The Tragedy of Coeur d'Alene

Coeur d’Alene (CDE)  is a silver and gold mining company that we have owned in the past but do not at present. Like many bullion miners, they seem to be cheap relative to the NAV of the assets they own. CDE was down quite sharply during the Summer before rallying strongly starting in August when central bank reflation started driving up bullion prices. And yet, spare a thought for CEO Mitch Krebs, because the poor fellow has barely participated in the recent stock rally. Mitch Krebs owns 74,812 shares according to the 2012 proxy statement, a mere 0.083% of the company. He’s a bystander, barely connected to the daily swings in the company’s value. In fact his 2011 compensation of $2.4 million was more than the entire value of his stockholding. How frustrating this must be for Mr. Krebs to show up for work every day helping to make his owners rich which working for a (not trivial) salary and bonus.

But Mr. Krebs is actually far smarter than he at first appears. The proxy statement describes a performance-driven compensation process which sounds reasonable enough. But rather than being based on increasing debt-adjusted per share earnings, which is what shareholders care about, the relevant metrics are production. His interests are to make CDE bigger, not necessarily to increase EPS. So in fact, the common equity is there to be used to make acquisitions, even though surely one of the best investments CDE could make would be to repurchase its own stock.

Mitch Krebs has made this clear. He recently said they expect to make an acquisition within the next 12 months. This will undoubtedly help him achieve some of the production metrics that drive his compensation, but may not make his shareholders richer. Perhaps that’s why former CEO Denis Wheeler owns no shares at all. He’s seen this movie before – in fact, he had a starring role in it for many years. The best way to make money out of CDE is to own what they’d like to buy. For our part, we are long the Gold Miners ETF (GDX), although it’s admittedly a little too big for CDE to buy.

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