Next Generation Silver Producers Pt. II

Chris Marchese

Chief Mining Analyst, GoldSeek & SilverSeek

Sign-up for the SilverSeeker Reports

$SILV $SIL.TO $AXU $AUN.V

Following Part I of this piece, which highlighted three of six “next generation silver producers”, we will focus this piece on the next three, which include SilverCrest Metals, Alexco Resources, and Aurcana. The latter two don’t have tier-I silver asset but are very high grade and this group has an an all-in sustaining cost profile (AISC) in the bottom 50% on the industry cost curve, with SilverCrest and Aurcana having an AISC profile in the lowest quartile. Unlike Part I, whereby one company was nearing production, another was about to make an official production decision, and the last was still 3-4 years away from one (though worth inclusion as it will inevitably be an absolutely massive operation), these three companies are all nearing a production decision, which will be made this year assuming COVID-19 doesn’t completely shut down the capital markets or make the cost of equity very high for a prolonged period of time. As of this writing, it is looking like the metals have put in bottoms as a result of unprecedented global monetary and fiscal stimulus and rampant physical demand, but anything can happen.

SilverCrest (Mexico, Tier-I asset): While MAG is undoubtably the best undeveloped silver projects in the world (though first production is expected late 1H/early 2H 2020), SilverCrests’s Las Chispas project is the next best (too early to include New Pacific’s Silver Sand’s project). SilverCrest has rapidly advanced Las Chispas since 2015 (when the new SilverCrest Metals was started after the same team sold the original company to First Majestic Silver) and is expected to completed a feasibility study in the 2H of the year and a production decision to follow.

There still remains significant exploration upside as it seems there is a new discovery every couple of months. Further, only a fraction of the identified veins has been drilled. Over the past 12 or so months, the company has been releasing non-stop positive news flow, whether it be the preliminary economics assessment (PEA), drill results or improved recovery rates. Las Chispas has the added advantage of being a silver-gold mine as opposed to having significant base metal byproduct. Further, it has a top-notch management team.

The PEA released in 1H 2019 was beyond excellent but this was just a starting point. There has been significant exploration success since the report was filed, which will increase the average life of mine (LOM) grades of both metals, or at least those in the initial years, and the life of mine. The feasibility study (FS) will incorporate trade-off studies to determine optimum throughput levels. In the PEA, daily throughput was envisioned to be 1,250tpd but the optimum level is somewhere between 1,500-2,000tpd. Regardless of what that is, and assuming a 1,500tpd scenario together with higher grades and improved recovery rates will increase an already substantial average annul output.

Before looking at the economics of the 1,250tpd and 1,500tpd throughput levels and varying mine lives (8.5yr-11yr – which is conservative), we will take a look at the exploration success since the PEA. The PEA only contained 10 of 36 known veins, leaving robust exploration upside. Further, there is 25km of untested strike length and there have been 3 significant high-grade discoveries in just the last 6 months.

The following is a chronological list of exploration highlights post PEA with only 1/3^rd of the identified veins properly drilled:

·         Jun 27, 2019: The newly constructed decline intersected the high-grade Babicanora vein, confirms new vein discovery (Babi Vista Vein) and additional high-grade in-fill drill results.

o    Babi Vista drill highlights: 7.6m @ 4,671 g/t AgEq, 3.5m @ 5,875 g/t AgEq, and 5.6m @ 2,176 AgEq.

o    Infill-drill highlights in the Area 51 zone: 7.6m @ 26.6 g/t Au + 2,676 g/t Ag, , 1.5m @ 10.2 g/t Au + 585 g/t Ag, 3.5m @ 5.8 g/t Au + 597 g/t Ag, 6m @ 10.4 g/t Au + 1,248 g/t Ag, 1.4m @ 31.3 g/t Au + 3,991 g/t Ag, 5.6m @ 13.6 g/t Au + 1,343 g/t Ag, 1m @ 67.1 g/t Au + 6,358 g/t Ag, 3.5m @ 32.8 g/t Au + 3,417 g/t Ag

o    The Babicanora vein is still open along strike in the upper part of the block model as indicated by new high-grade holes, the upper and lower parts of Babicanora Central zone being drilled for in-fill and expansion purposes, and potentially favorable significantly deeper hosts for vein mineralization.

·         Aug 28, 2019: SilverCrest announced Babi Sur Vein Expansion, additional high-grade drill results: 0.5m @ 40.8 g/t Au + 2,870 g/t Ag, 8.8m @ 3.09 g/t Au + 305 g/t Ag, 3.1m @ 8.51 g/t Au + 716 g/t Ag, 1.7m @ 14.26 g/t Au + 1,237 g/t Ag, 1.9m @ 2.29 g/t Au + 889 g/t Ag, 1.1m @ 3.37 g/t Au + 1,472 g/t Ag.

·         Oct 9, 2019: The company announced Las Chispas vein extensions and new vein discovery:

o    Drill highlights include: 1.4m @ 6.11 g/t Au + 795 g/t Ag, 2.5m @ 4.17 g/t Au + 642 g/t Ag, 1.6m @ 9 g/t Au + 1,424 g/t Ag, 0.6m @ 15.85 g/t Au + 2,530 g/t Ag. 1.2m @ 7.72 g/t Au + 1,005 g/t Ag.

·          Oct 16, 2019: Announced positive reconciliation results for Babicanora vein, weighted average mined grade of 2,284 g/t AgEq including: 2.8m @ 15,409 g/t AgEq, 4.3m @ 7,023 g/t AgEq, and 3.5m @ 6,632 g/t AgEq. Highlights of Babicanora vein reconciliation (estimates):

·         Nov 14, 2019: SilverCrest announces Babi Vista high-grade expansion, drill highlights include:

o    0.4m @ 10 g/t Au + 878 g/t Ag, 8.8m @ 7.36 g/t Au + 584 g/t Ag, 0.3m @ 120 g/t Au + 9.510 g/t Ag, 0.7m @ 18.15 g/t Au + 1,775 g/t Ag, 0.4m @ 5.32 g/t Au + 632 g/t Ag.

·         Nov 21, 2019: SilverCrest announces best drill hole to data; 8.6m @ 44.3 g/t Au + 4,551 g/t Ag. The company identified a newly defined zone, Area 118 zone. Highlights include:

o    0.4m @ 8.26 g/t Au + 1,060 g/t Ag, 1.4m @ 6.11 g/t Au + 795 g/t Ag, 0.4m @ 18.80 g/t Au + 2,440 g/t Ag, 2.5m @ 4.17 g/t Au + 642 g/t Ag, 1.6m @ 4.5 g/t Au + 708 g/t Ag, 1.2m @ 7.72 g/t Au + 1,005 g/t Ag, 1.6m @ 9 g/t Au + 1,424 g/t Ag, 5.5m @ 3.54 g/t Au + 615 g/t Ag.

·         Jan 20, 2020: SilverCrest announced Babi Sur vein results, expanding high-grade with improved continuity. Highlights include:

o    2.5m @ 90.98 g/t Au + 108.2 g/t Ag, 7.8m @ 10.53 g/t Au + 78.6 g/t Ag, 2.8m @ 12.91 g/t Au + 1,141 g/t Ag, 1.8m @ 8.04 g/t Au + 600 g/t Ag, 4.4m @ 5.7 g/t Au + 476 g/t Ag, 2.5m @ 91 g/t Au + 108 g/t Ag, 0.4m @ 5.88 g/t Au + 750 g/t Ag.

·         Feb 18, 2020: SilverCrest announced highest-grade discovery to data at Las Chispas, Area 200 zone. Highlights include:

o    0.4m @ 91 g/t Au + 12,844 g/t Ag, 1m @ 10.42 g/t Au + 1,962 g/t Ag, 2.2m @ 17.7 g/t Au + 1,801 g/t Ag, 2.1m @ 20 g/t Au + 2,400 g/t Ag, 2m @ 39.3 g/t Au + 3,472 g/t Ag, 0.8m @ 8.5 g/t Au + 2,527 g/t Ag, 2.4m @ 45.7 g/t Au + 5,577 g/t Ag, 1m @ 21 g/t Au + 3,034 g/t Ag, 1.3m @ 5 g/t Au + 1,839 g/t Ag, 2.2m @ 11.51 g/t Au + 1,161 g/t Ag, 3.3m @ 3.18 g/t Au + 3,742 g/t Ag, 4.6m @ 6.54 g/t Au + 966.5 g/t Ag, 1.6m @ 75.7 g/t Au + 7,661 g/t Ag, 1.4m @ 6.31 g/t Au + 1,210 g/t Ag, 3.5m @ 12.5 g/t Au + 1,741 g/t Ag, 4.4m @ 6.67 g/t Au + 1,244 g/t Ag, 1.4m @ 90.2 g/t Au + 9,422 g/t Ag, 2.1m @ 17.7 g/t Au, 2.1m @ 20 g/t Au + 2,400 g/t Ag, 2.4m @ 45.7 g/t Au + 5,577 g/t Ag, 2.2m @ 11.51 g/t Au + 1,161 g/t Ag, 3.3m @ 3.2 g/t Au + 3,740 g/t Ag, 4.6m @ 6.54 g/t Au + 966.5 g/t Ag, 1.6m @ 76 g/t Au + 7,662 g/t Ag, 3.5m @ 12.56 g/t Au + 1,741 g/t Ag, 4.4m @ 6.66 g/t Au + 1,244 g/t Ag, 4.8m @ 6.58 g/t Au + 1,025 g/t Ag, 1.4m @ 90 g/t Au + 9,422 g/t Ag.

·         Mar 5, 2020: SilverCrest Metals announced metallurgical tests with increased precious metal recoveries. The results show an increase of gold recoveries to 96.1% from 94.4%, and an increase in silver recoveries to 93.9% from 89.9%.

·         Mar 9, 2020: The company announce significant Babi Vista vein high-grade expansion. Drill highlights include (infill + expansionary):

o    1.6m @ 45.8 g/t Au + 2,400 g/t Ag, 0.9m @ 7.87 g/t Au + 702 g/t Ag, 0.4m @ 10 g/t Au + 7,834 g/t Ag, 1.1m @ 101.4 g/t Au + 5,413 g/t Ag, 1.2m @ 26.25 g/t Au + 1,916 g/t Ag, 2.1m @ 81.6 g/t Au + 6,619 g/t Ag, 1.3m @ 21.10 g/t Au + 1,896 g/t Ag, 4.3m @ 17.27 g/t Au + 1,364.8 Ag, 4m @ 6.04 g/t Au + 448.5 g/t Ag, 1.6m @ 45.8 g/t Au + 2,396 g/t Ag, 1.1m @ 101 g/t Au + 5,413 g/t Ag.

Following the PEA, as highlighted above, SilverCrest has been very successful expanding its resource base and continuing to identify bonanza grade silver zones and high-grade gold zones (although this hasn’t been accounted for via an update MRE). The ten veins that are currently being drilled are open for expansion. It is clear, that with the discovery of new bonanza grade zones that grades will be higher, at least in the initial several years but beyond that is the fact more than two dozen veins have been identified but the company has yet to drill them as its been very busy expanding resources through the existing veins.

The economics of the project, solely based on the PEA are truly impressive in terms of rates of return, scale, cost-structure, and exploration potential. Further, the project requires very reasonable capital investments relative to the size of the project. Initial capital requirements based on a 1.25ktpd operation is estimated to be $100m (for valuation purposes, we will assume a $135m initial capital investment to account for potential capital cost over-runs and a 1.5ktpd operation). In the base case scenario used in the PEA, assuming long-term metal price decks of $1,450/oz. Au and $19/oz. Ag, the after-tax NPV is $506.5m, after-tax internal rate of return (IRR) of 91% and payback period of just 7.5 months! It’s AISC profile is $7.53/oz AgEq. When looking at projects, one metric I like to look at is the NPV-score or NPV of a project divided by the initial capital investment (slight alteration to the profitability index). Using Silvercrest’s base case metal price of $16.69/oz. Ag & $1,269/oz. Au, the NPV-score is a staggering 3.10x.

The assumptions used in the base case NAV calculation  ( in our model) is a $19/oz. Ag price deck, $1,550/oz. Au price deck, 6.50% cost of capital, upwards of $100m in other expenses over the LOM (exploration and corporate level G&A), a life of mine of 11yrs and slightly higher grades over the initial 5-yrs. Given the successful exploration efforts following the PEA, the fact that so many drilled veins are still open in several directions, and the number of untested veins, a 11yr mine life is very fair and likely on the conservative side. To account for this as well as the relatively higher NAV multiples given to high-grade, low-cost long-lived silver operations of scale, a 1.60x NAV multiple is appropriate. Further, two sensitivity tables (to account for changes in the silver and gold price) follow the NAV calculation, one for 1.0x NAV and the other for 1.60x NAV.

Note: To account for a larger mill and potential capital cost over-runs, we will use initial capital costs of $135m (+35%). Further, companies such as First Majestic usually command a 1.80-2.40x NAV multiple.

 1.0x NAV Sensitivity Analysis

Note: On March 11^th 2020, SilverCrest announced it has entered into an agreement with a syndicate of underwriters led by National Bank Financial (NBF), Eight Capital Corp, and Scotia Capital, pursuant to which the underwriters agreed to purchase, on a bought deal basis 9.1m shares of the company at a price C$8.25 (approx. US$6.10/share at the time) for aggregate proceeds of C$75m, along with a 15% over-allotment option. SSR Mining pursuant to the Nov. 2018 agreement has the right to maintain its pro-rate interest of up to 9.90%. On March 18^th, the company announced it received notice from NBF purporting to terminate its obligations for the financing agreement based on the “disaster out’ clause in the agreement (COVID-19). But the COVID-19 pandemic was already well documented and SilverCrest intends to pursue legal action. Regardless, the stock price will soon be back to similar levels and we will assume the financing will be successful if not via NBF then through another underwrite and the other two parties at roughly the same price. The dilution from this financing is included in the fully diluted share count in the NAV calculation.

Chart courtesy of Stockcharts.com

Alexco Resources (Canada, Tier-II): The company has a commanding position in the Keno Hill silver district In the Yukon. It is quite rare to find a primary silver mine in Canada, but if you’re going to find one, it would be in Keno Hill. The company was initially in production in the early 2010’s. However, several years later, after the silver price was smashed, the company wasn’t able to produce silver economically as its sole operating mine, Bellekeno, was a narrow vein operation and it was never quite able to feed the mill to capacity. It also had the encumbrance of a 25% silver stream owned by Wheaton Precious Metals. It has since gone back to drilling out multiple deposits on the property.

Since shutting down mining operations at Bellekeno, it has successfully been drilling out deposits such as Lucky Queen, Flame & Moth, and Bermingham, the latter two being much more sizeable. It has also since amended the streaming agreement whereby at lower prices (and dependent on grade), Wheaton Precious Metals will pay a higher price, which decreases as the price go up and at $25/oz. Ag, the silver stream has an on-going per ounce purchase price falls to nil/oz. and because its in Canada (where the streaming profits are taxed), the stream essentially becomes a net smelter return (NSR).

Over recent years, the company has been increasing its silver resource, which hasn’t been updated to include the past 12 or months of drilling. It’s 2P reserve estimate is rather small at 30m oz, while its indicated resource (inclusive of reserves) is 83.5m oz. with an additional 24m oz. of inferred resource. There are countless targets at its Keno Hill project, which will be more aggressively explored once the company turns cash flow positive.

In 2019, The company released an updated pre-feasibility study (PFS), whereby the initial average annual production over the 7yr mine life would be 4m oz. p.a., peaking at 5m oz in year 4 (though attributable production to Alexco, on average will be 3m oz net of the WPM silver stream + any on-going per ounce payment received from the streaming agreement). While Alexco would be far more attractive if it didn’t have the stream encumbrance, having such high-grade operations will keep the project economic.  Revenue from silver, will average about 75% of total revenue with lead and zine averaging roughly 12.50% each.

The base case (PFS) uses an average silver price deck of $17.91/oz., $1/lb. Pb, $1,325/oz. Au, and $1.22/lb. Zn. This would yield an all-in sustaining cost (AISC) profile of $11.94/oz., with byproduct credits reducing operating costs per oz. Ag by nearly $5/oz. and the silver stream adding $2.40/oz. In other words, at current metal prices, AISC would be closer to $12.25-$13/oz due to materially lower base metal prices, at least at this time. There is a short-timeline to construction (6-7months) as several ramps have already been developed and the mill is already in place. Over a longer period of time, assuming the company can increase its resource base (which is likely), there are plenty of opportunities to expand silver output. Current output is based on a 400tpd operation (expanding to 430tpd in year-3), which is rather small but because Alexco’s resource is such high-grade, it can still produce a material amount of silver. It is difficult to calculate the amount of remaining capital investment as a portion of it has already been incurred but a fair estimate is $20-$25m.

Aurcana (U.S., Tier-II/III): The company has many similarities to Alexco, the biggest difference being Alexco’s project being encumbered by a large silver stream but having more significant exploration upside, at least at this point in time.

Like Alexco, a production (& construction) decision can be made at any time. Aurcana owns 100% of the Revenue-Virginius Mine (although an official decision will likely be made once the cost of capital comes down a bit and/or, the price of silver has recovered as well as base metals to a lesser degree). It is fully permitted for immediate production at its Denver, Colorado silver mine.

The current reserve and resource estimate stand at 21.2m oz. AgEq oz. @ 1,265 g/t, and an M&I resource 29.9m AgEq @ 975 g/t (roughly 75% of these amounts are silver, not equivalents). Due to the deposits high-grade nature, it has an attractive LOM AISC of just $8/oz. (using LT price decks of $18.50/oz. Ag, $1,300/oz. Au, $1/lb. Pb, and $1.20/lb. Zn. Assuming current base metal prices will prevail (+/- 10%), AISC will be higher, closer to $8.25-$9.25/oz. Like Alexco, there is a short buildout time at just 9 months (Alexco estimated to be 6-7 months).

On an AgEq basis, AISC, per the FS is estimated to be $10.71/oz. over the first 5-years and $11.01/oz. over the LOM. Restart capital is estimated at $37m, which yields a payback period of under 2-years. At the price decks previously mentioned, the after-tax NPV is $75m with an IRR of 71%. There is a fair amount of exploration upside due to multiple veins systems close to underground access.

Aurcana, at least initially, will be a small operation, producing an average of 3.1m AgEq oz; silver (71% of revenue or 2.2m oz.), gold (8% of revenue), Lead (15% of revenue), and zinc (6% of revenue). The initial life is 6-years, and 8 years with successful conversion of inferred resources.  There are several organic opportunities to enhance the size of company-wide production as well potential consolidation in the sector. The first organic opportunity is naturally resource expansion, which is grown large enough would lead to an increase in average annual output, provided it could increase mining capacity to some degree.

Aurcana also has another advanced stage development project at its Shafter Projects in Texas. While it doesn’t have the grades nor cost structure of the Revenue-Virginius project, it does have an AISC profile of $11/oz Ag, (but this is rather small at 1.6m AgEq oz. or 1-1.1m oz. Ag). The Shafter project was previously in operation in 2012 +/-, When it was projected to produce upwards of 5m oz. p.a. Due to declining silver prices and high-costs the operation was wound down. Part of the problem was that the former management team didn’t have a good grasp on the orebody, and in turn couldn’t run it profitably. In other words, there is medium and longer-term potential to develop Shafter into a nice operation even if production only reached 2.5-3.5m oz. Ag p.a.

Disclosure: Among the companies mentioned in this article, I hold positions in SilverCrest Metals (SILV)

Chris Marchese for the Gold Seeker Report

Chief Mining Analyst at GoldSeek & SilverSeek

Chief Mining Analyst with GoldSeek and SilverSeek. Previously he was the Senior Mining Equity and Economic Analysis at The Morgan Report. He was a Co-Founder and Director of Lemuria Royalties, before it was acquired in March 2018. He also co-authored The Silver Manifesto with David Morgan in 2015. 

https://twitter.com/CJMAuAg

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. GoldSeek.com, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; GoldSeek.com makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of GoldSeek.com only and are subject to change without notice. GoldSeek.com assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report. The information presented in stock reports are not a specific buy or sell recommendation and is presented solely for informational purposes only. The author/publisher may or may not have a position in the securities and/or options relating thereto. Fortuna Silver Mines is not a sponsor of this, or any other related, websites. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.