial paper was invested in U.S. sub-prime
residual mortgage-backed securities, the Company determined the fair value of the
investments based on the best available market data for such investments at the date of
acquisition. The Company recorded these investments at the date of the Palmarejo
acquisition, as a non-current asset, at their estimated fair value of $5.3 million. No
impairments beyond the value initially recorded were deemed necessary at June 30, 2008.
The fair value reported may change materially in subsequent periods.
NOTE E METAL AND
OTHER INVENTORIES
Inventories
consist of the following:
|
June 30,
2008
|
December 31,
2007
|
|
(in thousands)
|
Concentrate and dore inventory
|
|
|
$
|
15,449
|
|
$
|
11,221
|
|
Supplies
|
|
|
|
12,990
|
|
|
7,697
|
|
|
|
|
|
|
Metal and other inventories
|
|
|
$
|
28,439
|
|
$
|
18,918
|
|
|
|
|
|
|
|
|
|
NOTE F
STOCK-BASED COMPENSATION PLANS
The
Company has an Annual Incentive Plan, a Long-Term Incentive Plan (the 2003 Long-Term
Incentive Plan) and the 2005 Non-Employee Directors Equity Incentive Plan
(2005 Non-Employee Directors Plan). Total employee compensation expense
charged to operations and capital projects under these Plans was $1.1 million and $3.8
million and $1.7 million and $3.1 million for the three and six months ended June 30, 2008
and 2007, respectively.
17
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Annual Incentive Plan
Under
the Annual Incentive Plan, the Board of Directors may annually approve cash-based awards
to the executive officers and key management employees based on certain Company and
employee performance measures. Cash payments for the six months ended June 30, 2008 and
2007, amounted to $2.6 million and $2.2 million, respectively, and relate to accruals for
the years 2007 and 2006, respectively.
1989 Long-Term Incentive
Plan
Under
the 1989 Long-Term Incentive Plan, as amended by shareholders in 1995, the Company may
grant non-qualified and incentive stock options that are exercisable at prices equal to
the fair market value of the shares on the date of grant and vest cumulatively at an
annual rate of one third during the three-year period following the date of grant. In
addition to stock options, the Companys 1989 Long-Term Incentive Plan provides for
grants of stock appreciation rights (SARs), restricted stock, restricted stock units,
performance shares, performance units, cash based awards, and stock based awards.
The
number of shares authorized to be issued under this plan was 2.9 million shares. There
were 0.6 million shares reserved for issuance under this plan at June 30, 2008 for stock
options previously awarded. No further awards will be made under this plan.
2003 Long-Term Incentive
Plan
The
2003 Long-Term Incentive Plan (the LTIP) was approved by our shareholders on
May 20, 2003, and replaced our prior 1989 Long-Term Incentive Plan. Under the plan, we may
grant nonqualified stock options, incentive stock options, SARs, restricted stock,
restricted stock units, performance shares, performance units, cash-based awards and other
stock-based awards to our executive officers and other key employees.
The
number of shares authorized for grant under this plan was 6.8 million shares. There were
5.4 million shares reserved for issuance under this plan at June 30, 2008. Of the 5.4
million shares, 3.6 million shares can be issued for future grants. There were 1.3 million
options and 0.5 million performance shares outstanding under this plan at June 30, 2008.
Non-Employee
Directors Plan
On
June 3, 2005, the Companys shareholders approved the 2005 Non-Employee
Directors Equity Incentive Plan and authorized 500,000 shares of common stock for
issuance under the plan. During the six months ended June 30, 2008 and June 30, 2007,
55,782 and 59,476 shares were issued in lieu of $0.3 million and $0.3 million,
respectively, of Directors fees. At June 30, 2008, 0.3 million shares were reserved
for issuance under this plan.
Under
the previous Directors plan, options were granted only in lieu of annual
directors fees. At June 30, 2008, 0.4 million shares are reserved for issuance under
this plan for stock options previously awarded. No further grants of options will be made
under this plan.
18
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
As
of June 30, 2008 and 2007, options to purchase 2,355,816 shares and 2,467,561 shares of
common stock, respectively, were outstanding under the Long-Term and the Directors
Plans described above. The options are exercisable at prices ranging from $0.74 to $7.09
per share.
Stock
options granted under the Companys incentive plans vest over three years and are
exercisable over a period not to exceed ten years from the grant date. Exercise prices are
equal to the fair market value of the shares on the date of the grant. The value of each
option award is estimated on the date of the grant using the Black-Scholes option pricing
model.
Restricted
stock grants are recorded based on the fair value of the underlying shares on the date of
grant and vest in equal installments annually over three years. Holders of the restricted
stock are entitled to vote the shares and to receive any dividends declared on the shares.
Performance
share grants are valued using a Monte Carlo simulation valuation model on the date of
grant. Compensation costs ultimately recognized are equal to the grant date fair value.
Vesting is contingent on meeting certain market conditions based on relative total
shareholder return. The performance shares vest at the end of the three-year service
period if the market conditions are met and the employee remains an employee of the
Company. The existence of a market condition requires recognition of compensation cost
over the requisite period regardless of whether the market condition is ever satisfied.
The
compensation expense recognized in the Companys consolidated financial statements
for the three and six months ended June 30, 2008 and 2007 for awards of equity instruments
was $0.2 million and $1.9 million and $1.1 million and $1.7 million, respectively. As of
June 30, 2008, there was $2.2 million of total unrecognized compensation cost (net of
estimated forfeitures) related to unvested stock options, restricted stock grants and
performance share grants which is expected to be recognized over a weighted-average
vesting period of 2.3 years.
The
weighted average fair value of stock options on the date of grant, and the assumptions
used to estimate the fair value of the stock options using the Black-Scholes option
valuation model were as follows:
|
Six Months Ended
June 30,
|
|
2008
|
2007
|
Weighted average fair value of options granted
|
|
|
|
$2.55
|
|
|
$2.35
|
|
Expected volatility
|
|
|
|
56.2%
|
|
|
58.9%
|
|
Expected life
|
|
|
|
6 years
|
|
|
6 years
|
|
Risk-free interest rate
|
|
|
|
3.0%
|
|
|
4.5%
|
|
Expected dividend yield
|
|
|
|
--
|
|
|
--
|
|
The
expected volatility of the option is determined using historical volatilities based on
historical stock prices. The Company estimated the expected life of options granted using
the midpoint between the vesting date and the original contractual term. The risk free
rate was determined using the yield available on U.S. Treasury Zero-coupon issues with a
remaining term equal to the expected life of the option. The Company has not paid
dividends on its common stock since 1996.
The
following table summarizes stock option activity during the six months ended June 30,
2008:
19
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Shares
|
Weighted Average
Exercise Price
|
Stock options outstanding at December 31, 2007
|
|
|
|
2,281,595
|
|
$
|
3.42
|
|
Granted
|
|
|
|
418,486
|
|
|
4.62
|
|
Exercised
|
|
|
|
(9,053
|
)
|
|
3.92
|
|
Canceled/expired
|
|
|
|
(335,212
|
)
|
|
4.95
|
|
|
|
|
|
|
Stock options outstanding at June 30, 2008
|
|
|
|
2,355,816
|
|
$
|
3.42
|
|
|
|
|
|
|
Options
to purchase 1,766,895 shares were exercisable at June 30, 2008 at a weighted average
exercise price of $3.06.
As
of June 30, 2008, the total future compensation cost related to non-vested options not yet
recognized in the statement of income was $0.4 million and the weighted average period
over which these awards are expected to be recognized was 2.3 years.
The
following table summarizes restricted stock activity during the six months ended June 30,
2008:
|
Number of Shares
|
Weighted
Average
Grant
Date Fair
Value
|
Outstanding at December 31, 2007
|
|
|
|
603,195
|
|
$
|
4.20
|
|
Granted
|
|
|
|
493,366
|
|
|
4.40
|
|
Vested
|
|
|
|
(265,705
|
)
|
|
4.22
|
|
Forfeited
|
|
|
|
(119,548
|
)
|
|
4.41
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
|
711,308
|
|
$
|
4.29
|
|
|
|
|
|
|
As
of June 30, 2008, there was $1.1 million of total unrecognized compensation cost related
to restricted awards to be recognized over a weighted-average period of 2.4 years.
The
following table summarizes performance shares activity during the six months ended June
30, 2008:
|
Number of Shares
|
Weighted
Average
Grant
Date Fair
Value
|
Outstanding at December 31, 2007
|
|
|
|
420,543
|
|
$
|
4.45
|
|
Granted
|
|
|
|
214,847
|
|
|
6.27
|
|
Forfeited
|
|
|
|
(141,520
|
)
|
|
5.02
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
|
493,870
|
|
$
|
5.08
|
|
|
|
|
|
|
As
of June 30, 2008, there was $0.7 million of total unrecognized compensation cost related
to performance shares to be recognized over a weighted average period of 2.1 years.
NOTE G- INCOME TAXES
The
Company computes income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach which results in the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax basis of
those assets and liabilities, as well as net operating loss and tax credit carryforwards,
using enacted tax rates in effect in the years in which the differences are expected to
reverse. The Company has U.S. net operating loss carryforwards which expire in 2011
through 2025. Net operating losses in foreign countries generally have an indefinite
carryforward period, however, Mexico has a 10 year carryforward period and carryforwards
expire from 2016 through 2018.
20
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
The
following table summarizes the components of the Companys income tax provision for
the three and six months ended June 30, 2008 and 2007:
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States - Alternative minimum tax
|
|
|
$
|
(988
|
)
|
$
|
(76
|
)
|
$
|
(988
|
)
|
$
|
(309
|
)
|
United States - Foreign withholding
|
|
|
|
(227
|
)
|
|
(283
|
)
|
|
(404
|
)
|
|
(666
|
)
|
Argentina
|
|
|
|
(846
|
)
|
|
(1,308
|
)
|
|
(2,939
|
)
|
|
(2,906
|
)
|
Australia
|
|
|
|
(1,563
|
)
|
|
(659
|
)
|
|
(4,291
|
)
|
|
(1,773
|
)
|
Mexico
|
|
|
|
(17
|
)
|
|
--
|
|
|
(22
|
)
|
|
--
|
|
Canada
|
|
|
|
(20
|
)
|
|
--
|
|
|
(20
|
)
|
|
--
|
|
Bolivia
|
|
|
|
(669
|
)
|
|
--
|
|
|
(669
|
)
|
|
--
|
|
Deferred:
|
|
|
United States
|
|
|
|
1,073
|
|
|
--
|
|
|
1,547
|
|
|
--
|
|
Argentina
|
|
|
|
62
|
|
|
(349
|
)
|
|
371
|
|
|
(174
|
)
|
Australia
|
|
|
|
(375
|
)
|
|
(461
|
)
|
|
135
|
|
|
(361
|
)
|
Bolivia
|
|
|
|
(388
|
)
|
|
--
|
|
|
(388
|
)
|
|
--
|
|
Chile
|
|
|
|
(211
|
)
|
|
(91
|
)
|
|
(1,348
|
)
|
|
(739
|
)
|
Mexico
|
|
|
|
3,051
|
|
|
--
|
|
|
3,823
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
$
|
(1,118
|
)
|
$
|
(3,227
|
)
|
$
|
(5,193
|
)
|
$
|
(6,928
|
)
|
|
|
|
|
|
|
|
|
|
The
income tax provision for the six months ended June 30, 2008 and 2007 varies from the
statutory rate primarily because of differences in tax rates for the Companys
foreign operations and changes in valuation allowances for net deferred tax assets.
NOTE H- SEGMENT REPORTING
Operating
segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision
maker, or decision-making group, in deciding how to allocate resources and in assessing
performance. The Companys chief operating decision-making group is comprised of the
Chief Executive Officer, Chief Financial Officer, the Senior Vice President of Operations
and the President of South America.
The
operating segments are managed separately because each segment represents a distinct use
of Company resources which contribute to Company cash flows in its respective geographic
area. The Companys reportable operating segments include the Rochester, Cerro Bayo,
Martha, San Bartolomé, Kensington, Palmarejo, Endeavor and Broken Hill mining
properties. All operating segments are engaged in the discovery and/or mining of gold and
silver and generate the majority of their revenues from the sale of these precious metal
concentrates and/or refined precious metals. The Cerro Bayo and Martha mines sell precious
metal concentrates, typically under long-term contracts, to smelters located in Japan
(Dowa Mining Ltd.), Mexico (Met-Mex Penoles) and Germany (Nordeutsche). Refined gold and
silver produced by the Rochester mine is principally sold on a spot basis to precious
metals trading banks such as Standard Bank and Mitsui. Concentrates produced at the
Endeavor and Broken Hill mines are sold to Nystar (formerly Zinifex), an Australia
smelter. The Companys exploration programs are reported as other. The other segment
also includes the corporate headquarters, elimination of intersegment transactions and
other items necessary to reconcile to the consolidated amounts. The accounting policies of
the operating segments are the same as those described in the summary of significant
accounting policies above. The Company evaluates performance and allocates resources based
on profit or loss.
21
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Financial
information relating to the Companys segments is as follows:
Segment Reporting
|
Rochester
Mine
|
Cerro
Bayo
Mine
|
Martha
Mine
|
Endeavor
Mine
|
Broken
Hill
Mine
|
San
Bartolome
Mine
|
Kensington
Project
|
Palmarejo
Project
|
Other
|
Total
|
Three Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales of metals
|
|
|
$
|
16,045
|
|
$
|
13,968
|
|
$
|
10,271
|
|
$
|
3,443
|
|
$
|
6,297
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
50,024
|
|
Productions costs applicable to sales
|
|
|
|
11,003
|
|
|
8,009
|
|
|
4,897
|
|
|
197
|
|
|
826
|
|
|
(59
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
24,873
|
|
Depreciation and depletion
|
|
|
|
583
|
|
|
2,214
|
|
|
1,344
|
|
|
552
|
|
|
677
|
|
|
59
|
|
|
--
|
|
|
733
|
|
|
144
|
|
|
6,306
|
|
Exploration expense
|
|
|
|
41
|
|
|
629
|
|
|
1,250
|
|
|
--
|
|
|
--
|
|
|
148
|
|
|
11
|
|
|
1,680
|
|
|
966
|
|
|
4,725
|
|
Other operating expenses
|
|
|
|
--
|
|
|
879
|
|
|
76
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,159
|
|
|
9,612
|
|
|
5,963
|
|
|
17,689
|
|
Interest and other income
|
|
|
|
--
|
|
|
(1,716
|
)
|
|
110
|
|
|
--
|
|
|
--
|
|
|
(1
|
)
|
|
15
|
|
|
484
|
|
|
1,285
|
|
|
177
|
|
Interest expense
|
|
|
|
--
|
|
|
--
|
|
|
69
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,054
|
|
|
(256
|
)
|
|
867
|
|
Income tax (benefit) expense
|
|
|
|
--
|
|
|
211
|
|
|
784
|
|
|
--
|
|
|
--
|
|
|
1,057
|
|
|
--
|
|
|
(3,051
|
)
|
|
2,117
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
$
|
4,418
|
|
$
|
310
|
|
$
|
1,961
|
|
$
|
2,694
|
|
$
|
4,794
|
|
$
|
(1,206
|
)
|
$
|
(1,155
|
)
|
$
|
(9,544
|
)
|
$
|
(7,649
|
)
|
$
|
(5,377
|
)
|
Segment assets
(A)
|
|
|
$
|
48,044
|
|
$
|
56,524
|
|
$
|
42,214
|
|
$
|
43,023
|
|
$
|
28,427
|
|
$
|
248,601
|
|
$
|
319,906
|
|
$
|
1,819,768
|
|
$
|
10,194
|
|
$
|
2,616,701
|
|
Capital expenditures
|
|
|
$
|
151
|
|
$
|
2,896
|
|
$
|
1,852
|
|
$
|
26,511
|
|
$
|
--
|
|
$
|
30,999
|
|
$
|
9,782
|
|
$
|
31,279
|
|
$
|
657
|
|
$
|
104,127
|
|
|
Rochester
Mine
|
Cerro
Bayo
Mine
|
Martha
Mine
|
Endeavor
Mine
|
Broken
Hill
Mine
|
San
Bartolome
Mine
|
Kensington
Project
|
Other
|
Total
|
Three Months Ended
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales of metals
|
|
|
$
|
24,835
|
|
$
|
9,987
|
|
$
|
10,053
|
|
$
|
1,495
|
|
$
|
5,294
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
51,664
|
|
|
|
|
Productions costs applicable to sales
|
|
|
|
13,093
|
|
|
25,651
|
|
|
4,200
|
|
|
132
|
|
|
879
|
|
|
--
|
|
|
(1
|
)
|
|
(17,214
|
)
|
|
26,740
|
|
|
|
|
Depreciation and depletion
|
|
|
|
2,764
|
|
|
1,411
|
|
|
401
|
|
|
122
|
|
|
934
|
|
|
--
|
|
|
--
|
|
|
121
|
|
|
5,753
|
|
|
|
|
Exploration expense
|
|
|
|
--
|
|
|
721
|
|
|
824
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
53
|
|
|
951
|
|
|
2,549
|
|
|
|
|
Other operating expenses
|
|
|
|
--
|
|
|
3
|
|
|
16
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,691
|
|
|
5,710
|
|
|
|
|
Interest and other income
|
|
|
|
73
|
|
|
282
|
|
|
(45
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(2
|
)
|
|
4,008
|
|
|
4,316
|
|
|
|
|
Interest expense
|
|
|
|
--
|
|
|
8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
75
|
|
|
83
|
|
|
|
|
Income tax expense
|
|
|
|
--
|
|
|
91
|
|
|
1,665
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(10
|
)
|
|
1,481
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
$
|
9,051
|
|
$
|
(17,616
|
)
|
$
|
2,902
|
|
$
|
1,241
|
|
$
|
3,481
|
|
$
|
--
|
|
$
|
(44
|
)
|
$
|
12,903
|
|
$
|
11,918
|
|
|
|
|
Segment assets
(A)
|
|
|
$
|
85,035
|
|
$
|
49,464
|
|
$
|
13,250
|
|
$
|
16,341
|
|
$
|
28,425
|
|
$
|
98,353
|
|
$
|
266,582
|
|
$
|
13,298
|
|
$
|
570,748
|
|
|
|
|
Capital expenditures
|
|
|
$
|
92
|
|
$
|
3,815
|
|
$
|
3,001
|
|
$
|
94
|
|
$
|
212
|
|
$
|
16,406
|
|
$
|
33,713
|
|
$
|
368
|
|
$
|
57,701
|
|
|
|
|
|
Rochester
Mine
|
Cerro
Bayo
Mine
|
Martha
Mine
|
Endeavor
Mine
|
Broken
Hill
Mine
|
San
Bartolome
Mine
|
Kensington
Project
|
Palmarejo
Project
|
Other
|
Total
|
Six Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales of metals
|
|
|
$
|
36,030
|
|
$
|
30,925
|
|
$
|
19,018
|
|
$
|
8,634
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
107,310
|
|
Productions costs applicable to sales
|
|
|
|
23,793
|
|
|
16,065
|
|
|
8,253
|
|
|
595
|
|
|
1,511
|
|
|
(59
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
50,158
|
|
Depreciation and depletion
|
|
|
|
1,173
|
|
|
5,032
|
|
|
2,253
|
|
|
979
|
|
|
1,361
|
|
|
59
|
|
|
--
|
|
|
839
|
|
|
273
|
|
|
11,969
|
|
Exploration expense
|
|
|
|
84
|
|
|
1,492
|
|
|
2,249
|
|
|
--
|
|
|
--
|
|
|
173
|
|
|
33
|
|
|
2,682
|
|
|
1,755
|
|
|
8,468
|
|
Other operating expenses
|
|
|
|
--
|
|
|
883
|
|
|
85
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,309
|
|
|
15,397
|
|
|
14,324
|
|
|
31,998
|
|
Interest and other income
|
|
|
|
5
|
|
|
(394
|
)
|
|
(62
|
)
|
|
--
|
|
|
--
|
|
|
(1
|
)
|
|
37
|
|
|
(78
|
)
|
|
2,000
|
|
|
1,507
|
|
Interest expense
|
|
|
|
--
|
|
|
--
|
|
|
69
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,054
|
|
|
564
|
|
|
1,687
|
|
Income tax (benefit) expense
|
|
|
|
--
|
|
|
1,348
|
|
|
2,568
|
|
|
--
|
|
|
--
|
|
|
(1057
|
)
|
|
--
|
|
|
(3,823
|
)
|
|
4,043
|
|
|
5,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
$
|
10,985
|
|
$
|
5,711
|
|
$
|
3,479
|
|
$
|
7,060
|
|
$
|
9,831
|
|
$
|
(1,231
|
)
|
$
|
(1,305
|
)
|
$
|
(16,227
|
)
|
$
|
(18,959
|
)
|
$
|
(656
|
)
|
Segment assets
(A)
|
|
|
$
|
48,044
|
|
$
|
56,524
|
|
$
|
42,214
|
|
$
|
43,023
|
|
$
|
28,427
|
|
$
|
248,601
|
|
$
|
319,906
|
|
$
|
1,819,768
|
|
$
|
10,194
|
|
$
|
2,616,701
|
|
Capital expenditures
|
|
|
$
|
161
|
|
$
|
4,136
|
|
$
|
3,668
|
|
$
|
26,511
|
|
$
|
--
|
|
$
|
67,459
|
|
$
|
19,430
|
|
$
|
46,605
|
|
$
|
666
|
|
$
|
168,636
|
|
22
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Rochester
Mine
|
Cerro
Bayo
Mine
|
Martha
Mine
|
Endeavor
Mine
|
Broken
Hill
Mine
|
San
Bartolome
Mine
|
Kensington
Project
|
Other
|
Total
|
Six Months Ended
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales of metals
|
|
|
$
|
52,297
|
|
$
|
19,768
|
|
$
|
18,065
|
|
|
3,374
|
|
|
9,020
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
102,524
|
|
|
|
|
Productions costs applicable to sales
|
|
|
|
24,849
|
|
|
29,895
|
|
|
8,481
|
|
|
288
|
|
|
1,462
|
|
|
--
|
|
|
(1
|
)
|
|
(17,214
|
)
|
|
47,760
|
|
|
|
|
Depreciation and depletion
|
|
|
|
7,180
|
|
|
2,802
|
|
|
751
|
|
|
279
|
|
|
1,528
|
|
|
--
|
|
|
--
|
|
|
234
|
|
|
12,774
|
|
|
|
|
Exploration expense
|
|
|
|
--
|
|
|
1,415
|
|
|
2,034
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
196
|
|
|
1,785
|
|
|
5,430
|
|
|
|
|
Other operating expenses
|
|
|
|
--
|
|
|
34
|
|
|
21
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
22
|
|
|
12,314
|
|
|
12,391
|
|
|
|
|
Interest and other income
|
|
|
|
126
|
|
|
432
|
|
|
(68
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1
|
|
|
8,375
|
|
|
8,866
|
|
|
|
|
Interest expense
|
|
|
|
--
|
|
|
19
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
151
|
|
|
170
|
|
|
|
|
Income tax expense
|
|
|
|
--
|
|
|
739
|
|
|
3,161
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
10
|
|
|
3,018
|
|
|
6,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
$
|
20,394
|
|
$
|
(14,704
|
)
|
$
|
3,549
|
|
|
2,807
|
|
|
6,030
|
|
|
--
|
|
|
(226
|
)
|
|
8,087
|
|
$
|
25,937
|
|
|
|
|
Segment assets
(A)
|
|
|
$
|
85,035
|
|
$
|
49,464
|
|
$
|
13,250
|
|
|
16,341
|
|
|
28,425
|
|
|
98,353
|
|
|
266,582
|
|
|
13,298
|
|
$
|
570,748
|
|
|
|
|
Capital expenditures
|
|
|
$
|
1,105
|
|
$
|
5,758
|
|
$
|
3,630
|
|
|
2,112
|
|
|
212
|
|
|
27,704
|
|
|
58,631
|
|
|
552
|
|
$
|
99,704
|
|
|
|
|
|
(A)
Segment
assets consist of receivables, prepaids, inventories, property, plant and
equipment, and mining properties
|
|
Revenues
from silver sales were $37.5 million and $35.3 million for the three months ended June
30, 2008 and 2007, respectively. Revenues from gold sales were $12.5 million and $16.4
million for the three months ended June 30, 2008 and 2007, respectively.
|
|
Revenues
from silver sales were $80.9 million and $70.3 million for the six months ended June 30,
2008 and 2007, respectively. Revenues from gold sales were $26.4 million and $32.2
million for the six months ended June 30, 2008 and 2007, respectively.
|
|
June 30,
|
|
2008
|
2007
|
Assets
|
|
|
|
|
|
|
|
|
Total assets for reportable
|
|
|
segments
|
|
|
$
|
2,616,701
|
|
$
|
570,748
|
|
Cash and cash equivalents
|
|
|
|
97,842
|
|
|
236,232
|
|
Short-term investments
|
|
|
|
88,665
|
|
|
36,270
|
|
Other assets
|
|
|
|
73,495
|
|
|
40,662
|
|
|
|
|
Total consolidated assets
|
|
|
$
|
2,876,703
|
|
$
|
883,912
|
|
|
|
|
23
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Three Months Ended
June 30, 2008
|
Revenues
|
Long-Lived
Assets
|
United States
|
|
|
$
|
16,045
|
|
$
|
324,972
|
|
Australia
|
|
|
|
9,740
|
|
|
66,941
|
|
Chile
|
|
|
|
13,968
|
|
|
27,500
|
|
Argentina
|
|
|
|
10,271
|
|
|
20,011
|
|
Bolivia
|
|
|
|
--
|
|
|
221,738
|
|
Mexico
|
|
|
|
--
|
|
|
1,807,341
|
|
Other Foreign Countries
|
|
|
|
--
|
|
|
172
|
|
|
|
|
Total
|
|
|
$
|
50,024
|
|
$
|
2,468,675
|
|
|
|
|
|
Three Months Ended
June 30, 2007
|
Revenues
|
Long-Lived
Assets
|
United States
|
|
|
$
|
24,835
|
|
$
|
271,737
|
|
Australia
|
|
|
|
6,789
|
|
|
44,774
|
|
Chile
|
|
|
|
9,987
|
|
|
23,546
|
|
Argentina
|
|
|
|
10,053
|
|
|
6,575
|
|
Bolivia
|
|
|
|
--
|
|
|
88,636
|
|
Other Foreign Countries
|
|
|
|
--
|
|
|
197
|
|
|
|
|
Total
|
|
|
$
|
51,664
|
|
$
|
435,465
|
|
|
|
|
|
Six Months Ended
June 30, 2008
|
Revenues
|
Long-Lived
Assets
|
United States
|
|
|
$
|
36,030
|
|
$
|
324,972
|
|
Australia
|
|
|
|
21,337
|
|
|
66,941
|
|
Chile
|
|
|
|
30,925
|
|
|
27,500
|
|
Argentina
|
|
|
|
19,018
|
|
|
20,011
|
|
Bolivia
|
|
|
|
--
|
|
|
221,738
|
|
Mexico
|
|
|
|
--
|
|
|
1,807,341
|
|
Other Foreign Countries
|
|
|
|
--
|
|
|
172
|
|
|
|
|
Total
|
|
|
$
|
107,310
|
|
$
|
2,468,675
|
|
|
|
|
|
Six Months Ended
June 30, 2007
|
Revenues
|
Long-Lived
Assets
|
United States
|
|
|
$
|
52,297
|
|
$
|
271,737
|
|
Australia
|
|
|
|
12,394
|
|
|
44,774
|
|
Chile
|
|
|
|
19,768
|
|
|
23,546
|
|
Argentina
|
|
|
|
18,065
|
|
|
6,575
|
|
Bolivia
|
|
|
|
--
|
|
|
88,636
|
|
Other Foreign Countries
|
|
|
|
--
|
|
|
197
|
|
|
|
|
Total
|
|
|
$
|
102,524
|
|
$
|
435,465
|
|
|
|
|
NOTE I- RECLAMATION AND
REMEDIATION
Reclamation
and remediation costs are based principally on legal and regulatory requirements.
Management estimates costs associated with reclamation of mining properties as well as
remediation cost for inactive properties. The Company uses assumptions about future costs,
mineral prices, mineral processing recovery rates, production levels and capital and
reclamation costs. Such assumptions are based on the Companys current mining plan
and the best available information for making such estimates. On an ongoing basis,
management evaluates its estimates and assumptions; however, actual amounts could differ
from those based on such estimates and assumptions.
24
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Changes
to the Companys asset retirement obligations are as follows:
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in thousands)
|
Asset retirement obligation - Beginning Balance
|
|
|
$
|
33,446
|
|
$
|
30,168
|
|
$
|
33,135
|
|
$
|
29,909
|
|
Accretion
|
|
|
|
629
|
|
|
565
|
|
|
1,258
|
|
|
1,130
|
|
Settlements
|
|
|
|
(638
|
)
|
|
(86
|
)
|
|
(956
|
)
|
|
(392
|
)
|
|
|
|
|
|
|
|
Asset retirement obligation - Ending Balance
|
|
|
$
|
33,437
|
|
$
|
30,647
|
|
$
|
33,437
|
|
$
|
30,647
|
|
|
|
|
|
|
|
|
In
addition, the Company has accrued $1.4 million and $1.6 million as of June 30, 2008 and
2007, respectively, for reclamation liabilities related to former mining activities. These
amounts are also included in reclamation and mine closure liabilities.
NOTE J DERIVATIVE
FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company enters into derivative instruments to manage the Companys exposure to
foreign currency exchange rates and market prices associated with changes in gold and
silver commodity prices. The Company accounts for its derivative contracts in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. Accordingly, unrealized gains and losses related to the
change in fair market value of derivative contracts, which qualify and are designated as
cash flow hedges, are recorded as other comprehensive income or loss and such amounts are
recognized into earnings as the associated contracts are settled.
Forward Foreign Exchange
Contracts
The
Company, from time to time, enters into forward foreign currency exchange contracts to
reduce the foreign exchange risk associated with forecasted Chilean peso operating costs
for 2008 at its Cerro Bayo mine. The contracts require the Company to exchange U.S.
dollars for Chilean pesos at a weighted average exchange rate of 496 pesos to each U.S.
dollar. At June 30, 2008, the Company had foreign exchange contracts of $6.0 million in
U.S. dollars. For the three and six months ended June 30, 2008 and 2007, respectively, the
Company recorded a realized gain of $0.1 million and $0.3 million, and
less than $0.1 million and less than $0.1 million, respectively, in connection with its foreign
currency hedging program. As of June 30, 2008, the fair value of the foreign exchange
contracts was a liability of $0.3 million. Change in gains (losses) accumulated in other
comprehensive income (loss) for cash flow hedging contracts are as follows:
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in thousands)
|
Beginning balance
|
|
|
$
|
724
|
|
$
|
(333
|
)
|
$
|
(82
|
)
|
$
|
(60
|
)
|
Reclassification to earnings
|
|
|
|
(71
|
)
|
|
(49
|
)
|
|
(306
|
)
|
|
(26
|
)
|
Change in fair value
|
|
|
|
(948
|
)
|
|
671
|
|
|
93
|
|
|
375
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
$
|
(295
|
)
|
$
|
289
|
|
$
|
(295
|
)
|
$
|
289
|
|
|
|
|
|
|
|
|
25
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
Concentrate Sales
Contracts
The
Company enters into concentrate sales contracts with third-party smelters. The contracts,
in general, provide for a provisional payment based upon provisional assays and quoted
metal prices and the provisionally priced sales 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, which is the final settlement price based on a future price, does
not qualify for hedge accounting. These embedded derivatives are recorded as derivative
assets (in prepaid expenses and other), or derivative liabilities (in other current
liabilities), on the balance sheet and are adjusted to fair value through earnings each
period until the date of final settlement.
At
June 30, 2008, the Company had outstanding provisionally priced sales of $63.4 million,
consisting of 2.7 million ounces of silver and 16,700 ounces of gold, which had a fair
value of approximately $62.4 million, including the embedded derivative. At June 30, 2007
the Company had outstanding receivables for provisionally priced sales of $73.1 million,
consisting of 3.8 million ounces of silver and 34,159 ounces of gold, which had a fair
value of approximately $73.1 million, including the embedded derivative.
Commodity Derivatives
The
Company has occasionally entered into forward metal sales contracts to manage the price
risk associated with a portion of its cash flows against fluctuating gold prices. As of
June 30, 2008, the Company had no outstanding forward sales contracts for either gold or
silver.
NOTE K- LONG-TERM DEBT
3 ¼% Convertible
Senior Notes
On
March 18, 2008, the Company completed an offering of $230 million in aggregate principal
amount of Convertible Senior Notes due 2028. The notes are unsecured and bear interest at
a rate of 3¼% per year, payable on March 15 and September 15 of each year,
beginning on September 15, 2008. The notes mature on March 15, 2028, unless earlier
converted, redeemed or repurchased by the Company.
Each
holder of the notes may require that the Company repurchase some or all of the
holders notes on March 15, 2013, March 15, 2015, March 15, 2018 and March 15, 2023
at a repurchase price equal to 100% of the principal amount of the notes to be
repurchased, plus accrued and unpaid interest, in cash, shares of common stock or a
combination of cash and shares of common stock, at the Companys election. Holders
will also have the right, following certain fundamental change transactions, to require
the Company to repurchase all or any part of their notes for cash at a repurchase price
equal to 100% of the principal amount of the notes to be repurchased plus accrued and
unpaid interest. The Company may redeem the notes for cash in whole or in part at any time
on or after March 22, 2015 at 100% of the principal amount of the notes to be redeemed
plus accrued and unpaid interest.
The
notes provide for net share settlement of any conversions. Pursuant to this
feature, upon conversion of the notes, the Company (1) will pay the note holder an amount
in cash equal to the lesser of the conversion obligation or the principal amount of the
notes, and (2) will settle any excess of the conversion obligation above the notes
principal amount in the Companys common stock, cash or a combination thereof, at the
Companys election.
26
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
The
notes will be convertible under certain circumstances, at the holders option, at an
initial conversion rate of 176.0254 shares of the Companys common stock per $1,000
principal amount of notes, which is equivalent to an initial conversion price of
approximately $5.68 per share of common stock, subject to adjustment in certain
circumstances.
The
fair value of the 3¼% Convertible Senior Notes is determined by market transactions
on or about June 30, 2008. The fair value of the 3¼% Senior Convertible Notes as of
June 30, 2008 was $187.5 million.
1 ¼% Convertible
Senior Notes
The
$180.0 million principal amount of 1 ¼% Convertible Senior Notes due January 2024
outstanding at June 30, 2008 are convertible into shares of common stock at the option of
the holder on January 15, 2011, 2014 and 2019, unless previously redeemed, at a conversion
price of $7.60 per share, subject to adjustment in certain circumstances.
The
Company is required to make semi-annual interest payments. The notes are redeemable at the
option of the Company before January 18, 2011, if the closing price of the Companys
common stock over a specified number of trading days has exceeded 150% of the conversion
price, and anytime thereafter. Before January 18, 2011, the redemption price is equal to
100% of the principal amount of the notes plus an amount equal to 8.75% of the principal
amount of the notes, less the amount of any interest actually paid on the notes on or
prior to the redemption date. The notes are due at maturity on January 15, 2024.
The
fair value of the 1 ¼% notes is determined by market transactions on or about June
30, 2008 and December 31, 2007, respectively. The fair value of the notes as of June 30,
2008 and December 31, 2007 was $151.7 million and $156.6 million, respectively.
Bridging Debt Facility
On
October 22, 2007, Bolnisi entered into a $20 million credit facility with Macquarie Bank
Limited to fund further exploration and development of the Palmarejo silver/gold project,
the exploration and development of the Yecora gold/silver project and the El Realito
gold/silver project and for working capital purposes. The credit facility was extended to
September 30, 2008, and bears interest at a variable rate (LIBOR) plus a margin of 2.45%.
As of June 30, 2008, the Company had $20 million outstanding under the facility which
bears interest at 5.175% and is included in current portion of long-term debt and capital
lease obligations.
Bank Loan
On
August 30, 2007, Palmarejo entered into a temporary credit facility of $2.0 million
secured by the Companys investments in asset-backed commercial paper, to fund
working capital requirements. The facility was amended on October 9, 2007. On June 3,
2008, the Company paid off the outstanding credit facility balance.
27
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
NOTE L- DEFINED
CONTRIBUTION, 401(k), DEFINED BENEFIT AND POST-RETIREMENT MEDICAL PLANS
Defined Contribution
Plan and 401(k) Plan
The
Company provides a noncontributory defined contribution retirement plan for all eligible
U.S. employees. Total plan expenses recognized in the Companys consolidated
financial statements were $0.1 million and $0.2 million for the three months ended June
30, 2008 and 2007, respectively, and $0.4 million and $0.5 million for the six months
ended June 30, 2008 and 2007, respectively.
The
Company maintains a savings plan (which qualifies under Section 401(k) of the U.S.
Internal Revenue Code) covering all eligible U.S. employees. Under the plan, employees may
elect to contribute up to 100% of their cash compensation, subject to ERISA limitations.
Under the matching formula in this plan, the Company matches 100% of the employees
deferral contribution to a maximum of 3% and matches 50% of the employees deferral
contribution to a maximum of an additional 1% of the employees compensation.
Employees have the option of investing in twelve different types of investment funds.
Total plan expenses recognized in the Companys consolidated financial statements
were $0.1 million and $0.1 million for the three months ended June 30, 2008 and 2007,
respectively, and $0.4 million and $0.4 million for the six months ended June 30, 2008 and
2007, respectively.
As
a result of the sale of Coeur Silver Valley, the Company no longer maintains a
post-retirement medical and/or defined benefit pension plans.
NOTE M
COMMITMENTS AND CONTINGENCIES
Labor Union Contracts
The
Company maintains two labor agreements in South America, consisting of a labor agreement
with Syndicato de Trabajadores de Compañía Minera Cerro Bayo Ltd. at its
Cerro Bayo mine in Chile and with Associacion Obrera Minera Argentina at its Martha mine
in Argentina. The agreement at Cerro Bayo is effective from December 24, 2007 to
December 21, 2010 and the agreement at Mina Martha is effective from June 30, 2008 to
June 30, 2010. Additionally certain employees at San Bartolomé are covered by
a labor agreement that became effective October 11, 2007. This Bolivian labor agreement
does not have a fixed term. As of June 30, 2008, the Company had approximately 40%
of its worldwide labor force covered by collective bargaining agreements.
Termination Benefits
In
September 2005, the Company established a one-time termination benefit program at the
Rochester mine as the mine approaches the end of its mine life. The employees will be
required to render service until they are terminated in order to be eligible for benefits.
Approximately 84% of the workforce was severed by the end of the first quarter of 2008,
while the remaining 16% are expected to stay on for residual leaching and reclamation
activities. As of June 30, 2008, the total amount expected to be incurred under this plan
is approximately $4.9 million. The liability is recognized ratably over the minimum future
service period. The amount accrued as of June 30, 2008 was $0.5 million.
28
Coeur dAlene
Mines Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) - (Continued)
(dollars in thousands, except per share, per ounce amounts)
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in thousands)
|
(in thousands)
|
Beginning Balance
|
|
|
|
535
|
|
$
|
2,009
|
|
|
820
|
|
$
|
1,959
|
|
Accruals
|
|
|
|
(2
|
)
|
|
502
|
|
|
100
|
|
|
641
|
|
Payments
|
|
|
|
--
|
|
|
(330
|
)
|
|
(387
|
)
|
|
(419
|
)
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
$
|
533
|
|
$
|
2,181
|
|
$
|
533
|
|
$
|
2,181
|
|
|
|
|
|
|
|
|
The
Company does not have a written severance plan for any of its foreign operations including
Chile, Argentina, Bolivia and Mexico. However, laws in these foreign jurisdictions require
payment of certain minimum statutory termination benefits. Accordingly, in situations
where minimum statutory termination benefits must be paid to the affected employees, the
company records employee severance costs in accordance with SFAS No. 112,
Employers Accounting for Postemployment Benefits. The Company has
accrued obligations for postemployment benefits in these locations of approximately $3.5
million as of June 30, 2008.
Kensington Production
Royalty
On
July 7, 1995, Coeur, through its wholly-owned subsidiary, Coeur Alaska, Inc. (Coeur
Alaska), acquired the 50% ownership interest of Echo Bay Exploration Inc.
(Echo Bay) in the Kensington property from Echo Bay and Echo Bay Alaska, Inc.
(collectively the Sellers), giving Coeur 100% ownership of the Kensington
property. The property is located on the east side of Lynn Canal between Juneau and
Haines, Alaska. Coeur Alaska is obligated to pay Echo Bay a scaled net smelter return
royalty on 1.0 million ounces of future gold production after Coeur Alaska recoups the
$32.5 million purchase price and its construction and development expenditures incurred
after July 7, 1995 in connection with placing the property into commercial production. The
royalty ranges from 1% at $400 gold prices to a maximum of 2 ½% at gold prices
above $475, with the royalty to be capped at 1.0 million ounces of production.
NOTE N- SIGNIFICANT
CUSTOMERS
The
Company markets its metals products and concentrates primarily to bullion trading banks
and five third party smelters. These customers then sell the metals to end users for use
in industry applications such as electronic circuitry, jewelry and silverware production
and the manufacture and development of photographic film. Sales of metals to bullion
trading banks amounted to approximately 33.6% and 51.0% of total metals sales for the six
months ended June 30, 2008 and 2007, respectively. Generally, the loss of a single bullion
trading bank customer would not adversely affect the Company in view of the liquidity of
the markets and availability of alternative trading banks.
The
Company currently markets its silver and gold concentrates to third party smelters in
Japan, Mexico, Australia and Germany. Sales of metals concentrates to third party smelters
amounted to approximately 66.4% and 49.0% of metals sales for the six months ended June
30, 2008 and 2007, respectively. The loss of any one smelter customer could have a
material adverse effect in the event of the possible unavailability of alternative
smelters.
NOTE O- LITIGATION AND
OTHER EVENTS
Federal Court (Alaska) Kensington
Project Permit Challenge
On
September 12, 2005, three environmental groups (Plaintiffs) filed a lawsuit in
Federal District Court in Alaska against the U.S. Army Corps of Engineers (Corps of
Engineers) and the U.S. Forest Service (USFS) seeking to invalidate the
permit issued to Coeur Alaska, Inc. for the Companys Kensington mine. The Plaintiffs
claim the Clean Water Act (CWA) Section 404 permit issued by the Corps of
Engineers authorizing the deposition of mine tailings into Lower Slate Lake conflicts with
the CWA. They additionally claim the USFSs approval of the Amended Plan of
Operations is arbitrary and capricious because it relies on the 404 permit issued by the
Corps of Engineers. Following the District Courts remand of the Section 404
permit to the Corps of Engineers for further review, the Corps reinstated the
Companys permit on March 29, 2006. The lawsuit challenging the permit was
re-opened on April 6, 2006; Coeur Alaska filed its answer to the Amended Complaint;
and Coeur Alaska, the State of Alaska, and Goldbelt, Inc., a local native corporation,
were granted Defendant-Intervenor status to join the agencies in their defense of the
permit.
29
On
August 4, 2006, the Federal District Court in Alaska dismissed the Plaintiffs
challenge and upheld the Section 404 permit. On August 7, 2006, the Plaintiffs filed a
Notice of Appeal of the decision to the Ninth Circuit Court of Appeals (Ninth
Circuit Court) and on August 9, 2006 the Plaintiffs additionally filed a Motion for
Injunction Pending Appeal with the Ninth Circuit Court. The Ninth Circuit Court granted a
temporary injunction pending appeal on August 24, 2006, enjoining certain activities
relating to the lake tailings facility.
On
May 22, 2007, the Ninth Circuit Court reversed the District Courts August 4, 2006
decision which had upheld the Companys 404 permit and issued its opinion that
remanded the case to the District Court with instructions to vacate the Companys 404
permit as well as the USFS Record of Decision approving the general tailings disposal plan
and the Goldbelt 404 permit to construct the Cascade Point Marine Facility. On August 20,
2007, Coeur Alaska filed a Petition for Rehearing En Banc with the Ninth Circuit Court, as
did the State of Alaska and Goldbelt, Inc. The Department of Justice, on behalf of the
Corps of Engineers, and USFS additionally filed a limited Petition for Rehearing with the
Ninth Circuit Court panel seeking reconsideration of the mandate of the May 22, 2007 panel
decision. On October 29, 2007, the Ninth Circuit Court denied the Petitions for Rehearing
En Banc. On November 14, 2007, the Ninth Circuit Court granted a stay of the mandate
pending further appeal to the Supreme Court, subject to the development of a reclamation
plan for the lake area. The Company and the State of Alaska filed Petitions for Certiorari
to the Supreme Court of the United States on January 28, 2008. On June 27, 2008, the
Supreme Court of the United States granted the State of Alaska and Coeur Alaskas
Petitions for a writ of certiorari to review the decision of the Ninth Circuit Court. The
Company cannot predict if it will prevail in this appeal.
Item 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is designed to provide a reader of our financial statements with a
narrative from the perspective of management on our financial condition, results of
operations, liquidity and other factors that may affect our future results. We believe it
is important to read our MD&A in conjunction with our Annual Report on SEC Form 10-K
for the year ended December 31, 2007, as well as other publicly available information.
This
document contains numerous forward-looking statements relating to the Companys gold
and silver mining business. The United States Private Securities Litigation Reform Act of
1995 provides a safe harbor for certain forward-looking statements. Operating,
exploration and financial data, and other statements in this document are based on
information the Company believes reasonable, but involve significant risks and
uncertainties, including the risks set forth under Part II Item 1A below, as to future
gold and silver prices, costs, ore grades, estimation of gold and silver reserves, mining
and processing conditions, changes that could result from the Companys future
acquisition of new mining properties or businesses, the risks and hazards inherent in the
mining business (including environmental hazards, industrial accidents, weather or
geologically related conditions), regulatory and permitting matters, and risks inherent in
the ownership and operation of, or investment in, mining properties or businesses in
foreign countries. Actual results and timetables could vary significantly from the
estimates presented. Readers are cautioned not to put undue reliance on forward-looking
statements. The Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future events or
otherwise.
30
The
MD&A includes references to total cash costs per ounce of silver produced both on an
individual mine basis and on a consolidated basis. Total cash costs per ounce represent a
non- U.S. generally accepted accounting principles (GAAP) measurement that
management uses to monitor and evaluate the performance of its mining operations. A
reconciliation of total cash costs per ounce to U.S. GAAP Production Expenses
is also provided herein and should be referred to when reading the total cash costs per
ounce measurement.
General
The
results of the Companys operations are significantly affected by the market prices
of silver and gold, which may fluctuate widely and are affected by many factors beyond the
Companys control, including, without limitation, interest rates, expectations
regarding inflation, currency values, governmental decisions regarding the disposal of
precious metals stockpiles, global and regional political and economic conditions, and
other factors.
The
average price of silver (Handy & Harman) and gold (London Final) for the six months
ended June 30, 2008 was $17.41 and $911.36 per ounce, respectively. The market price of
silver and gold on August 5, 2008 was $16.68 per ounce and $882.00 per ounce,
respectively.
Coeur
dAlene Mines Corporation is a large primary silver producer located in North America
and is engaged, through its subsidiaries, in the operation and/or ownership, development
and exploration of silver and gold mining properties and companies located primarily
within South America (Chile, Argentina and Bolivia), the United States (Nevada and
Alaska), Australia (New South Wales), Mexico (Chihuahua) and Africa (Tanzania). Coeur
dAlene Mines Corporation and its subsidiaries are hereinafter referred collectively
as Coeur or the Company.
The
Companys business strategy is to capitalize on the ore reserve/mineralized material
bases located at its operating mines and the expertise of its management team to continue
as a leading primary silver production company through long-term, cash flow generating
growth. The principal elements of the Companys business strategy are to:
(i) increase the Companys silver production and reserves; (ii) decrease
cash costs and increase production at the Companys existing silver mining
operations; (iii) transform development-stage properties into producing mines;
(iv) acquire operating mines, mineral interests and exploration and/or development
properties with a view to reducing the Companys cash and total costs, providing
short-term positive cash flow return and expanding its silver production base and
reserves; and (v) continue to explore for new silver and gold discoveries primarily
near its existing mine sites and evaluate new opportunities to expand its production
through acquisitions and exploration.
In
addition to the matters discussed above with respect to the key factors of the
Companys business strategy, the most important matters on which management is
focused include:
|
|
San
Bartolomé Mine
. The Company commenced commercial production on June 27, 2008.
Should silver production be lower than expected or if operating costs prove to be higher
than currently estimated, the Companys results of operations will be adversely
affected. Other uncertainties associated with the mine include logistical and other risks
associated with mining in Bolivia.
|
|
|
Palmarejo
Project
. In December 2007, Coeur completed the acquisition of the Palmarejo project
located in Mexico. Capital expenditures for this property are currently estimated to be
approximately $200 million during 2008 and construction activities there are underway.
The Company completed the final feasibility study in June 2008 and now considers the mine
to be in the development stage. As a result, it has begun to capitalize mine development
expenditures at Palmarejo. The Company currently expects to commence commercial
production during the first half of 2009. Any significant increase in the capital
expenditures and/or delay in the commencement of production would adversely affect the
Companys costs and liquidity.
|
31
|
|
Kensington
Mine
. The Company has continued in its effort to enable the Kensington Mine to
commence production, including the completion of Kensingtons mill, related surface
facilities and a tunnel connecting the Kensington and Jualin properties. In addition, the
Company continues to cooperate with environmental conservation groups with respect to the
use of an alternative site for the construction of the mines tailings disposal
facility. On June 27, 2008, the Supreme Court of the United States granted the State of
Alaska and Coeur Alaskas Petitions for a writ of certiorari to review the decision
of the Ninth Circuit Court vacating the Companys 404 permit for its tailing
facility. Further delay in the commencement of production at the Kensington Mine would
adversely affect the Companys costs and liquidity.
|
|
|
Rochester
Mine
. As scheduled, mining activities at Rochester ceased in August 2007 as the mine
entered its residual leaching phase, which is expected to continue through 2011. The
Company continues to explore its options with respect to this property, including
possible recommencement of operating activities related to the Companys ongoing
exploration program and due to higher silver and gold prices. The absence of production
being experienced in the residual leaching stage, and ultimate cessation of activities
there, will result in a reduction in net sales.
|
|
|
Cerro
Bayo Mine
. The Companys top priority with respect to this mine is to reduce
operating costs and continue to successfully add new ore reserves through exploration
activities. As part of the ongoing operational improvement program at the Cerro Bayo
mine, in April 2008, the Company announced a temporary suspension of mining operations at
this mine, expected to last approximately six weeks, in order to upgrade its electrical
infrastructure. On May 5, 2008, the Company announced that the electrical upgrade was
completed and the mine has resumed operations ahead of schedule. The continued successful
implementation of the improvement program at Cerro Bayo along with successful exploration
activities will be keys to continuing to generate cash flow from this operation.
|
Operating
Highlights and Statistics
South American Operations
Cerro
Bayo Mine:
In
late 2007, the Company implemented a recovery plan at Cerro Bayo to address the higher
costs and lower productivity experienced at the mine during the second half of 2007.
Key components of this plan include increased underground mine development to
provide more operational flexibility, reducing the size of the workforce, improving
workforce training using more efficient mining methods, an organizational restructuring,
and a cost improvement program. On April 8, 2008, the Company announced that, as
part of its ongoing operational improvement program, the mine would be upgrading its
electrical infrastructure in both the surface and underground facilities in order to
improve operational reliability and performance, resulting in a temporary suspension of
mining operations. On May 5, 2008, the Company announced the resumption of operating
activities at Cerro Bayo and that the electrical upgrades had been completed ahead of
schedule.
Silver
production was 342,856 ounces and gold production was 6,593 ounces in the second quarter
of 2008 compared to 369,500 ounces of silver and 10,218 ounces of gold in the second
quarter of 2007. The silver production decrease was primarily due to a 32.3% decrease in
tons mined as a result of the temporary four-week suspension of operations which occurred
in April 2008 to allow for the upgrading of the mines electrical infrastructure. In
addition, silver production was impacted by lower than expected stope tonnages and grades.
Total cash costs per ounce of silver in the second quarter of 2008 were $7.62 per ounce
compared to $7.16 per ounce in 2007.
32
Silver
production was 776,886 ounces and gold production was 16,722 ounces six months ended June
30, 2008, compared to 721,448 ounces of silver and 19,646 ounces of gold in the six months
ended June 30, 2007. The silver production increase was primarily due to a 9% increase in
silver ore grades as a result of the recovery plan initiated late last year to improve
mine productivity, grade control and organizational efficiency. Total cash costs per ounce
of silver for the six months ended June 30, 2008 were $4.06 per ounce compared to $4.26
per ounce in 2007.
Martha Mine:
Commissioning
of a new, standalone 260 ton per day processing facility took place at Martha during the
first half of 2008. As a result, production has been hampered by mill start-up related
issues and a shortage of available spare parts to address these issues. However, the
Company believes these start-up related issues have now been addressed and operational
results continue to improve each month.
Silver
production was 614,442 ounces and gold production was 815 ounces in the second quarter of
2008, compared to 809,026 ounces of silver and 1,089 ounces of gold in the second quarter
of 2007. Total cash costs per ounce for the three months ended June 30, 2008 were $9.66
per ounce, compared to $5.18 per ounce in 2007. The decrease in silver production was
primarily due to lower than planned mill tonnages due to mill start-up related issues and
lower silver ore grades as planned as compared to ore grades in the second quarter of
2007. The increase in cash costs per ounce were primarily due to the lower silver ounce
production and higher costs of labor, taxes and increased royalties resulting from higher
realized metal prices in the three months ended June 30, 2008 compared to 2007.
Silver
production was 1,265,078 ounces in the six months ended June 30, 2008 compared to
1,432,124 ounces in 2007 respectively. The decrease in silver production was primarily due
to lower planned mill tonnages due to mill start-up related issues and lower silver ore
grades as planned as compared to the first half of 2007. Total cash costs per ounce for
the six months ended June 30, 2008 were $8.12 per ounce, compared to $5.59 per ounce in
2007. The increase in total cash cost per ounce was primarily due to higher costs of
labor, taxes and increased royalties resulting from higher realized metal prices in the
six months ended June 30, 2008 compared to 2007.
San Bartolomé Mine:
The
San Bartolomé Mine commenced commercial production on June 27, 2008. Silver
production during June, 2008 was 21,856 ounces of silver. Due to start-up delays the mine
now expects production during the remainder of 2008 to be approximately 3.2 million ounces
of silver.
North American Operations
Rochester
Mine:
In
August of 2007, the Company terminated mining and crushing operations at the Rochester
mine as ore reserves were fully mined. Residual heap leaching activities are now ongoing
and are expected to continue through 2011. Consequently, silver production was 898,837
ounces and gold production was 6,062 ounces during the second quarter of 2008 compared to
1,227,233 ounces of silver and 14,146 ounces of gold in the second quarter of 2007. Total
cash costs per ounce decreased to $(0.89) from $2.54 in the second quarter of 2007. The
decrease in cash cost per ounce is primarily due to (i) only processing costs are being
incurred now that mining activities have ceased; and (ii) by-product credits from the gold
produced exceeded operating costs in the 2008 period.
Silver
production was 1,579,347 ounces and gold production was 11,912 ounces during the six
months ended June 30, 2008 compared to 2,410,029 ounces of silver and 28,435 ounces of
gold in the six months ended June 30, 2007. Total cash costs per ounce decreased to
$(1.05) from $3.71 in the six months ended June 30, 2007. The decrease in cash cost per
ounce is primarily due to (i) only processing costs are being incurred now that mining
activities have ceased; and (ii) by-product credits from the gold produced exceeded
operating costs in the 2008 period.
33
Australian Operations
Endeavor
Mine:
Silver
production at the Endeavor mine in the second quarter of 2008 was 228,792 ounces of silver
compared to 124,441 ounces of silver in the second quarter of 2007. This 83.9% increase in
silver production was primarily due to a 39.8% increase in silver ore grades as compared
to the second quarter of 2007. Total cash costs per ounce of silver produced were $2.59 in
the second quarter of 2008 compared to $2.91 in the second quarter of 2007. The decrease
in cash cost per ounce is primarily due to the increase in the ounces of silver produced
during the period.
Silver
production at the Endeavor mine for the six months ended June 30, 2008 was 457,291 ounces
of silver compared to 284,718 ounces of silver in the six months ended June 30, 2007. This
60.6% increase in silver production was primarily due to a 59.4% increase in silver ore
grades as compared to the second quarter of 2007. Total cash costs per ounce of silver
produced were $2.47 in the six months ended June 30, 2008 compared to $3.06 in the six
months ended June 30, 2007. The decrease in cash cost per ounce is primarily due to the
increase in ounces of silver produced during the period as compared to the first half of
2007.
On
May 23, 2005, the Company acquired all of the silver production and reserves, up to a
maximum of 17.7 million payable ounces, contained at the Endeavor Mine in Australia, which
is owned and operated by Cobar Operations Pty. Limited (Cobar), a wholly-owned
subsidiary of CBH Resources Ltd. (CBH), for $43.7 million. The Endeavor Mine
is located 720 km northwest of Sydney in New South Wales and has been in production since
1983. Under the terms of the original agreement, CDE Australia, a wholly-owned subsidiary
of Coeur, paid Cobar $15.4 million of cash at the closing. In addition, CDE Australia will
pay Cobar approximately $26.2 million upon the receipt of a report confirming that the
reserves at the Endeavor mine are equal to or greater than the reported ore reserves for
2004. In January 2008, the mine met the criteria for payment of the additional $26.2
million and was capitalized to mineral interests. On April 1, 2008, the Company paid this
amount plus accrued interest at a rate of 7.5% per annum from January 24, 2008. In
addition to these upfront payments, Coeur originally committed to pay Cobar an operating
cost contribution of $1.00 for each ounce of payable silver plus a further increment when
the silver price exceeds $5.23 per ounce. This further increment was to have begun on the
second anniversary of this agreement and is 50% of the amount by which the silver price
exceeds $5.23 per ounce. A cost contribution of $0.25 per ounce is also payable by Coeur
in respect of new ounces of proven and probable silver reserves as they are discovered.
During the first quarter of 2007, $2.0 million was paid for additional ounces of proven
and probable silver reserves under the terms of the contract. The amount was capitalized
as a cost of the mineral interest acquired and is being amortized using the units of
production method.
On
March 28, 2006, CDE Australia Pty, Ltd. (CDE Australia) reached an agreement with CBH
Resources Ltd. to modify the terms of the original silver purchase agreement. Under the
modified terms, CDE Australia owns all silver production and reserves up to a maximum of
20.0 million payable ounces, up from 17.7 million payable ounces in the original
agreement. The conditions relating to the second payment were also modified and tied to
certain paste fill plant performance criteria and mill throughput tests. The Company has
received approximately 1.8 million payable ounces to date and the current ore reserve
contains approximately 14.4 million payable ounces based on current metallurgical recovery
and current smelter contract terms. Expansion of the ore reserve will be required to
achieve the maximum payable ounces of silver production as set forth in the modified
contract. It is expected that future expansion to the ore reserve will occur as a result
of the conversion of portions of the propertys existing inventory of mineralized
material and future exploration discoveries. CBH conducts regular exploration to discover
new mineralization and to define reserves from surface and underground drilling platforms.
The silver price-sharing provision is deferred until such time as Coeur has received
approximately 2 million cumulative ounces of silver from the mine or June 2007, whichever
is later. In addition, the silver price-sharing threshold increased to US$7.00 per ounce,
from the previous level of US$5.23 per ounce. The Endeavor mine is a primary zinc and lead
producer. During 2008, the prices for zinc and lead have declined which could impact
CBHs ability to further expand the ore reserves.
34
As
of June 30, 2008, the Company has recovered approximately 36.9% of the transaction
consideration consisting of 1.8 million payable ounces, or 9.0%, of the 20 million maximum
payable silver ounces to which the Company is entitled under the terms of the silver sale
and purchase agreement. No assurances can be made that the mine will achieve its 20
million payable silver ounce target to which the Company is entitled under the terms of
the silver sale and purchase agreement.
Broken
Hill Mine:
Silver
production at the Broken Hill Mine in the second quarter of 2008 was 382,349 ounces
compared to 476,494 ounces in the second quarter of 2007. The decrease in silver
production is primarily due to a decrease in silver ore grades and recoveries, partially
offset by an increase in tons mined. Total cash costs per ounce of silver production were
$3.66 in the second quarter of 2008 compared to $3.20 in the second quarter of 2007. The
increase is primarily due to higher smelting, refining and transportation costs.
Silver
production at the Broken Hill Mine in the six months ended June 30, 2008 was 768,829
ounces compared to 779,342 ounces in the six months ended June 30, 2007. The decrease in
silver production is primarily due to a 15.6% decrease in silver ore grades. Total cash
costs per ounce of silver production were $3.69 in the six months ended June 30, 2008
compared to $3.19 in the 2007. The increase is primarily due to higher smelting, refining
and transportation costs.
On
September 8, 2005, the Company acquired all of the silver production and reserves, up to a
maximum of 17.2 million payable ounces (24.5 million contained ounces), contained at the
Broken Hill mine in Australia, which is owned and operated by Perilya Broken Hill Ltd.
(PBH) for $36.9 million. In addition, CDE Australia pays PBH an operating cost
contribution of approximately $2.00 for each ounce of payable silver. Under the terms of
the agreement, PBH may earn up to US$0.75 million per year of additional consideration by
meeting certain silver production thresholds. No additional payments pursuant to
production thresholds were made during the second quarter of 2008.
As
of June 30, 2008, the Company has recovered approximately 109.8% of the transaction
consideration consisting of 4.9 million payable ounces, or 28.3%, of the 17.2 million
payable silver ounces to which the Company is entitled to under the terms of the silver
sale agreement. No assurances can be made that the mine will achieve its 17.2 million
payable silver ounce target to which the Company is entitled under the terms of the silver
sale and purchase agreement.
35
Operating Statistics
From Continuing Operations
The
following table presents information by mine and consolidated sales information for the
three and six month periods ended June 30, 2008 and 2007:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2008
|
2007
|
2008
|
2007
|
Rochester
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons processed
|
|
|
|
--
|
|
|
2,065,481
|
|
|
--
|
|
|
4,148,753
|
|
Ore grade/Ag oz
|
|
|
|
--
|
|
|
0.59
|
|
|
--
|
|
|
0.67
|
|
Ore grade/Au oz
|
|
|
|
--
|
|
|
.006
|
|
|
--
|
|
|
.007
|
|
Recovery/Ag oz
(A)
|
|
|
|
--
|
|
|
100.7
|
%
|
|
--
|
|
|
86.2
|
%
|
Recovery/Au oz
(A)
|
|
|
|
--
|
|
|
117.7
|
%
|
|
--
|
|
|
103.6
|
%
|
Silver production ounces
|
|
|
|
898,837
|
|
|
1,227,233
|
|
|
1,579,347
|
|
|
2,410,029
|
|
Gold production ounces
|
|
|
|
6,062
|
|
|
14,146
|
|
|
11,912
|
|
|
28,435
|
|
Cash cost/oz
|
|
|
$
|
(.89
|
)
|
$
|
2.54
|
|
$
|
(1.05
|
)
|
$
|
3.71
|
|
Total cost/oz
|
|
|
$
|
(.24
|
)
|
$
|
5.21
|
|
$
|
(.24
|
)
|
$
|
6.96
|
|
Cerro Bayo
|
|
|
Tons milled
|
|
|
|
67,063
|
|
|
99,095
|
|
|
158,581
|
|
|
157,545
|
|
Ore grade/Ag oz
|
|
|
|
5.45
|
|
|
3.92
|
|
|
5.25
|
|
|
4.82
|
|
Ore grade/Au oz
|
|
|
|
.126
|
|
|
.110
|
|
|
.124
|
|
|
.133
|
|
Recovery/Ag oz
|
|
|
|
93.8
|
%
|
|
95.1
|
%
|
|
93.3
|
%
|
|
95.0
|
%
|
Recovery/Au oz
|
|
|
|
77.7
|
%
|
|
93.4
|
%
|
|
84.8
|
%
|
|
93.7
|
%
|
Silver production ounces
|
|
|
|
342,856
|
|
|
369,500
|
|
|
776,886
|
|
|
721,448
|
|
Gold production ounces
|
|
|
|
6,593
|
|
|
10,218
|
|
|
16,722
|
|
|
19,646
|
|
Cash cost/oz
|
|
|
$
|
7.62
|
|
$
|
7.16
|
|
$
|
4.06
|
|
$
|
4.26
|
|
Total cost/oz
|
|
|
$
|
13.96
|
|
$
|
10.91
|
|
$
|
10.44
|
|
$
|
8.07
|
|
Martha Mine
|
|
|
Tons milled
|
|
|
|
13,170
|
|
|
9,663
|
|
|
22,147
|
|
|
17,864
|
|
Ore grade/Ag oz
|
|
|
|
49.26
|
|
|
89.12
|
|
|
59.47
|
|
|
84.77
|
|
Ore grade/Au oz
|
|
|
|
.065
|
|
|
.122
|
|
|
.071
|
|
|
.115
|
|
Recovery/Ag oz
|
|
|
|
94.7
|
%
|
|
93.9
|
%
|
|
96.0
|
%
|
|
94.6
|
%
|
Recovery/Au oz
|
|
|
|
95.3
|
%
|
|
92.5
|
%
|
|
92.8
|
%
|
|
93.3
|
%
|
Silver production ounces
|
|
|
|
614,442
|
|
|
809,026
|
|
|
1,265,078
|
|
|
1,432,124
|
|
Gold production ounces
|
|
|
|
815
|
|
|
1,089
|
|
|
1,469
|
|
|
1,924
|
|
Cash cost/oz
|
|
|
$
|
9.66
|
|
$
|
5.18
|
|
$
|
8.12
|
|
$
|
5.59
|
|
Total cost/oz
|
|
|
$
|
11.84
|
|
$
|
5.57
|
|
$
|
10.12
|
|
$
|
6.00
|
|
Endeavor
|
|
|
Tons milled
|
|
|
|
281,991
|
|
|
251,785
|
|
|
529,153
|
|
|
537,865
|
|
Ore grade/Ag oz
|
|
|
|
1.44
|
|
|
1.03
|
|
|
1.53
|
|
|
0.96
|
|
Recovery/Ag oz
|
|
|
|
56.5
|
%
|
|
48.2
|
%
|
|
56.6
|
%
|
|
55.1
|
%
|
Silver production ounces
|
|
|
|
228,791
|
|
|
124,441
|
|
|
457,290
|
|
|
284,718
|
|
Cash cost/oz
|
|
|
$
|
2.59
|
|
$
|
2.91
|
|
$
|
2.47
|
|
$
|
3.06
|
|
Total cost/oz
|
|
|
$
|
5.00
|
|
$
|
3.89
|
|
$
|
4.61
|
|
$
|
4.04
|
|
Broken Hill
|
|
|
Tons milled
|
|
|
|
526,197
|
|
|
447,771
|
|
|
1,027,167
|
|
|
749,388
|
|
Ore grade/Ag oz
|
|
|
|
1.02
|
|
|
1.28
|
|
|
1.03
|
|
|
1.22
|
|
Recovery/Ag oz
|
|
|
|
71.0
|
%
|
|
83.2
|
%
|
|
72.6
|
%
|
|
85.0
|
%
|
Silver production ounces
|
|
|
|
382,349
|
|
|
476,494
|
|
|
768,829
|
|
|
779,342
|
|
Cash cost/oz
|
|
|
$
|
3.66
|
|
$
|
3.20
|
|
$
|
3.69
|
|
$
|
3.19
|
|
Total cost/oz
|
|
|
$
|
5.43
|
|
$
|
5.16
|
|
$
|
5.46
|
|
$
|
5.15
|
|
San Bartolomé
(B)
|
|
|
Tons milled
|
|
|
|
17,078
|
|
|
--
|
|
|
17,078
|
|
|
--
|
|
Ore grade/Ag oz
|
|
|
|
8.15
|
|
|
--
|
|
|
8.15
|
|
|
--
|
|
Recovery/Ag oz
|
|
|
|
15.7
|
%
|
|
--
|
|
|
15.7
|
%
|
|
--
|
|
Silver production ounces
|
|
|
|
21,856
|
|
|
--
|
|
|
21,856
|
|
|
--
|
|
Cash cost/oz
|
|
|
$
|
13.15
|
|
|
--
|
|
$
|
13.15
|
|
|
--
|
|
Total cost/oz
|
|
|
$
|
15.85
|
|
|
--
|
|
$
|
15.85
|
|
|
--
|
|
CONSOLIDATED PRODUCTION TOTALS
|
|
|
Silver ounces
|
|
|
|
2,489,131
|
|
|
3,006,694
|
|
|
4,869,286
|
|
|
5,627,661
|
|
Gold ounces
|
|
|
|
13,470
|
|
|
25,453
|
|
|
30,103
|
|
|
50,005
|
|
Cash cost per oz/silver
|
|
|
$
|
4.03
|
|
$
|
3.93
|
|
$
|
3.29
|
|
$
|
4.15
|
|
Total cost/oz
|
|
|
$
|
6.19
|
|
$
|
5.94
|
|
$
|
5.58
|
|
$
|
6.45
|
|
CONSOLIDATED SALES TOTALS
(C)
|
|
|
Silver ounces sold
|
|
|
|
2,270,588
|
|
|
2,805,479
|
|
|
4,682,905
|
|
|
5,481,913
|
|
Gold ounces sold
|
|
|
|
15,168
|
|
|
25,520
|
|
|
29,930
|
|
|
50,152
|
|
Realized price per silver ounce
|
|
|
$
|
18.84
|
|
$
|
13.47
|
|
$
|
18.64
|
|
$
|
13.60
|
|
Realized price per gold ounce
|
|
|
$
|
987.70
|
|
$
|
664.57
|
|
$
|
976.68
|
|
$
|
655.06
|
|
36
|
(A)
|
The leach cycle at Rochester requires 5 to 10 years to recover gold and silver
contained in the ore. The Company estimates the ultimate recovery to be
approximately 61.5% for silver and 93% for gold. However, ultimate recoveries
will not be known until leaching operations cease, which is currently estimated
for 2011. Current recovery may vary significantly from ultimate recovery. In
August 2007, mining and crushing activities were terminated and ore reserves
were fully mined. See Critical Accounting Policies and Estimates Ore on
Leach Pad.
|
|
(B)
|
San Bartolomé commenced start-up activities on June 27, 2008. Mine
statistics do not represent normal operating results. It is expected that the
Company will achieve normal operating levels by the end of 2008.
|
|
(C)
|
Units sold at realized metal prices will not match reported metal sales due
primarily to the effects on revenues of mark-to-market adjustments on embedded
derivatives in the Companys provisionally priced sales contracts.
|
|
Cash
Costs per Ounce are calculated by dividing the cash costs computed for each of the
Companys mining properties for a specified period by the amount of gold ounces or
silver ounces produced by that property during that same period. Management uses cash
costs per ounce as a key indicator of the profitability of each of its mining properties.
Gold and silver are sold and priced in the world financial markets on a US dollar per
ounce basis.
|
|
Cash
Costs are costs directly related to the physical activities of producing silver and
gold, and include mining, processing and other plant costs, third-party refining and
smelting costs, marketing expense, on-site general and administrative costs, royalties,
in-mine drilling expenditures that are related to production and other direct costs.
Sales of by-product metals are deducted from the above in computing cash costs. Cash
costs exclude depreciation, depletion and amortization, corporate general and
administrative expense, exploration, interest, and pre-feasibility costs and accruals for
mine reclamation. Cash costs are calculated and presented using the Gold Institute
Production Cost Standard applied consistently for all periods presented.
|
|
Total
cash costs per ounce is a non-GAAP measurement and investors are cautioned not to place
undue reliance on it and are urged to read all GAAP accounting disclosures presented in
the consolidated financial statements and accompanying footnotes. In addition, see the
reconciliation of cash costs to production costs set forth below.
|
The
following tables present a reconciliation between non-GAAP cash costs per ounce to GAAP
production costs applicable to sales reported in the Statement of Operations:
THREE MONTHS ENDED JUNE 30, 2008
(In thousands except ounces and per ounce costs)
|
|
Rochester
|
Cerro Bayo
|
Martha
|
Endeavor
|
Broken Hill
|
San Bartolomé
|
Total
|
Production of Silver (ounces)
|
|
|
|
898,837
|
|
|
342,856
|
|
|
614,442
|
|
|
228,791
|
|
|
382,349
|
|
|
21,856
|
|
|
2,489,131
|
|
Cash Costs per ounce
|
|
|
$
|
(0.89
|
)
|
$
|
7.62
|
|
$
|
9.66
|
|
$
|
2.59
|
|
$
|
3.66
|
|
$
|
13.15
|
|
$
|
4.03
|
|
Total Cash Costs
|
|
|
$
|
(799
|
)
|
$
|
2,613
|
|
$
|
5,934
|
|
$
|
592
|
|
$
|
1,400
|
|
$
|
287
|
|
$
|
10,027
|
|
Add/Subtract:
|
|
|
Third party smelting costs
|
|
|
|
--
|
|
|
(1,163
|
)
|
|
(1,089
|
)
|
|
(369
|
)
|
|
(653
|
)
|
|
--
|
|
|
(3,274
|
)
|
By-product credit
|
|
|
|
5,437
|
|
|
5,894
|
|
|
729
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
12,060
|
|
Other adjustments
|
|
|
|
(3
|
)
|
|
--
|
|
|
116
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
113
|
|
Change in inventory
|
|
|
|
6,365
|
|
|
665
|
|
|
(793
|
)
|
|
(26
|
)
|
|
79
|
|
|
(346
|
)
|
|
5,944
|
|
Depreciation, depletion and amortization
|
|
|
|
583
|
|
|
2,173
|
|
|
1,226
|
|
|
551
|
|
|
677
|
|
|
59
|
|
|
5,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
|
$
|
11,583
|
|
$
|
10,182
|
|
$
|
6,123
|
|
$
|
748
|
|
$
|
1,503
|
|
$
|
--
|
|
$
|
30,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
SIX MONTHS ENDED JUNE 30, 2008
(In thousands except ounces and per ounce costs)
|
|
Rochester
|
Cerro Bayo
|
Martha
|
Endeavor
|
Broken Hill
|
San Bartolomé
|
Total
|
Production of Silver (ounces)
|
|
|
|
1,579,347
|
|
|
776,886
|
|
|
1,265,078
|
|
|
457,290
|
|
|
768,829
|
|
|
21,856
|
|
|
4,869,286
|
|
Cash Costs per ounce
|
|
|
$
|
(1.05
|
)
|
$
|
4.06
|
|
$
|
8.12
|
|
$
|
2.47
|
|
$
|
3.69
|
|
$
|
13.15
|
|
$
|
3.29
|
|
Total Cash Costs
|
|
|
$
|
(1,654
|
)
|
$
|
3,157
|
|
$
|
10,274
|
|
$
|
1,130
|
|
$
|
2,836
|
|
$
|
287
|
|
$
|
16,030
|
|
Add/Subtract:
|
|
|
Third party smelting costs
|
|
|
|
--
|
|
|
(2,407
|
)
|
|
(1,463
|
)
|
|
(680
|
)
|
|
(1,331
|
)
|
|
--
|
|
|
(5,881
|
)
|
By-product credit
|
|
|
|
10,830
|
|
|
15,359
|
|
|
1,341
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
27,530
|
|
Other adjustments
|
|
|
|
100
|
|
|
--
|
|
|
470
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
570
|
|
Change in inventory
|
|
|
|
14,515
|
|
|
(43
|
)
|
|
(2,369
|
)
|
|
145
|
|
|
6
|
|
|
(346
|
)
|
|
11,908
|
|
Depreciation, depletion and amortization
|
|
|
|
1,173
|
|
|
4,951
|
|
|
2,063
|
|
|
979
|
|
|
1,361
|
|
|
59
|
|
|
10,586
|
|
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
|
$
|
24,964
|
|
$
|
21,017
|
|
$
|
10,316
|
|
$
|
1,574
|
|
$
|
2,872
|
|
$
|
--
|
|
$
|
60,743
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, 2007
(In thousands except ounces and per ounce costs)
|
|
Rochester
|
Cerro Bayo
|
Martha
|
Endeavor
|
Broken Hill
|
Total
|
|
Production of Silver (ounces)
|
|
|
|
1,227,233
|
|
|
369,500
|
|
|
809,026
|
|
|
124,441
|
|
|
476,494
|
|
|
3,006,694
|
|
|
|
|
Cash Costs per ounce
|
|
|
$
|
2.54
|
|
$
|
7.16
|
|
$
|
5.18
|
|
$
|
2.91
|
|
$
|
3.20
|
|
$
|
3.93
|
|
|
|
|
Total Cash Costs (Non-GAAP)
|
|
|
$
|
3,112
|
|
$
|
2,645
|
|
$
|
4,190
|
|
$
|
362
|
|
$
|
1,525
|
|
$
|
11,834
|
|
|
|
|
Add/Subtract:
|
|
|
Third party smelting costs
|
|
|
|
--
|
|
|
(845
|
)
|
|
(464
|
)
|
|
(249
|
)
|
|
(600
|
)
|
|
(2,158
|
)
|
|
|
|
By-product credit
(1)
|
|
|
|
9,420
|
|
|
6,776
|
|
|
726
|
|
|
--
|
|
|
--
|
|
|
16,922
|
|
|
|
|
Other adjustments
|
|
|
|
511
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
511
|
|
|
|
|
Change in inventory
|
|
|
|
205
|
|
|
(546
|
)
|
|
--
|
|
|
19
|
|
|
(47
|
)
|
|
(369
|
)
|
|
|
|
Depreciation, depletion and amortization
|
|
|
|
2,765
|
|
|
1,384
|
|
|
313
|
|
|
122
|
|
|
934
|
|
|
5,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to
|
|
|
sales, including depreciation,
|
|
|
depletion and amortization (GAAP)
|
|
|
$
|
16,013
|
|
$
|
9,414
|
|
$
|
4,765
|
|
$
|
254
|
|
$
|
1,812
|
|
$
|
32,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, 2007
(In thousands except ounces and per ounce costs)
|
|
Rochester
|
Cerro Bayo
|
Martha
|
Endeavor
|
Broken Hill
|
Total
|
|
Production of Silver (ounces)
|
|
|
|
2,410,029
|
|
|
721,448
|
|
|
1,432,124
|
|
|
284,718
|
|
|
779,342
|
|
|
5,627,661
|
|
|
|
|
Cash Costs per ounce
|
|
|
$
|
3.71
|
|
$
|
4.26
|
|
$
|
5.59
|
|
$
|
3.06
|
|
$
|
3.19
|
|
$
|
4.15
|
|
|
|
|
Total Cash Costs (Non-GAAP)
|
|
|
$
|
8,934
|
|
$
|
3,071
|
|
$
|
7,999
|
|
$
|
873
|
|
$
|
2,483
|
|
$
|
23,360
|
|
|
|
|
Add/Subtract:
|
|
|
Third party smelting costs
|
|
|
|
--
|
|
|
(1,452
|
)
|
|
(982
|
)
|
|
(616
|
)
|
|
(968
|
)
|
|
(4,018
|
)
|
|
|
|
By-product credit (1)
|
|
|
|
18,696
|
|
|
12,914
|
|
|
1,271
|
|
|
--
|
|
|
--
|
|
|
32,881
|
|
|
|
|
Other adjustments
|
|
|
|
650
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
650
|
|
|
|
|
Change in inventory
|
|
|
|
(3,276
|
)
|
|
(2,333
|
)
|
|
518
|
|
|
32
|
|
|
(54
|
)
|
|
(5,113
|
)
|
|
|
|
Depreciation, depletion and amortization
|
|
|
|
7,181
|
|
|
2,749
|
|
|
584
|
|
|
279
|
|
|
1,528
|
|
|
12,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to
|
|
|
sales, including depreciation,
|
|
|
depletion and amortization (GAAP)
|
|
|
$
|
32,185
|
|
$
|
14,949
|
|
$
|
9,390
|
|
$
|
568
|
|
$
|
2,989
|
|
$
|
60,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Exploration Activity
During
the three and six months ended June 30, 2008, the Company incurred costs of approximately
$5.1 and $9.6 million, respectively, related to its global exploration program including
drilling and related costs of $0.3 million and $1.1 million, respectively, capitalized as
mine development. The majority of this was devoted to exploration around its large
operating properties.
Cerro Bayo Mine (Chile)
Exploration
at Cerro Bayo during the second quarter of 2008 focused on reserve development/delineation
drilling and discovery of new mineralization at the Coigues Este area, which occurs about
one kilometer east of the mill facility. In addition, exploratory drilling was also
conducted in the Cascada and Marcela Sur areas in the southern and eastern parts of the
Cerro Bayo district. Approximately 15,250 meters (50,000 feet) were drilled in the two
programs. Positive results were received from both programs and are expected to result in
additional reserves and mineralized material.
Martha Mine (Argentina)
At
Martha, 3,550 meters (11,600 feet) of drilling was completed during the second quarter of
2008 to expand reserves and discover new mineralization. The focus of this work was at the
Martha mine and the new Betty and Isabel vein systems to the north of the mine. Drilling
will continue throughout the year on these and other targets in the Martha mine district.
In
addition to its exploration program near the Martha mine, the Company also conducts
exploration in other parts of the Santa Cruz province of Argentina. In the second quarter
of 2008, the Company focused this effort on the fully owned Lejano property, and on the
Joaquin, Sol de Mayo and Satelite properties. Joaquin is one of two properties on which
the Company has an option to acquire a joint venture interest with Mirasol Resources Ltd.
Sol de Mayo and Satelite are controlled by the Company under separate options to purchase
with private Argentina business interests. At Lejano, the Company completed 542 meters
(1,777 feet) of drilling in the second quarter before onset of winter conditions.
Palmarejo (Mexico)
Exploration
is underway at the Companys new Palmarejo property in the Sierra Madre Occidental of
northern Mexico. The focus of this work was drilling on the Guadalupe deposit designed to
expand the size of the known silver and gold mineralization. A total of 1,138 meters
(4,390 feet) of drilling was completed in the quarter. The Company is planning to increase
its drilling activities in the second half of the year with the main focus to be on the
Guadalupe and Palmarejo zones.
Tanzania (Africa)
In
the second quarter of 2008, the Company continued exploration on its properties in the
Lake Victoria Goldfields District of northern Tanzania, consisting of additional mapping,
sampling, structural geology studies and data modeling to refine the next phase of
drilling. Drilling sites were prepared at Kiziba Hill and core drilling commenced in July,
2008.
Development Projects:
San Bartolomé
(Bolivia)
During
2004, the Company completed an updated feasibility study, obtained all required permits
and commenced construction of the San Bartolomé mine. The Company estimates the
total capital cost (excluding political risk insurance premiums and capitalized interest)
at San Bartolomé to be approximately $228 million, of which $188.4 million has been
incurred as of June 30, 2008. The Company estimates initial operating costs, once the
plant achieves full scale operations, of $4.10 per silver ounce, excluding insurance,
royalties and production taxes of $2.03 per ounce. The Company commenced commercial
production at San Bartolomé on June 27, 2008. Due to start-up related delays, the
Company now expects production during the remainder of the year to be approximately 3.2
million ounces of silver. San Bartolomé is expected to produce approximately 9
million ounces of silver during 2009. No assurances can be made that the project will
achieve its production targets and cost estimates discussed above.
39
The
San Bartolomé project involves risks that are inherent in any mining venture, as
well as particular risks associated with the location of the project. Also, managing
mining projects in the altiplano area of Bolivia, where Cerro Rico is located, presents
logistical challenges. The political and cultural differences of Bolivia may also present
challenges.
The
Company obtained a political risk insurance policy from the Overseas Private Insurance
Corporation (OPIC) and another private insurer. The policy is in the amount of
$155 million and covers 85% of any loss arising from expropriation, political violence or
currency inconvertibility. The policy is expected to cost approximately $3.4 million per
year, which is capitalized during the development and construction phases and included as
a cost of inventory produced (at approximately $0.21 per ounce of silver produced) when
the project commences commercial production.
Palmarejo (Mexico)
On
December 21, 2007, the Company acquired all of the outstanding stock of Bolnisi Gold NL
(Bolnisi), an Australian company listed on the Australian Stock Exchange, and
Palmarejo Silver and Gold Corporation (Palmarejo) a Canadian company listed on
the TSX Venture Exchange. The principal asset of Bolnisi was its ownership of 72.8% of the
outstanding common shares of Palmarejo, which was actively exploring the Palmarejo project
and other exploration stage properties in Mexico. Coeur is currently constructing the
Palmarejo project and expects to commence commercial production in the first half of 2009.
The
Palmarejo project is located in the state of Chihuahua in northern Mexico. The Palmarejo
projects consists of approximately 12,115 hectares covered by mining concessions, of which
about 11,817 hectares are owned outright by Planet Gold, a wholly-owned subsidiary of the
Company, with an additional 226 hectares held by means of leases and options to purchase,
which agreements are summarized below. In addition, Planet Gold has obtained the rights
to, but has not yet made all payments to complete, the purchase of 72 additional hectares.
In addition to the Palmarejo project, the Company also acquired the Yecora
exploration-stage property located in Sonora, on the border with Chihuahua and the El
Realito and La Guitarra exploration-stage properties in Chihuahua.
The
Palmarejo project contains a number of mineralized zones or areas of interest. The most
important of these to date is the Palmarejo zone in the far north of the concessions based
on the northwest-southeast trending La Prieta and La Blanca gold-silver bearing
structures. In addition to Palmarejo, mineralized vein and alteration systems have been
identified in the district, roughly sub-parallel to the Palmarejo zone. The most
significant of these additional targets are the Guadalupe (including Animas) and La Patria
vein systems in the southern part of the property and are currently under investigation by
the Companys exploration teams.
On
June 10, 2008, Coeur announced the results of a feasibility study for the Palmarejo
silver/gold open pit/underground project. The feasibility study reflects results from
geologic, engineering and economic analyses for only the Palmarejo deposit. The Company
expects to update the results of this study later this year to reflect results from its
ongoing exploration and development work this year, which it expects will further increase
ore reserves, mineralized material, production levels, mine life and cash flow.
40
This
study established the first proven and probable mineral reserve for the Palmarejo project.
This initial ore reserve consists of 62.4 million silver ounces and 0.75 million gold
ounces.
Capital
costs to achieve commercial production at Palmarejo were also updated as part of the
feasibility study. These capital costs are expected to be approximately $200 million in
2008 and the Company expects to spend approximately $63 million in 2009 to achieve
commercial production. Production is expected to commence during the first half of 2009,
with silver production anticipated to be 5.1 million ounces and gold production estimated
to be 67,000 ounces during this initial year of operations. This feasibility study
based on $11/oz silver prices and $600/oz gold prices anticipates an initial mine
life of nine years. On average, cash costs per ounce of silver are expected to be negative
over the life of the mine as a result of the gold by-product credit. No assurances can be
made that the project will achieve its schedule, production or cost estimates.
The
Company has budgeted over $8.0 million for exploration at the Palmarejo District in 2008,
its first year of exploration since completion of the acquisition, in an attempt to
discover new silver and gold mineralization and define new ore reserves.
Kensington (Alaska)
The
Kensington property, which contains the projects reserves, consists of over 6,100
acres of patented (750 acres) and unpatented federal mining claims and state claims. The
adjacent Jualin property to the south consists of 9,236 acres of patented and unpatented
federal mining claims and state claims.
On
July 7, 1995, Coeur, through its wholly-owned subsidiary, Coeur Alaska, Inc. (Coeur
Alaska), acquired the 50% ownership interest of Echo Bay Exploration Inc.
(Echo Bay) in the Kensington property from Echo Bay and Echo Bay Alaska, Inc.
(collectively the Sellers), giving Coeur 100% ownership of the Kensington
property. The property is located on the east side of Lynn Canal between Juneau and
Haines, Alaska. Coeur Alaska is obligated to pay Echo Bay a scaled net smelter return
royalty on 1.0 million ounces of future gold production after Coeur Alaska recoups the
$32.5 million purchase price and its construction and development expenditures incurred
after July 7, 1995 in connection with placing the property into commercial production. The
royalty ranges from 1% at $400 gold prices to a maximum of 2 ½% at gold prices
above $475, with the royalty to be capped at 1.0 million ounces of production.
On
September 12, 2005, three environmental groups (Plaintiffs) filed a lawsuit in
Federal District Court in Alaska against the U.S. Army Corps of Engineers (Corps of
Engineers) and the U.S. Forest Service (USFS) seeking to invalidate the
permit issued to Coeur Alaska, Inc. for the Companys Kensington mine. The Plaintiffs
claim the Clean Water Act (CWA) Section 404 permit issued by the Corps of
Engineers authorizing the deposition of mine tailings into Lower Slate Lake conflicts with
the CWA. They additionally claim the USFSs approval of the Amended Plan of
Operations is arbitrary and capricious because it relies on the 404 permit issued by the
Corps of Engineers. Following the District Courts remand of the Section 404
permit to the Corps of Engineers for further review, the Corps reinstated the
Companys permit on March 29, 2006. The lawsuit challenging the permit was
re-opened on April 6, 2006; Coeur Alaska filed its answer to the Amended Complaint;
and Coeur Alaska, the State of Alaska, and Goldbelt, Inc., a local native corporation,
were granted Defendant-Intervenor status to join the agencies in their defense of the
permit.
On
August 4, 2006, the Federal District Court in Alaska dismissed the Plaintiffs
challenge and upheld the Section 404 permit. On August 7, 2006, the Plaintiffs filed a
Notice of Appeal of the decision to the Ninth Circuit Court of Appeals (Ninth
Circuit Court) and on August 9, 2006 the Plaintiffs additionally filed a Motion for
Injunction Pending Appeal with the Ninth Circuit Court. The Ninth Circuit Court granted a
temporary injunction pending appeal on August 24, 2006, enjoining certain activities
relating to the lake tailings facility.
41
On
May 22, 2007, the Ninth Circuit Court reversed the District Courts August 4, 2006
decision which had upheld the Companys 404 permit and issued its opinion that
remanded the case to the District Court with instructions to vacate the Companys 404
permit as well as the USFS Record of Decision approving the general tailings disposal plan
and the Goldbelt 404 permit to construct the Cascade Point Marine Facility. On August 20,
2007, Coeur Alaska filed a Petition for Rehearing En Banc with the Ninth Circuit Court, as
did the State of Alaska and Goldbelt, Inc. The Department of Justice, on behalf of the
Corps of Engineers, and USFS additionally filed a limited Petition for Rehearing with the
Ninth Circuit Court panel seeking reconsideration of the mandate of the May 22, 2007 panel
decision. On October 29, 2007, the Ninth Circuit Court denied the Petitions for Rehearing
En Banc. On November 14, 2007, the Ninth Circuit Court granted a stay of the mandate
pending further appeal to the Supreme Court, subject to the development of a reclamation
plan for the lake area. The Company and the State of Alaska filed Petitions for Certiorari
to the Supreme Court of the United States on January 28, 2008. On June 27, 2008, the
Supreme Court of the United States granted the State of Alaska and Coeur Alaskas
Petitions for a writ of certiorari to review the decision of the Ninth Circuit Court.
The
Company cannot predict if it will prevail in this appeal. In the event that the Company
does not prevail, the Company has identified an alternate site for the tailings disposal
facility which it believes can be permitted and has submitted a modified plan of
operations to the USFS. As a part of the modified plan of operations, the Company entered
into a Memorandum of Understanding in April 2008 with Goldbelt Incorporated, an Alaska
Native corporation, focusing on development of an alternative transportation plan that
would transport mine workers from Juneau to Yankee Cove, and then by boat from Yankee Cove
to the Kensington mine site.
The
Kensington litigation has contributed to an increase in capital costs. The Company has
expended approximately $277.7 million (excluding capitalized interest) as of June 30,
2008. Total expenditures by the Company at the Kensington property in the three months
ended June 30, 2008 were $9.8 million and $19.4 million for the six months ended June 30,
2008. Such expenditures were used to continue the permitting and development activities.
The Company plans to spend approximately $20.7 million on the project during the remainder
of 2008. Based upon the Companys current estimates, an impairment writedown could be
necessary should the expectation of the long-term price for gold decrease below
approximately $625 per ounce. As of June 30, 2008, the carrying value of the Kensington
projects long-lived assets was $317.3 million.
The
Company believes that commercial production could commence in late 2009, subject to
successful resolution of the permitting and litigation issues described above and
completion of associated construction of the tailings facility. No assurances can be made
that the project will achieve its schedule and cost estimates as discussed above. Further,
no assurance can be given as to whether or when regulatory permits and approvals granted
to the Company may be further challenged, appealed or contested by third parties or
issuing agencies, or as to whether the Company will ultimately place the Kensington
project into commercial production.
Critical Accounting
Policies and Estimates
Management
considers the following policies to be most critical in understanding the judgments that
are involved in preparing the Companys consolidated financial statements and the
uncertainties that could impact its results of operations, financial condition and cash
flows. Our consolidated financial statements are impacted by the accounting policies used
and the estimates and assumptions made by management during their preparation. We have
identified the policies below as critical to our business operations and the understanding
of our results of operations. Managements Discussion and Analysis of our Financial
Condition and Results of Operations are based on our consolidated financial statements,
which have been prepared in conformity with accounting principles generally accepted in
the United States (GAAP). The preparation of these statements requires that we make
estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial statements,
and the reported amounts of revenue and expenses during the reporting period. We base
these estimates on historical experience and on assumptions that we consider reasonable
under the circumstances; however, reported results could differ from those based on the
current estimates under different assumptions or conditions. The impact and any associated
risks related to these policies on our business operations are discussed throughout
Managements Discussion and Analysis of Financial Condition and Results of
Operations. The areas requiring the use of managements estimates and assumptions
relate to recoverable ounces from proven and probable reserves that are the basis of
future cash flow estimates and units-of-production depreciation and amortization
calculations; useful lives utilized for depreciation, depletion, amortization and
accretion of future cash flows for long lived assets; estimates of recoverable gold and
silver ounces in ore on leach pad; reclamation and remediation costs; valuation allowance
for deferred tax assets; and post-employment and other employee benefit liabilities. For a
detailed discussion on the application of these and other accounting policies, see Note B
in the Notes to the Consolidated Financial Statements of this Form 10-Q.
42
Revenue
Recognition
. Pursuant to guidance in Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition for Financial Statements, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable, no obligations remain and collectability is probable. The passing of title
to the customer is based on the 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, in an identical
form to the product sold.
Under
our 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 metal 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 a provisional payment based upon
provisional assays and quoted metal prices. Final settlement is based on the average
applicable price for a specified future period, and generally occurs from three to six
months after shipment. Final sales are settled using smelter weights, settlement assays
(average of assays exchanged and/or umpire assay results) and are priced as specified in
the smelter contract. The Companys provisionally priced sales 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.
The embedded derivative is recorded as a derivative asset in prepaid expenses and other,
or a derivative liability on the balance sheet and is adjusted to fair value through
revenue each period until the date of final gold and silver settlement. The form of the
material being sold, after deduction for smelting and refining, is in an identical form to
that sold on the London Bullion Market. The form of the product is metal in flotation
concentrate, which is the final process for which the Company is responsible.
The
effects of forward sales contracts are reflected in revenue at the date the related
precious metals are delivered or the contracts expire. Third party smelting and refining
costs are recorded as a reduction of revenue.
At
June 30, 2008, the Company had outstanding provisionally priced sales of $63.4 million,
consisting of 2.7 million ounces of silver and 16,700 ounces of gold, which had a fair
value of approximately $62.4 million including the embedded derivative. For each one cent
per ounce change in realized silver price, revenue would vary (plus or minus)
approximately $27,000 and for each one dollar per ounce change in realized gold price,
revenue would vary (plus or minus) approximately $16,700. At June 30, 2007, the Company
had outstanding provisionally priced sales of $73.1 million consisting of 3.8 million
ounces of silver and 34,159 ounces of gold. For each one cent per ounce change in realized
silver price, revenue would vary (plus or minus) approximately $38,300; and for each one
dollar per ounce change in realized gold price, revenue would vary (plus or minus)
approximately $34,200.
43
Estimates.
The
preparation of this Quarterly Report on Form 10-Q requires us to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our 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
Companys 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 our control.
Ore reserves 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 our mines, the mining methods we
use and the related costs we incur to develop and mine our reserves. Changes in
these assumptions could result in material adjustments to our reserve
estimates. We use reserve estimates in determining the units-of-production
depreciation and amortization expense, as well as in evaluating mine asset
impairments.
We
review and evaluate our long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable. We
utilize the methodology set forth in Statement of Financial Accounting Standard (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, to
evaluate the recoverability of its assets. An impairment is considered to exist if total
estimated future cash flows or probability-weighted cash flows on an undiscounted basis is
less than the carrying amount of the assets, including property, plant and equipment,
mineral property, development property, and any deferred costs. The accounting estimates
related to impairment are critical accounting estimates because the future cash flows 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. An
impairment loss exists when estimated undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than its carrying amount. Any
impairment loss recognized represents the excess of the assets carrying value as
compared to its estimated fair value. The Company reviews the carrying value of its assets
whenever events or changes in circumstances indicate that the carrying amount of its
assets may not be fully recoverable. The Company did not record any write-downs during the
periods ended June 30, 2008 and 2007.
We
depreciate our 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 our proven
and probable recoverable reserves or on a straight-line basis 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 our 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 pad.
The Rochester Mine utilizes the heap leach process to extract silver and
gold from ore. 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
key stages in the conversion of ore into silver and gold are (i) the blasting process in
which the ore is broken into large pieces; (ii) the processing of the ore through a
crushing facility that breaks it into smaller pieces; (iii) the transportation of the
crushed ore to the leach pad where the leaching solution is applied; (iv) the collection
of the leach solution; (v) subjecting the leach solution to the precipitation process, in
which gold and silver is converted back to a fine solid; (vi) the conversion of the
precipitate into dorè; and (vii) the conversion by a third party refinery of the
dorè into refined silver and gold bullion.
44
We
use several integrated steps to scientifically measure the metal content of ore placed on
the leach pads during the key stages. As the ore body is drilled in preparation for the
blasting process, samples of the drill residue are assayed to determine estimated
quantities of contained metal. We estimate the quantity of ore by utilizing global
positioning satellite survey techniques. We then process the ore through a crushing
facility 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. We then transport the crushed ore to
the leach pad for application of the leaching solution. As the leach solution is collected
from the leach pads, we continuously sample for assaying. We measure the quantity of leach
solution by flow meters throughout the leaching and precipitation process. After
precipitation, the product is converted to dorè, which is the final product
produced by the mine. We again sample and assay the dorè. Finally, a third party
smelter converts the dorè into refined silver and gold bullion. At this point we
are able to determine final ounces of silver and gold available for sale. We then review
this end result and reconcile it to the estimates we had used and developed throughout the
production process. Based on this review, we adjust our estimation procedures when
appropriate.
Our
reported inventories include metals estimated to be contained in the ore on leach pad of
$34.7 million as of June 30, 2008. Of this amount, $19.2 million is reported as a current
asset and $15.5 million is reported as a non-current asset. The distinction between
current and non-current is based upon the expected length of time necessary for the
leaching process to remove the metals from the broken ore. The historical cost of the
metal that is expected to be extracted within twelve months is classified as current and
the historical cost of metals contained within the broken ore that will be extracted
beyond twelve months is classified as noncurrent. The ore on leach pad inventory is stated
at actual production costs incurred to produce and place ore on the leach pad during the
current period, adjusted for the effects on monthly production costs of abnormal
production levels.
The
estimate of both the ultimate recovery expected over time, and the quantity of metal that
may be extracted relative to such twelve month period, requires the use of estimates which
are inherently inaccurate since they rely upon laboratory testwork. Testwork consists of
60-day leach columns from which we project metal recoveries into the future. The
quantities of metal contained in the ore are 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 approximately twenty
years of leach pad operation at the Rochester Mine. The assumptions we use to measure
metal content during each stage of the inventory conversion process includes estimated
recovery rates based on laboratory testing and assaying. We periodically review our
estimates compared to actual experience and revise our estimates when appropriate.
However, the ultimate recovery will not be known until leaching operations cease, which is
currently estimated for 2011.
When
we began operations at the Rochester mine in 1986, based solely on laboratory testing, we
estimated the ultimate recovery of silver and gold at 50% and 80%, respectively. Since
1986, we have adjusted the expected ultimate recovery 3 times (once in each of 1989, 1997
and 2003) based upon actual experience gained from leach operations. In 1989, we increased
our estimated recoveries for silver and gold to 55% and 85%, respectively. The change was
accounted for prospectively as a change in estimate, which had the effect of increasing
the estimated recoverable ounces of silver and gold contained in the heap by 1.6 million
ounces and 10,000 ounces, respectively. In 1997, we revised our estimated recoveries for
silver and gold to 59% and 89%, respectively, which increased the estimated recoverable
ounces of silver and gold contained in the heap by 4.7 million ounces and 39,000 ounces,
respectively. Finally, in 2003, we revised our estimated recoveries for silver and gold to
61.5% and 93%, respectively, which increased the estimated recoverable ounces of silver
and gold contained in the heap by 1.8 million ounces and 41,000 ounces, respectively.
45
If
our estimate of ultimate recovery requires adjustment, the impact upon our inventory
valuation and upon our income statement would be as follows:
|
Positive/Negative
Change in Silver Recovery
|
Positive/Negative
Change in Gold Recovery
|
|
|
1%
|
2%
|
3%
|
1%
|
2%
|
3%
|
Quantity of recoverable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ounces
|
|
|
|
1.7 million
|
|
|
3.5 million
|
|
|
5.2 million
|
|
|
13,240
|
|
|
26,480
|
|
|
39,720
|
|
Positive impact on
|
|
|
future cost of
|
|
|
production per silver
|
|
|
equivalent ounce for
|
|
|
increases in recovery
|
|
|
rates
|
|
|
$
|
2.65
|
|
$
|
4.06
|
|
$
|
4.94
|
|
$
|
1.29
|
|
$
|
2.25
|
|
$
|
2.99
|
|
Negative impact on
|
|
|
future cost of
|
|
|
production per silver
|
|
|
equivalent ounce for
|
|
|
decreases in recovery
|
|
|
rates
|
|
|
$
|
(3.94
|
)
|
$
|
(3.94
|
)
|
$
|
(3.94
|
)
|
$
|
(1.84
|
)
|
$
|
(4.66
|
)
|
$
|
(9.53
|
)
|
Inventories
of ore on leach pads are valued based upon actual production costs incurred to produce and
place such ore on the leach pad during the current period, adjusted for the effects on
monthly production of costs of abnormal production levels, less costs allocated to
minerals recovered through the leach process. The costs consist of those production
activities occurring at the mine site and include the costs, including depreciation,
associated with mining, crushing and precipitation circuits. In addition, refining is
provided by a third party refiner to place the metal extracted from the leach pad in a
saleable form. These additional costs are considered in the valuation of inventory.
Reclamation
and remediation costs.
Reclamation and remediation costs are based principally on
legal and regulatory requirements. Management estimates costs associated with reclamation
of mining properties as well as remediation cost for inactive properties. Such costs
related to active mines are accrued and charged over the expected operating lives of the
mines using the units-of-production method.
The
estimated undiscounted cash flows generated by our assets and the estimated liabilities
for reclamation and remediation are determined using the Companys assumptions about
future costs, mineral prices, mineral processing recovery rates, production levels and
capital and reclamation costs. Such assumptions are based on the Companys current
mining plan and the best available information for making such estimates. On an ongoing
basis, management evaluates its estimates and assumptions; however, actual amounts could
differ from those based on such estimates and assumptions.
Income
taxes.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (FIN 48) an Interpretation of FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. FIN 48 requires that the Company
recognize in its financial statements the impact of a tax position, if that tax position
is more likely than not of being sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognition, classification of interest and
penalties, accounting in interim periods and disclosure. The provisions of FIN 48 were
effective January 1, 2007. The adoption of FIN 48 did not have a material effect on the
Companys financial position, results of operations or cash flows.
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 has substantially concluded all
U.S. federal income tax matters for years through 1999. Federal income tax returns for
2000 through 2006 are subject to examination. The Companys continuing practice is to
recognize interest and/or penalties related to income tax matters in income tax expense.
46
RESULTS OF OPERATIONS
Three Months Ended June
30, 2008 Compared to Three Months Ended June 30, 2007
Revenues
Sales
of metal from continuing operations in the second quarter of 2008 decreased by $1.6
million, or 3.2%, from the second quarter of 2007 to $50.0 million. The decrease in sales
of metal was primarily due to a decrease in the quantity of silver and gold ounces sold
which was offset by increased metal prices realized. In the second quarter of 2008, the
Company sold 2.3 million ounces of silver and 15,168 ounces of gold compared to 2.8
million ounces of silver and 25,520 ounces of gold for the same period in 2007. Realized
silver and gold prices were $18.84 and $987.70 per ounce, respectively, in the second
quarter of 2008, compared to $13.47 and $664.57 per ounce, respectively, in the comparable
quarter of 2007.
Included
in revenues is the by-product revenue associated with by-product metal sales consisting of
gold. During the second quarter of 2008, by-product revenues totaled $12.5 million
compared to $16.4 million in the second quarter of 2007. The decrease is due to a decrease
in the quantity of gold sold in the second quarter of 2008. The Company believes that
presentation of these revenue streams as by-products from its current operations will
continue to be appropriate in the future.
In
the second quarter of 2008, the Company produced a total of 2.5 million ounces of silver
and 13,470 ounces of gold, compared to 3.0 million ounces of silver and 25,453 ounces of
gold in the second quarter of 2007. The decrease in silver and gold production is
primarily due to decreased production at the Rochester mine.
Costs and Expenses
Production
costs applicable to sales from continuing operations in the second quarter of 2008
decreased by $1.9 million, or 7.0%, from the second quarter of 2007 to $24.9 million. The
decrease in production costs in the second quarter of 2008 is primarily due to lower costs
incurred at the Rochester mine and by-product credits from gold produced which exceeded
operating costs at Rochester, which was offset by higher costs of labor, fuel, power and
other consumables at the other mining operations.
Depreciation
and depletion increased by $0.6 million as compared to the second quarter of 2007. The
increase is due to depreciation expense from the Palmarejo project.
Administrative
and general expenses increased by $1.3 million, or 23.2%, as compared to the second
quarter of 2007. The increase is primarily due to compensation costs associated with the
Companys annual incentive plan, other corporate expenses, and non-operating expenses
at the Cerro Bayo Mine related to the temporary suspension of production activities to
upgrade the electrical infrastructure which was completed in May 2008.
Exploration
expenses increased by $2.2 million to $4.7 million in the second quarter of 2008 compared
to $2.5 million in the same period of 2007 as a result of an expanded exploration budget
primarily due to the addition of the Palmarejo project.
A
total of $10.6 million of pre-development costs at the Palmarejo project were recorded as
expenses during the second quarter of 2008. The Company completed its final feasibility
study for the Palmarejo project on June 10, 2008 and will commence capitalizing its mine
development expenditures for the remainder of 2008. No pre-development expenses were
recorded in the second quarter of 2007.
47
Other Income and Expenses
Interest
and other income in the second quarter of 2008 decreased by $4.1 million to $0.2 million
compared with the second quarter of 2007. The decrease was primarily due to lower levels
of invested cash and short-term investments and lower interest rates earned on the
Companys cash, cash equivalents and short-term investments.
Interest
expense increased to $0.9 million in the second quarter of 2008 compared to $0.1 million
in the second quarter of 2007 due to increased short-term borrowings related to capital
lease obligations at the Palmarejo project. Capitalized interest was $2.9 million in the
second quarter of 2008 compared to $0.6 million in the prior years second quarter.
Income Taxes
For
the three months ended June 30, 2008, the Company reported an income tax provision of
approximately $1.1 million compared to an income tax provision of $3.2 million in the
second quarter of 2007. The following table summarizes the components of the
Companys income tax provision for the three months ended June 30, 2008 and 2007.
|
Three Months Ended
June 30,
|
|
2008
|
2007
|
Current:
|
|
|
|
|
|
|
|
|
United States - Alternative minimum tax
|
|
|
$
|
(988
|
)
|
$
|
(76
|
)
|
United States - Foreign withholding
|
|
|
|
(227
|
)
|
|
(283
|
)
|
Argentina
|
|
|
|
(846
|
)
|
|
(1,308
|
)
|
Australia
|
|
|
|
(1,563
|
)
|
|
(659
|
)
|
Mexico
|
|
|
|
(17
|
)
|
|
--
|
|
Canada
|
|
|
|
(20
|
)
|
|
--
|
|
Bolivia
|
|
|
|
(669
|
)
|
|
--
|
|
Deferred:
|
|
|
United States
|
|
|
|
1,073
|
|
|
(349
|
)
|
Argentina
|
|
|
|
62
|
|
|
(461
|
)
|
Australia
|
|
|
|
(375
|
)
|
|
(91
|
)
|
Bolivia
|
|
|
|
(388
|
)
|
|
--
|
|
Chile
|
|
|
|
(211
|
)
|
|
--
|
|
Mexico
|
|
|
|
3,051
|
|
|
--
|
|
|
|
|
|
|
Income tax provision
|
|
|
$
|
(1,118
|
)
|
$
|
(3,227
|
)
|
|
|
|
|
|
During
the three months ended June 30, 2008, the Company recognized a current provision in
certain foreign jurisdictions primarily related to higher metal prices, inflationary
adjustments on non-monetary assets and unrealized foreign exchange gains on U.S. dollar
denominated liabilities in Mexico and Bolivia. Further, the Company accrued foreign
withholding taxes of approximately $0.2 million on inter-company transactions between the
U.S. parent and subsidiaries operating in Argentina and Australia. Finally, the Company
recognized a net $3.2 million deferred tax benefit for the recognition of deferred taxes
on deductible temporary differences and net operating loss carryforwards in the various
jurisdictions.
During
the three months ended June 30, 2007, due to higher metals prices and additional proven
and probable reserves, the Company recognized a current provision in the U.S. and certain
foreign operating jurisdictions. Further, the Company accrued foreign withholding taxes of
approximately $0.3 million on inter-company transactions between the U.S. parent and
subsidiaries operating in Argentina and Australia. Finally, the Company recognized a $0.1
million deferred tax provision in Chile as projections of future pre-tax income were
previously sufficient to utilize all remaining net operating loss carry-forwards and a
$0.8 million provision in other foreign jurisdictions as a result of the reversal of
deferred taxes on deductible temporary differences.
48
Six Months Ended June
30, 2008 Compared to Six Months Ended June 30, 2007
Revenues
Sales
of metal from continuing operations in the six months ended June 30, 2008 increased by
$4.8 million, or 4.7%, over the same period of 2007 to $107.3 million. The increase in
sales of metal was primarily attributable to higher realized metal prices, partially
offset by a decrease in the quantity of ounces sold during the six months ended June 30,
2008 compared to the same period in 2007. In the six months ended June 30, 2008, the
Company sold 4.7 million ounces of silver and 29,930 ounces of gold, compared to 5.5
million ounces of silver and 50,152 ounces of gold for the same period in 2007. Realized
silver and gold prices were $18.64 and $976.68 per ounce, respectively, in the six months
ended June 30, 2008 compared to $13.60 and $655.06, respectively, in the comparable period
of 2007.
Included
in revenues is the by-product revenue associated with by-product metal sales consisting of
gold. In the six months ended June 30, 2008, by-product revenues totaled $26.4 million
compared to $32.2 million for the same period of 2007. The decrease in by-product revenues
is primarily due to a decrease in the number of gold ounces sold offset by an increase in
the realized prices for gold. The Company believes that presentation of these revenue
streams as by-products will continue to be appropriate in the future.
In
the six months ended June 30, 2008, the Companys continuing operations produced a
total of 4.9 million ounces of silver and 30,103 ounces of gold, compared to 5.6 million
ounces of silver and 50,005 ounces of gold in the same period of 2007. The decrease in
silver production is primarily due to decreased production from the Martha, Broken Hill
and Rochester mines, offset by increased production from the Cerro Bayo and Endeavor
mines.
Costs and Expenses
Production
costs applicable to sales from continuing operations in the six months ended June 30, 2008
increased by $2.4 million, or 5.0%, from the same period of 2007 to $50.2 million. The
increase in the six months ended June 30, 2008 is primarily due to higher costs of labor,
fuel, power and other consumables at the Companys operations.
Depreciation
and depletion decreased by $0.8 million, or 6.3%, for the first six months of 2008
compared to the first six months of 2007 primarily due to lower depletion expense from the
Rochester mine.
Administrative
and general expenses increased by $3.7 million, or 30.9%, in the six months ended June 30,
2008 compared to the same period in 2007 primarily due to compensation cost associated
with the Companys annual incentive plan increases, other corporate expenses and
non-operating expenses at the Cerro Bayo Mine related to the temporary suspension of
production activities to upgrade the electrical infrastructure which was completed in May
2008.
Exploration
expenses increased by $3.0 million in the six months ended June 30, 2008 compared to the
same period in 2007 as a result of an expanded exploration budget primarily due to the
addition of the Palmarejo project since last years second quarter.
A
total of $16.4 million of pre-development costs at the Palmarejo project were recorded as
expenses during the first six months of 2008. The Company completed its final feasibility
study for the Palmarejo project on June 10, 2008 and will commence capitalizing its mine
development expenditures for the remainder of 2008. No pre-development expenses were
recorded during the first six months of 2007.
49
During
the first quarter of 2007, the Company accrued the final $0.5 million royalty to the U.S.
Government called for under the May 2001 settlement agreement relating to the federal
natural resources action commenced against the Company in March 1996. The final payment
was made early in the second quarter of 2007.
Other Income and Expenses
Interest
and other income in the six months ended June 30, 2008 decreased by $7.4 million to $1.5
million compared with the same period of 2007. The decrease was primarily due to lower
levels of invested cash and short-term investments and lower interest rates earned during
the six months ended June 30, 2008 compared to the same period in 2007.
Interest
expense was $1.7 million in the six months ended June 30, 2008 compared to $0.2 million in
the six months ended June 30, 2007 due to increased short-term borrowings related to
capital lease obligations at the Palmarejo project. Capitalized interest was $3.9 million
in the six months ended June 30, 2008 compared to $1.1 million in the same period of 2007.
Income Taxes
For
the six months ended June 30, 2008, the Company reported an income tax provision of
approximately $5.2 million compared to an income tax provision of $6.9 million in the same
period of 2007. The following table summarizes the components of the Companys income
tax provision for the six months ended June 30, 2008 and 2007.
|
Six Months Ended
June 30,
|
|
2008
|
2007
|
Current:
|
|
|
|
|
|
|
|
|
United States - Alternative minimum tax
|
|
|
$
|
(988
|
)
|
$
|
(309
|
)
|
United States - Foreign withholding
|
|
|
|
(404
|
)
|
|
(666
|
)
|
Argentina
|
|
|
|
(2,939
|
)
|
|
(2,906
|
)
|
Australia
|
|
|
|
(4,291
|
)
|
|
(1,773
|
)
|
Mexico
|
|
|
|
(22
|
)
|
Canada
|
|
|
|
(20
|
)
|
Bolivia
|
|
|
|
(669
|
)
|
Deferred:
|
|
|
United States
|
|
|
|
1,547
|
|
Argentina
|
|
|
|
371
|
|
|
(174
|
)
|
Australia
|
|
|
|
135
|
|
|
(361
|
)
|
Bolivia
|
|
|
|
(388
|
)
|
|
--
|
|
Chile
|
|
|
|
(1,348
|
)
|
|
(739
|
)
|
Mexico
|
|
|
|
3,823
|
|
|
|
|
|
|
Income tax provision
|
|
|
$
|
(5,193
|
)
|
$
|
(6,928
|
)
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company recognized a current provision in 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 Mexico and Bolivia. Further, the Company accrued foreign withholding taxes
of approximately $0.4 million on inter-company transactions from the U.S. parent to the
Argentina and Australia subsidiaries. Finally, the Company recognized a $5.9 million
deferred tax benefit for the recognition of deferred taxes on deductible temporary
differences in various foreign jurisdiction offset by a deferred tax provision of $1.7
million from future taxable temporary differences and utilization of tax carry-forwards in
Chile.
During
the six months ended June 30, 2007, due to significantly higher metals prices, the Company
recognized a current provision in the U.S. and certain foreign operating jurisdictions.
Further, the Company recognized a $0.7 million deferred tax provision in Chile as
projections of future pre-tax income were previously sufficient to utilize all remaining
net operating loss carry-forwards and a $0.5 million provision in the foreign jurisdiction
as a result of reversal of deferred taxes on deductible temporary differences.
50
LIQUIDITY AND CAPITAL
RESOURCES
Working Capital; Cash and
Cash Equivalents
The
Companys working capital (defined as current assets less current liabilities) at
June 30, 2008, increased by $56.6 million to approximately $209.0 million compared to
$152.4 million at December 31, 2007. The increase in working capital was primarily a
result of the issuance on March 18, 2008 of the Companys 3¼% Convertible
Senior Notes due March 2028 in the aggregate principal amount of $230 million. The ratio
of current assets to current liabilities was 2.9 to 1 at June 30, 2008, compared to 2.4 to
1 at December 31, 2007.
Net
cash used in operating activities in the three months ended June 30, 2008 was $2.6 million
compared to net cash provided by operating activities of $11.5 million in the three months
ended June 30, 2007. The decrease of $14.1 million in cash flow from operations is
primarily due to lower net income, and changes in inventories and receivables related to
accrued metal sales and increases in recoverable value added taxes in Bolivia in
connection with the San Bartolomé project. Net cash used in investing activities in
the second quarter of 2008 was $100.3 million compared to net cash used in investing
activities of $52.9 million in the prior years comparable period. The increase of
$47.3 million in cash used in investing activities is primarily due to an increase in
capital expenditures related to the construction activities at the San Bartolomé,
Palmarejo and Kensington projects. Net cash used in financing activities was $5.5 million
in the second quarter of 2008, compared to $0.4 million net cash used in the second
quarter of 2007. The increase was primarily due to the retirement of short-term
borrowings.
Net
cash used in operating activities in the six months ended June 30, 2008 was $10.2 million
compared to net cash provided by operating activities of $34.2 million in the six months
ended June 30, 2007. The decrease of $44.4 million in cash flow from operations is
primarily due to lower net income, and changes in inventories and receivables related to
accrued metal sales and increases in recoverable value added taxes in Bolivia in
connection with the San Bartolomé project. Net cash used in investing activities in
the six months ended June 30, 2008 was $204.6 million compared to net cash used in
investing activities of $67.6 million in the prior years comparable period. The
increase of $137.0 million in cash used in investing activities is primarily due to an
increase in capital expenditures related to the construction activities at the San
Bartolomé, Palmarejo and Kensington projects and purchases of short-term
investments. Net cash provided by financing activities was $214.0 million in the six
months ended June 30, 2008, compared to $1.1 million net cash used in the six months ended
June 30, 2007. The increase was due to cash proceeds from the issuance on March 18, 2008
of the Companys 3 ¼% Convertible Senior Notes due 2028 in the aggregate
principal amount of $230 million.
At
June 30, 2008, the Company had $186.5 million of cash, cash equivalents and short-term
investments. Management believes that its existing and available cash and short-term
investments and cash flow from operations will allow it to meet its obligations for the
next twelve months. The Company estimates approximately $185.0 million to $215.0 million will be spent in
the remainder of 2008 on capital expenditures at its operating mines and development-stage
properties.
Capital Expenditures
During
the second quarter of 2008, the Company expended $104.1 million in capital expenditures
consisting of $31.0 million at San Bartolome, $31.3 million at Palmarejo, $9.8 million at
Kensington, $1.9 million at the Martha mine, $2.9 million at the Cerro Bayo mine, $26.5
million at Endeavor and $0.7 million at corporate and other.
51
During
the first half of 2008, the Company expended $168.6 million in capital expenditures
consisting of $67.5 million at San Bartolomé, $46.6 million at Palmarejo, $19.4
million at Kensington, $3.7 million at the Martha Mine, $4.1 million at the Cerro Bayo
Mine, $26.5 million at Endeavor and $0.8 million at corporate and other.
Debt and Capital Resources
3.25% Convertible Senior
Notes Due 2028
On
March 18, 2008, the Company issued $230 million in aggregate principal amount of Senior
Convertible Notes due 2028 issued under an effective shelf registration statement on file
with the U.S. Securities and Exchange Commission.
The
notes are unsecured and bear interest at a rate of 3 1/4% per year, payable on March 15
and September 15 of each year, beginning on September 15, 2008. The notes will mature on
March 15, 2028, unless earlier converted, redeemed or repurchased by the Company.
Each
holder of the notes may require that the Company repurchase some or all of the
holders notes on March 15, 2013, March 15, 2015, March 15, 2018 and March 15, 2023
at a repurchase price equal to 100% of the principal amount of the notes to be
repurchased, plus accrued and unpaid interest, in cash, shares of common stock or a
combination of cash and shares of common stock, at the Companys election. Holders
will also have the right, following certain fundamental change transactions, to require
the Company to repurchase all or any part of their notes for cash at a repurchase price
equal to 100% of the principal amount of the notes to be repurchased plus accrued and
unpaid interest. The Company may redeem the notes for cash in whole or in part at any time
on or after March 22, 2015 at 100% of the principal amount of the notes to be redeemed
plus accrued and unpaid interest.
The
notes provide for net share settlement of any conversions, which limits the
number of shares of common stock to be issued in the future. Pursuant to this feature,
upon conversion of the notes, the Company (1) will pay the note holder an amount in cash
equal to the lesser of the conversion obligation or the principal amount of the notes, and
(2) will settle any excess of the conversion obligation above the notes principal
amount in the Companys common stock, cash or a combination thereof, at the
Companys election.
The
notes will be convertible under certain circumstances, at the holders option, at an
initial conversion rate of 176.0254 shares of the Companys common stock per $1,000
principal amount of notes, which is equivalent to an initial conversion price of
approximately $5.68 per share of common stock (representing a 30% conversion premium based
on the closing price of $4.37 per share of the Companys common stock on March 12,
2008), subject to adjustment in certain circumstances.
The
Company intends to use the proceeds of this offering to complete the construction of the
San Bartolomé silver project in Bolivia and fund construction of the Palmarejo
silver/gold project in Mexico. Any additional remaining proceeds may be used to repay
borrowings under the Companys bridge loan facility and bank facility and for general
corporate purposes.
Acquisitions of Bolnisi
and Palmarejo
On
December 21, 2007, the Company completed its acquisition of all the shares of Bolnisi Gold
NL and Palmarejo Gold and Silver Corporation in exchange for a total of approximately 272
million shares of Coeur common stock, a total cash payment of approximately $1.1 million
and the assumption of liabilities of $0.7 billion. Coeur issued 0.682 shares of Coeur
common stock (or, at the election of the Bolnisi shareholder, CHESS Depositary Interests
representing Coeur shares) and A$0.004 in cash (or approximately US$1.0 million in the
aggregate) for each Bolnisi ordinary share, and 2.715 shares of Coeur common stock and
C$0.004 in cash (or approximately US $0.1 million in the aggregate) for each Palmarejo
common share. The total consideration paid amounted to $1.1 billion and the total
liabilities assumed were $0.7 billion.
52
Bridging Debt Facility
On
October 22, 2007, Bolnisi entered into a $20 million credit facility with Macquarie Bank
Limited to fund further exploration and development of the Palmarejo silver/gold project,
the exploration and development of the Yecora gold/silver project and the El Realito
gold/silver project and for working capital purposes. The credit facility was extended to
September 30, 2008, and bears interest at a variable rate (LIBOR) plus a margin of 2.45%.
As of June 30, 2008, the Company had $20 million outstanding under the facility which
bears interest at 5.175% and is included in current portion of long-term debt and capital
lease obligations in the balance sheet. The Company expects to pay the balance of $20
million in the third quarter of 2008.
Bank Loan
On
August 30, 2007 Palmarejo entered into a temporary credit facility of $2.0 million secured
by the Companys investments in Asset-Backed Commercial Paper, to fund working
capital requirements. The facility was amended on October 9, 2007. On June 3, 2008, the
Company paid off the outstanding credit facility balance.
Litigation and Other
Events
Federal Court of Alaska
Kensington Project Permit Challenge
Reference
is made to the discussion set forth in Managements Discussion and Analysis of
Financial Condition and Results of Operations under Development Projects
Kensington (Alaska) for a detailed description of the Kensington project permit
legal challenge. On June 27, 2008, the Supreme Court of the United States granted the
State of Alaska and Coeur Alaskas Petitions for a writ of certiorari to review the
May 22, 2007 decision of the Ninth Circuit Court of Appeals with respect to the permit
legal challenge. The Company is pursuing an alternate site for a tailings disposal
facility in the event the Company does not prevail in the litigation.
No
assurance can be given as to whether or when regulatory permits and approvals granted to
the Company may be further challenged, appealed or contested by third parties or issuing
agencies, or as to whether the Company will ultimately place the Kensington project into
commercial production.
States of Maine, Idaho
and Colorado Superfund Sites Related to Callahan Mining Corporation
During
2001, the United States Forest Service (USFS) made a formal request for information
regarding the Deadwood Mine Site located in central Idaho. Callahan Mining Corporation had
operated at this site during the 1940s. The USFS believes that some cleanup action
is required at the location. However, Coeur dAlene Mines Corporation did not acquire
Callahan until 1991, more than 40 years after Callahan disposed of its interest in the
Deadwood property. The Company did not make any decisions with respect to generation,
transport or disposal of hazardous waste at the site. Therefore, it is believed that the
Company is not liable for any cleanup, and if Callahan might be liable, it has no
substantial assets with which to satisfy any such liability. To date no claim has been
made by the United States for any cleanup costs against either the Company or Callahan.
53
During
2002, the EPA made a formal request for information regarding a Callahan mine site in the
State of Maine. Callahan operated there in the late 1960s, shut the operations down
in the early 1970s and disposed of the property. The EPA contends that some cleanup
action is warranted at the site, and listed it on the National Priorities List in late
2002. The Company believes that because it made no decisions with respect to generation,
transport or disposal of hazardous waste at this location, it is not liable for any
cleanup costs. If Callahan might have liability, it has no substantial assets with which
to satisfy such liability. To date, no claim has been made for any cleanup costs against
either the Company or Callahan.
In
January 2003, the USFS made a formal request for information regarding a Callahan mine
site in the State of Colorado known as the Akron Mine Site. Callahan operated there in
approximately the late 1930s through the 1940s, and to the Companys knowledge,
disposed of the property. The Company is not aware of what, if any, cleanup action the
Forest Service is contemplating. However, the Company did not make decisions with respect
to generation, transport or disposal of hazardous waste at this location, and therefore
believes it is not liable for any cleanup costs. If Callahan might have liability, it has
no substantial assets with which to satisfy such liability. To date, no claim has been
made for any cleanup costs against either the Company or Callahan.
Item 3. Quantitative and
Qualitative Disclosure About Market Risk
The
Company is exposed to various market risks as a part of its operations. In an effort to
mitigate losses associated with these risks, the Company may, at times, enter into
derivative financial instruments. These may take the form of forward sales contracts,
foreign currency exchange contracts and interest rate swaps. The Company does not actively
engage in the practice of trading derivative securities for profit. This discussion of the
Companys market risk assessments contains forward looking statements
that contain risks and uncertainties. Actual results and actions could differ materially
from those discussed below.
The
Companys operating results are substantially dependent upon the world market prices
of silver and gold. The Company has no control over silver and gold prices, which can
fluctuate widely and are affected by numerous factors, such as supply and demand and
investor sentiment. In order to mitigate some of the risk associated with these
fluctuations, the Company will at times, enter into forward sale contracts. The Company
continually evaluates the potential benefits of engaging in these strategies based on
current market conditions. The Company may be exposed to nonperformance by counterparties
as a result of its hedging activities. This exposure would be limited to the amount that
the market price of the metal falls short of the contract price. The Company has
historically sold silver and gold produced by our mines pursuant to forward contracts and
at spot prices prevailing at the time of sale. Since 1999, the Company has not engaged in
any silver hedging activities and is currently not engaged in any gold hedging activities.
The
Company enters into concentrate sales contracts with third-party smelters. The contracts,
in general, provide for a provisional payment based upon provisional assays and quoted
metal prices and the provisionally priced sales 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, which is the final settlement price based on a future price, does
not qualify for hedge accounting. These embedded derivatives are recorded as derivative
assets (in Prepaid expenses and other), or derivative liabilities (in Accrued liabilities
and other), on the balance sheet and are adjusted to fair value through earnings each
period until the date of final settlement.
At
June 30, 2008, the Company had outstanding provisionally priced sales of $63.4 million,
consisting of 2.7 million ounces of silver and 16,700 ounces of gold, which had a fair
value of approximately $62.4 million including the embedded derivative. For each one cent
per ounce change in realized silver price, revenue would vary (plus or minus)
approximately $27,000; and for each one dollar per ounce change in realized gold price,
revenue would vary (plus or minus) approximately $16,700.
54
The
Company operates in several foreign countries, specifically Bolivia, Chile, Argentina and
Mexico, which exposes it to risks associated with fluctuations in the exchange rates of
the currencies involved. As part of its program to manage foreign currency risk, from
time to time, the Company enters into foreign currency forward exchange contracts. These
contracts enable the Company to purchase a fixed amount of foreign currencies. Gains and
losses on foreign exchange contracts that are related to firm commitments are designated
and effective as hedges and are deferred and recognized in the same period as the related
transaction. All other contracts that do not qualify as hedges are marked to market and
the resulting gains or losses are recorded in income. The Company continually evaluates
the potential benefits of entering into these contracts to mitigate foreign currency risk
and proceeds when it believes that the exchange rates are most beneficial. The Company
entered into forward foreign currency exchange contracts to reduce the foreign exchange
risk associated with forecasted Chilean peso operating costs for 2008 at its Cerro Bayo
mine. The contracts require the Company to exchange U.S. dollars for Chilean pesos at a
weighted average exchange rate of 496 pesos to each U.S. dollar. At June 30, 2008, the
Company had foreign exchange contracts of $6.0 million in U.S. dollars. For the three and
six months ended June 30, 2008 and 2007, respectively, the Company recorded a realized gain of
approximately $0.1 million and $0.3 million and less than $0.1 million and less than $0.1
million, respectively, in connection with its foreign currency hedging program. As of
June 30, 2008, the fair value of the foreign exchange contracts was a liability of $0.3
million.
All
of the Companys long-term debt at June 30, 2008, is fixed-rate based. The fair value
of the Companys long-term debt at June 30, 2008 was $151.7 million and $187.5
million related to its 1 ¼% and 3 ¼% Senior Convertible Notes, respectively.
The fair value was estimated based upon bond market closing prices on or about June 30,
2008.
Item 4. Controls and
Procedures
(a) Disclosure Controls
and Procedures
The
Companys disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed by it in its periodic reports filed
with the Securities and Exchange Commission is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms.
Based on an evaluation of the Companys disclosure controls and procedures conducted
by the Companys Chief Executive Officer and Chief Financial Officer, such officers
concluded at June 30, 2008, that the Companys disclosure controls and procedures
were effective at a reasonable level.
(b) Changes in Internal
Control Over Financial Reporting
Based
on an evaluation by the Companys Chief Executive Officer and Chief Financial
Officer, such officers concluded that there was no change in the Companys internal
control over financial reporting during the quarter ending June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
PART II. Other
Information
Item 1. Legal Proceedings
Federal Court of Alaska
Kensington Project Permit Challenge
Reference
is made to the discussion set forth in Managements Discussion and Analysis of
Financial Condition and Results of Operations under Development Projects
Kensington (Alaska) for a detailed description of the Kensington project permit
legal challenge. On June 27, 2008, the Supreme Court of the United States granted the
State of Alaska and Coeur Alaskas Petitions for a writ of certiorari to review the
May 22, 2007 decision of the Ninth Circuit Court of Appeals with respect to the permit
legal challenge. The Company is pursuing an alternate site for a tailings disposal
facility in the event the Company does not prevail in the litigation.
55
No
assurance can be given as to whether or when regulatory permits and approvals granted to
the Company may be further challenged, appealed or contested by third parties or issuing
agencies, or as to whether the Company will ultimately place the Kensington project into
commercial production.
Item 1A. Risk Factors
Item
1A (Risk Factors) of the Companys Annual Report on Form 10-K for the
year ended December 31, 2007 sets forth information relating to important risks and
uncertainties that could materially adversely affect the Companys business,
financial condition or operating results. Those risk factors continue to be relevant to an
understanding of the Companys business, financial condition and operating results.
Certain of those risk factors have been updated in this Form 10-Q to provide updated
information, as set forth below. References to we, our and
us in these risk factors refer to the Company.
The market prices of silver
and gold are volatile. If we experience low silver and gold prices it may result in
decreased revenues and decreased net income or losses, and may negatively affect our
business.
Silver
and gold are commodities. Their prices fluctuate, and are affected by many factors beyond
our control, including interest rates, expectations regarding inflation, speculation,
currency values, governmental decisions regarding the disposal of precious metals
stockpiles, global and regional demand and production, political and economic conditions
and other factors. Because we currently derive approximately 76% of our revenues from
continuing operations from sales of silver, our earnings are primarily related to the
price of this metal.
The
market prices of silver (Handy & Harman) and gold (London Final) on August 5, 2008
were $16.68 and $882.00 per ounce, respectively. The prices of silver and gold may decline
in the future. Factors that are generally understood to contribute to a decline in the
price of silver include sales by private and government holders, and a general global
economic slowdown.
Coeur
may also suffer from declines in mineral prices. Since 1999, Coeur has not engaged in any
silver hedging activities and is currently not engaged in any gold hedging activities.
Accordingly, Coeur has no protection from declines in mineral prices or currency
fluctuations.
If
the prices of silver and gold are depressed for a sustained period and our net losses
resume, we may be forced to suspend mining at one or more of our properties until the
prices increase, and to record additional asset impairment write-downs. Any lost revenues,
continued or increased net losses or additional asset impairment write-downs would
adversely affect our results of operations.
We may have to record
write-downs, which could negatively impact our results of operations
.
Statement
of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
(SFAS 144) established accounting standards for
impairment of the value of long-lived assets such as mining properties. SFAS 144 requires
a company to review the recoverability of the cost of its assets by estimating the future
undiscounted cash flows expected to result from the use and eventual disposition of the
asset. Impairment, measured by comparing an assets carrying value to its fair value,
must be recognized when the carrying value of the asset exceeds these cash flows, and
recognizing impairment write-downs could negatively impact our results of operations.
If
silver or gold prices decline or we fail to control production costs or realize the
minable ore reserves at our mining properties, we may be required to recognize asset
write-downs. We also may record other types of additional mining property charges in the
future to the extent a property is sold by us for a price less than the carrying value of
the property, or if reclamation liabilities have to be increased in connection with the
closure and reclamation of a property. Additional write-downs of mining properties could
negatively impact our results of operations.
56
The
Kensington property has been the subject of litigation involving a permit required to
complete construction of a required tailings facility. Reference is made to the discussion
set forth in Managements Discussion and Analysis of Financial Condition and Results
of Operations under Development Projects Kensington (Alaska) for a
detailed description of the Kensington project permit legal challenge, including the
possibility of an impairment writedown in the event that the expectation of the long-term
price for gold decreases below approximately $625 per ounce.
No
assurance can be given as to whether or when regulatory permits and approvals granted to
the Company may be further challenged, appealed or contested by third parties or issuing
agencies, or as to whether the Company will ultimately place the Kensington project into
commercial production.
The estimation of ore reserves
is imprecise and depends upon subjective factors. Estimated ore reserves may not be
realized in actual production. Our operating results may be negatively affected by
inaccurate estimates.
The
ore reserve figures presented in our public filings are estimates made by our technical
personnel. Reserve estimates are a function of geological and engineering analyses that
require us to make assumptions about production costs and silver and gold market prices.
Reserve estimation is an imprecise and subjective process and the accuracy of such
estimates is a function of the quality of available data and of engineering and geological
interpretation, judgment and experience. Assumptions about silver and gold market prices
are subject to great uncertainty as those prices have fluctuated widely in the past.
Declines in the market prices of silver or gold may render reserves containing relatively
lower grades of ore uneconomic to exploit, and we may be required to reduce reserve
estimates, discontinue development or mining at one or more of our properties, or write
down assets as impaired. Should we encounter mineralization or geologic formations at any
of our mines or projects different from those we predicted, we may adjust our reserve
estimates and alter our mining plans. Either of these alternatives may adversely affect
our actual production and operating results.
We
based our ore reserve determinations as of December 31, 2007 on a long-term silver price
average of $11 per ounce, with the exception of the Endeavor mine which uses $15 per ounce
and the Broken Hill mine which uses $13.50 per ounce of silver, and a long-term gold price
average of $600 per ounce for all properties with the exception of the Kensington property
which used a gold price of $550 per ounce. The market prices of silver (Handy &
Harman) and gold (London Final) on August 5, 2008 were $16.68 and $882.00 per ounce,
respectively.
The estimation of the ultimate
recovery of metals contained within the Rochester heap leach pad inventory is inherently
inaccurate and subjective and requires the use of estimation techniques. Actual
recoveries can be expected to vary from estimations.
The
Rochester mine utilizes the heap leach process to extract silver and gold from ore. 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
key stages in the conversion of ore into silver and gold are (i) the blasting process in
which the ore is broken into large pieces; (ii) the processing of the ore through a
crushing facility that breaks it into smaller pieces; (iii) the transportation of the
crushed ore to the leach pad where the leaching solution is applied; (iv) the collection
of the leach solution; (v) subjecting the leach solution to the precipitation process, in
which gold and silver is converted back to a fine solid; (vi) the conversion of the
precipitate into doré; and (vii) the conversion by a third party refinery of the
doré into refined silver and gold bullion.
57
We
use several integrated steps to scientifically measure the metal content of ore placed on
the leach pads during the key stages. As the ore body is drilled in preparation for the
blasting process, samples of the drill residue are assayed to determine estimated
quantities of contained metal. We estimate the quantity of ore by utilizing global
positioning satellite survey techniques. We then process the ore through a crushing
facility 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. We then transport the crushed ore to
the leach pad for application of the leaching solution. As the leach solution is collected
from the leach pads, we continuously sample for assaying. We measure the quantity of leach
solution with 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. We again weigh, sample and assay the doré. Finally, a third
party smelter converts the doré and determines final ounces of silver and gold
available for sale. We then review this end result and reconcile it to the estimates we
developed and used throughout the production process. Based on this review, we adjust our
estimation procedures when appropriate.
Our
reported inventories include metals estimated to be contained in the ore on leach pad of
$34.7 million as of June 30, 2008. Of this amount, $19.2 million was reported as a current
asset and $15.5 million was reported as a noncurrent asset. The distinction between
current and noncurrent is based upon the expected length of time necessary for the
leaching process to remove the metals from the crushed ore. The historical cost of the
metal that is expected to be extracted within twelve months is classified as current and
the historical cost of metals contained within the crushed ore that will be extracted
beyond twelve months is classified as noncurrent. The ore on leach pad inventory is stated
at actual production costs incurred to produce and place ore on the leach pad during the
current period, adjusted for the effects on monthly production costs of abnormal
production levels.
The
estimate of both the ultimate recovery expected over time, and the quantity of metal that
may be extracted relative to such twelve month period, requires the use of estimates which
are inherently inaccurate since they rely upon laboratory test work. Test work consists of
60 day leach columns from which we project metal recoveries into the future. The
quantities of metal contained in the ore are 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 approximately nineteen
years of leach pad operation at the Rochester mine. The assumptions we use to measure
metal content during each stage of the inventory conversion process includes estimated
recovery rates based on laboratory testing and assaying. We periodically review our
estimates compared to actual experience and revise our estimates when appropriate. The
length of time necessary to achieve our currently estimated ultimate recoveries of between
59% and 61.5% for silver, depending on the area being leached, and 93% for gold is
estimated to be between 5 and 10 years. In August 2007, the Company terminated mining and
crushing operations as ore reserves were fully mined. Residual heap leach activities are
expected to continue through 2011.
When
we began leach operations in 1986, based solely on laboratory testing, we estimated the
ultimate recovery of silver and gold at 50% and 80%, respectively. Since 1986, we have
adjusted the expected ultimate recovery three times (once in each of 1989, 1997 and 2003)
based upon actual experience gained from leach operations. In 2003, we increased our
estimated recoveries for silver and gold, respectively, to between 59% and 61.5% for
silver, depending on the area being leached, and 93% for gold. The leach cycle at the
Rochester Mine requires leaching to approximately the year 2011 for all recoverable metal
to be recovered.
58
If
our estimate of ultimate recovery requires adjustment, the impact upon our inventory
valuation and upon our income statement would be as follows:
|
Positive/Negative
Change in Silver Recovery
|
Positive/Negative
Change in Gold Recovery
|
|
|
1%
|
2%
|
3%
|
1%
|
2%
|
3%
|
Quantity of recoverable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ounces
|
|
|
|
1.7 million
|
|
|
3.5 million
|
|
|
5.2 million
|
|
|
13,240
|
|
|
26,480
|
|
|
39,720
|
|
Positive impact on
|
|
|
future cost of
|
|
|
production per silver
|
|
|
equivalent ounce for
|
|
|
increases in recovery
|
|
|
rates
|
|
|
$
|
2.65
|
|
$
|
4.06
|
|
$
|
4.94
|
|
$
|
1.29
|
|
$
|
2.25
|
|
$
|
2.99
|
|
Negative impact on
|
|
|
future cost of
|
|
|
production per silver
|
|
|
equivalent ounce for
|
|
|
decreases in recovery
|
|
|
rates
|
|
|
$
|
(3.94
|
)
|
$
|
(3.94
|
)
|
$
|
(3.94
|
)
|
$
|
(1.84
|
)
|
$
|
(4.66
|
)
|
$
|
(9.53
|
)
|
Inventories
of ore on leach pads are valued based upon actual production costs incurred to produce and
place such ore on the leach pad during the current period, adjusted for the effects on
monthly production costs of abnormal production levels, less costs allocated to minerals
recovered through the leach process. The costs consist of those production activities
occurring at the mine site and include the costs, including depreciation, associated with
mining, crushing and precipitation circuits. In addition, refining is provided by a third
party refiner to place the metal extracted from the leach pad in a saleable form. These
additional costs are considered in the valuation of inventory. Negative changes in our
inventory valuations and correspondingly on our income statement would have an adverse
impact on our results of operations, financial position and cash flows.
Our revenues and income (or loss)
from our interest in the Endeavor and Broken Hill mines are dependent in part upon the
performance of the operators of the mine.
In
May and September 2005, we acquired silver production and reserves at the Endeavor and
Broken Hill mines in Australia, respectively. These are primarily zinc and lead mines that
are owned and operated by other mining companies. The Companys revenues and income
(or loss) from its interest in the silver production at these mines are dependent upon the
performance of those operators and mines as well as upon zinc and lead prices that are
sufficient to maintain sustainable operations.
Significant construction and other
risks are associated with our development projects that could result in delays and/or
higher than anticipated costs in connection with the completion of construction and
commencement of mining operations there.
Our
ability to estimate the time and costs associated with the completion of construction of
mining and processing facilities at our development properties, such as San
Bartolomé, Kensington and Palmarejo, is subject to the inherent uncertainties
associated with construction, commissioning and start-up activities of such facilities and
commencement of operations.
Recently enacted and
proposed laws in Bolivia may have an impact on our financial results at the San Bartolomé mine.
The
Bolivian government has enacted and proposed various changes to applicable mining taxes
and property rights laws that could affect the San Bartolomé mine. The proposed
laws may have an impact on the financial results of the San Bartolomé mine.
Our business depends on good
relations with our employees.
The
Company could experience labor disputes, work stoppages or other disruptions in production
that could adversely affect us. As of June 30, 2008, unions represented
approximately 39.6% of our worldwide workforce. On that date, the Company had 268
employees at its Cerro Bayo mine and 123 employees at its Martha mine who were working
under a collective bargaining agreement. The agreement covering the Cerro Bayo mine
expires on December 21, 2010 and a collective bargaining agreement covering the Martha
mine expires on June 30, 2010. Additionally, the Company had 122 employees at its
San Bartolomé project working under a labor agreement which does not have a fixed
term.
59
Item 4. Submission of
Matters to a Vote of Security Holders
The
annual meeting of shareholders of the Company was held on May 13, 2008 (at which time a
quorum was present or represented by proxy). Of the Companys total 550,825,760
shares of common stock outstanding on March 18, 2008 (the record date), 361,909,271 shares
(or 65.7% of the outstanding shares of common stock) were represented in person or by
proxy at the annual meeting.
The
first proposal was the election of directors of the Company. The following persons were
nominated and elected by the votes indicated to serve as members of the Board of Directors
for one year or until their successors are elected and qualified: Dennis E. Wheeler (
296,852,213 shares for, 52,035,627 shares against and 13,712,268 shares abstaining), James
J. Curran ( 297,721,830 shares for, 50,790,977 shares against and 13,399,965 shares
abstaining), John H. Robinson ( 297,817,724 shares for, 50,790,977 shares against and
13,987,549 shares abstaining), Robert E. Mellor ( 335,929,736 shares for, 8,248,422 shares
against and 18,416,728 shares abstaining), Timothy R. Winterer ( 340,354,447 shares for,
8,247,058 shares against and 13,989,489 shares abstaining), J. Kenneth Thompson (
340,322,530 shares for, 8,244,836 shares against and 14,028,884 shares abstaining), Andrew
Lundquist ( 339,768,299 shares for, 8,248,950 shares against and 14,576,131 shares
abstaining), Alex Vitale ( 297,696,998 shares for, 50,791,835 shares against and
13,998,489 shares abstaining) and Sebastian Edwards ( 340,334,701 shares for, 8,247,058
shares against and 14,009,383 shares abstaining).
The
second proposal was the proposed ratification of the appointment of KPMG LLP as the
Companys independent accountants. The proposal was approved by the holders of more
than the required majority of the shares of common stock voting at the meeting. The
proposal was approved by a vote of 349,545,205 shares for, 6,297,502 shares against with
3,203,684 shares abstaining.
60
Item 6. Exhibits
|
10
|
Employment
Agreement (as amended and restated) between the Registrant and Dennis E. Wheeler.
(Incorporated herein by reference to Exhibit 10 to the
Registrant's Current Report on Form 8-K filed May 19,
2008).
|
|
31.1
|
Certification
of the CEO
|
|
31.2
|
Certification
of the CFO
|
|
32.1
|
Certification
of the CEO (18 U.S.C. Section 1350)
|
|
32.2
|
Certification
of the CFO (18 U.S.C. Section 1350)
|
61
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
COEUR DALENE MINES
CORPORATION
(Registrant)
Dated August 8, 2008
|
/s/ Dennis E. Wheeler
|
|
DENNIS E. WHEELER
|
|
Chairman, President and
|
|
Chief Executive Officer
|
Dated August 8, 2008
|
/s/ Mitchell J. Krebs
|
|
MITCHELL J. KREBS
|
|
Senior Vice President and
|
|
Chief Financial Officer
|
Dated August 8, 2008
|
/s/ Tom T. Angelos
|
|
TOM T. ANGELOS
|
|
Senior Vice President and
|
|
Chief Accounting Officer
|
62
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