In 2009 CDE needed a loan to complete the Palmarejo mine.
Money was difficult to borrow.
For 80 million dollars (of which they got 75 million plus FN stock) a deal was struck so that
Franco Neveda would pay $400 dollars per ounce for 50% of the gold mined for "live of mine".
The minimum delivery for the first eight years is 400,000 ounces .
This is 50,000 per year or 12,500 per quarter.
This is payable at 12,500 ounces per quarter for eight years beginning in July 2009
(Details can be found in 2009 10k)
The derivative loss is calculated on the remaining ounces to be paid.
Currently about 262,500 ounces are remaining to be paid.
This past quarter CDE produced 23,700 ounces of gold from Palmarejo.
FN received 12,500 and CDE received 11,200.
After July of 2017 when no further payments are required the split will be 50/50 with no minimum.
FN will still pay $400 per ounce to CDE for their 50% received.
This is what I believe from the 10k, Please correct if I am wrong in the interpretation.
Sentiment: Strong Buy
Monarach_ I believe your "After July of 2017 when no further payments are required" statement might be in error. I remember it being that 400,000 gold ounces is the benchmark to become free of
the 12,500/quarter obligation. It seems likely that in-spite of the recent problems at Palmarejo, the 400k target will be met a head of schedule. In the purchase of Palo Coeur got some already purchased equipment and $75k (?) cash from Bolinsi. As I recall Palmarejo was purchased for a little over 200 million shares with share price over $4/share plus a little cash to the Palmarejo Mine owners. That amounted to about a one billion dollar paper deal? The true cost paid is somewhat confused (in my mind) by the fact that Coeur shares were on a roll at that time (over priced) but later they headed down (along with other silver miners) to an eventual low of $0.50 in 2008. I am sure that the sellers who held their "new" Coeur shares in an attempt to benefit from their premier deposit didn't (and don't today) feel like it was a fair deal for them.
Rocky- I respect your comment that one should have finances lined up before embarking on large projects. In this case, I think Coeur was too committed to a large mine as a live or die proposition to have taken that reasonable route. I for one bought into the risky business plan and sweated through those hard 2008 times. I am not sure where Coeur would be right now if they would have mothballed Palo and probably Kensington to wait out the crisis.
Lpet, you're correct that the minimum obligation ends at 400,000 ounces, and Monarch is correct that by July 2017 the minimum obligation has to be satisfied. I also agree with your thinking that the 400k minimum will be met somewhat ahead of schedule.
I agree 100% with your last paragraph. Like you, I bought into the business plan in 2008 then suffered through the pains of the next two years. Today the company is in very good shape with sound fundamentals.
Lpet and Rocky,
You have brought good corrections to my post.
The point that I was trying to make is that the Franco deal was done by necessity and that the obligation that causes the GAAP accounting deduction is almost 50 percent completed and will have less influence with each passing quarter.
Considering everything, for CDE to get 3 large projects up and running in such difficult times is to their credit.
Lpet, hope you have been following the latest on the high temperture ecat.
Rocky, I have been a big fan of yours for years, thanks for all of your input.
Sentiment: Strong Buy
You got it basically right. But just for clarification, it's a royalty agreement, meaning Coeur pays FN a royalty (amounting to the excess over $400/ounce) rather than delivering ounces of gold. Also, it's the royalty obligation, not the derivative loss, that is calculated on the remaining ounces to be paid. The derivative gain or loss is merely the change in the royalty obligation vs. the prior quarter. You're correct in pointing out that in Q3 Coeur had to pay royalties on more than 50% of the ounces produced as a result of producing only 23,700 ounces.
CDE purchased Palmarejo for 2 million dollars in December of 2007.
The loan has no cash payback and if cash payback were required on a regular loan, their interest
rate would be more than 12 percent at the time for maybe 10 years.
The cash payback would be about 10 million per year in interest plus principle perhaps of perhaps 8 million.
Could they afford the additional interest with their then outstanding debt?
Their Bolivia project was maligned for years without justification and Alaska was held up for years
in court. CDE prevailed in both cases.
Was the deal bad at the time?
Maybe, Maybe Not.
The price of gold was 780 in August of 2008 and was about 900 during the six months prior to the close of the loan.FN was considering the possibility selling the gold at lower prices maybe 650 in the years ahead.
Did it work out well for them,
With the loan :
CDE has paid off almost all of their long term debt.
Started a share buyback program.
Purchased beginning positions in several resources
Completed or improved Bolovia, Alaska, Mexico and Nevada sites.
Companywise, this "bad loan" has had an overall good outcome.
I am interested in exactly what you would have done as CFO at the time if you given the chance.
and how you would justify these actions to the shareholders.
Sentiment: Strong Buy
I suspect your first line was a typo. Couer paid approx $2 Billion, not $2 million. And nearly all the purchase price was in the form of stock rather than cash. Also, nearly all the cost was recorded on the balance sheet as an investment in mineral rights.
Over the past 3-4 years, the merits of the Franco Nevada royalty agreement have been debated extensively on this message board. Due to a collapse in the prices of gold and silver in late 2008, Coeur was forced to borrow much more extensively than had been anticipated. In addition to the FN royalty agreement, there were the $75 million of convertible notes and warrants and the Mitsubishi gold lease. Add in the significant 3.25% and 1.25% convertible debt. Debt repayment was accomplished primarily in the form of issuing more shares, hence painful dilution in excess of 50% to the shareholders. Not to mention that Franco Nevada has a lien against the entire Palmarejo project in the event Coeur defaults on its minimum royalty obligation.
A shareholder in 2010 found himself holding an entirely different animal than what he had in 2008. In effect, 2009 was a year of transition for Coeur. It's balance sheet was totally different from 2008. It now had what was, in effect, a business partner in FN. It also ramped up two new major mines, San Bart and Palmarejo. So in 2010 Coeur was a producing company, vs. being primarily a development stage company in 2008. It didn't work out the way shareholders anticipated, and was painful.
If I had been the CFO in 2008, I would have made sure that all my project financing was in place prior to launching construction and development. All the dilution, FN transaction, convertible notes and gold lease would have been unnecessary. But this is with the benefit of hindsight.
Lastly, I have to ask a question ......... Where are you going with all this? What's your point in raising this topic again on this message board? We all know this has worked out to be a fabulous investment for Franco Nevada. From my perspective, any shareholder or prospective shareholder shouldn't be looking backward at this point. The questions should be are the shares fairly valued. Does the company have growth potential. What will this company look like in a year or two. What are the risks of owning Coeur. Am I confident the prices of gold and silver won't collapse. etc. etc. In the absence of evaluating these kinds of questions, one shouldn't be an investor in Coeur. He should merely be a trader.
Franco gets 50K ounces at $400ea......then sells for $1650 (being conservative) = $1250 profit / ounce = $62,500,000..........basically FOREVER.
So, let's be nice and say mine dies in 10-years, this means Wheeler Dealer borrowed $75,000,000, and is paying back $625,000,000.
And to top off the deal, CDE has to show that "unearned" income (the $1250) as a "loss" on their income statements.
Has to be the Deal of the Century.
this means Wheeler Dealer borrowed $75,000,000, and is paying back $625,000,000.
........Watch out nxst, plenty of Wheeler lovers around these parts, OMG STILL!!
The original deal Coeur shareholders behind the 8-ball by OVERPAYING for Pal, but Wheeler NEEDED reserves because he high graded plus sold silver WAY under cost of producing in the late 90s. As time went on, his poor judgement Earned him the"worst CEO" moniker as past mistakes painted Wheeler into a cornor. Wheaton River, anyone? and on and on...Still, there are his brain-dead supporters around saying all that is in the past. I wonder what these guys would say if someone came to their house and claimed 'prima noche' with their wife each day EVERY month and left with a tip.Is it really past?