There’s a Silver Lining in Coeur’s Joaquin Project Deferral

Coeur Mining (NYSE:CDE), the largest United States-based primary silver producer, has a good track record in terms of bringing mines into production. Indeed, between 2008 and 2010 it built and started production at three mines in diverse locations, later beginning production from a leach pad at another mine. 

Given that history, the news that the company has placed its Joaquin silver-gold prospect — currently in the advanced stages of exploration — on hold may come as a surprise. However, as a recent Wall Street Journal article notes, even large companies like Coeur aren’t exempt from the need to “cut spending and conserve capital” in today’s markets.

The company’s main concern seems to be that it’s quite risky to get money in and out of Argentina, where Joaquin is located. Essentially, The Wall Street Journal explains, the country’s government has put controls on the flow of capital in place. That’s a problem in itself, but “[t]he mining sector has also been hurt by an unstable exchange rate, high inflation and a penchant by provincial governments to arbitrarily increase royalties.”

For those reasons, Mitchell Krebs, president and CEO of Coeur, believes that “[a]llocating capital in Argentina is not one of the best uses of our capital. You can’t get enough of a return to compensate for the risks involved in getting capital in and out of the country.”

Rumor has it that a feasibility study for Coeur’s Mexico-based La Preciosa precious metals project will also be put on hold, but Krebs emphasized that his company will still be busy. For instance, “aggressive exploration program[s]” are currently taking place at Coeur’s existing mines, and the company may diversify into base metals, many of which are currently enjoying higher prices.

The bigger picture

It’s tough to see a mine deferral as positive, but with the larger picture in mind, it’s possible.

To understand that bigger picture, it’s helpful to look back at comments made recently to Silver Investing News by Andrew Chanin, co-founder of the PureFunds ISE Junior Silver ETF (ARCA:SILJ). He believes the world is due for a silver supply shortage, partially because low silver prices are hurting producing companies’ exploration efforts.

He explained that $20 per ounce — about the price silver has sat at thus far this year — “is a very key level” for such companies because if the white metal falls below that price, “one of the first things that [they] shut down is their exploration.” While that’s a great way to save money, Chanin pointed out that it raises the question of where future silver supply will come from.

Coeur’s deferral of Joaquin is a clear example of a producing company putting exploration on hold to wait for silver prices. Indeed, Krebs commented to The Wall Street Journal, “[t]iming is very important in this market. It is very important to demonstrate the discipline with capital that we are all taking about.”

Savvy investors will thus realize that in the longer term, mine deferrals like Coeur’s will likely help spur silver prices upward as supply because more and more scarce. As Chanin said, “it almost seems wild for people to think that there’s a huge downside left for silver.”

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

The Gold/Silver Price Ratio is Out of Whack — What’s Next?

Survey: Is a Silver Supply Shortage on the Horizon?