In 2009 SilverCrest Mines (TSX-V: SVL | NYSE MKT: SVLC) managed to finance the construction of its Santa Elena silver-gold mine at a time when money was scarce and investors skeptical. Today, life is even tougher for mine developers, but SilverCrest hasn't forgotten the lessons it learned in the lean times as it works to steadily but cautiously expand its precious metal operations in Mexico.
The company is most of the way through a major production expansion at Santa Elena, moving from a 2,500-tonne-per-day open-pit heap leach operation to a longer-term underground mine and 3,000-tonne-per-day mill and flotation circuit. The $82-million upgrade should make for a 45% increase in production next year to at least 3.5 million silver equivalent ounces, while extending mine life to 8 years reserves commencing in 2014.
SilverCrest has paid for the upgrade mostly from cash-flow generated by the mine itself, which was always the plan. The company put Santa Elena heap leach phase into operation in 2011 for a frugal $20 million, knowing it could then use mine revenues to expand in the future.
The recent drop in metal prices could well have interfered with those plans, but the company has kept tight control of its finances and remains profitable today.
"Look at our bottom line," Scott Drever, company CEO and Chairman, told Vanessa Collette of SilverSeek in a recent interview. "Even at these metal prices we're making excellent money. That was part of the plan, to get the cash flow early, and we were able to do that."
In the third quarter the company, like all precious metal miners, faced a stiff drop in prices. SilverCrest's realized silver price dropped 31% to $22 per oz., with gold dropping 21% to $1,346 per oz. But the company still generated $7.1 million in cash flow from operations, and had net earnings of $3.71 million, or 3¢ a share.
The company has managed to stay profitable by keeping overall costs down, despite price increases on everything from cyanide to diesel. For the quarter, cash costs per silver equivalent oz. came in at $7.96, up just 5% from the year before, while all-in sustaining cash costs per silver equivalent oz. sold actually decreased 23% to $10.41. For 2013 the company expects to produce 725,000 oz. silver and 30,000 oz. gold at under $8.50 per oz. Ag Eq.
Joking that costs are kept in line with an iron fist, Drever explained that they keep a very close watch on the budget.
"We run really tight budgets, and we review those budgets on a weekly and monthly basis," Drever said.
The mine itself also helps keep prices down thanks to its high grade epithermal veins, which the company mined at 1.63 gpt gold and 83.2 gpt silver in the quarter; cheaper operations thanks to the open pit heap leaching; and excellent infrastructure around its location in Sonora State.
Looking forward, Santa Elena will continue to be a cash generator for years to come. The mine has reserves of 8.2 million tonnes grading 1.24 gpt gold and 74.9 gpt silver for 327,430 oz. gold and 19.7 million oz. silver.
In April a prefeasbility study on the underground expansion of the mine showed that at $1,250 gold and $19.50 silver, the project had an IRR of 49% and a NPV of $108.7 million using a 5% discount rate. The mine could produce 263,000 oz. gold and 12.1 million oz. silver over its 8-year lifespan.
The company is largely on schedule with the expansion, with mill start-up expected in the first quarter of 2014. SilverCrest is continuing with underground development and mill construction, and expects to be at the targeted 3,000 tpd run rate by the end of 2014.
SilverCrest is now planning to use its proven mine-building approach to La Joya, its sizable polymetallic deposit in Durango State. As of a March resource update La Joya hosts 126.7 million tonnes grading 48.7 gpt Ag Eq., for almost 200 million oz. Ag. Eq. at a 15 gpt cut-off grade.
Drever said the industry standard approach would be to go big, put in a large operation, and take on the whole deposit at once.
"However, large operations these days, with the attendant capex of a billion, two billion, six billion, are not particularly favorable," Drever said.
So the company took a different approach and looked at what sort of capex it could handle. It added on a few other parameters, like limiting the strip ratio to 3:1 and targeting high grades, and came up with a plan to tackle the project on a manageable scale.
In late October the company released the results of its efforts in a preliminary economic assessment, showing an encouraging mine plan. The first stage of La Joya would be an open-pit operation with a 9-year mine life, operating with a 5,000-tpd mill.
Sticking to its plan, the company set the cut-off at 60 gpt to keep the grades high. That cut contained metal in half compared with a 15 gpt cut-off, but still left the mine with about 100 million oz. Ag Eq, at a grade of 112.2 gpt Ag Eq, which Drever said demonstrates a nice, consistent deposit. The mine plan shows a strip ratio of 2.57, and capital costs of $141 million, all within the company's targets.
The financials came to a pre-tax net present value of $133 million using a 5% discount rate, and an internal rate of return of 30.5% using $22 per oz. Ag, $3 per lb. Cu, and $1,200 per oz. Au.
"At this stage in a project like La Joya, those are good numbers," Drever said.
SilverCrest could have actually produced better headline NPV figures with different pit models, but they didn't meet the company's criteria. One pit scenario came back with a nearly 16-year mine life and a NPV $30 million richer than the current plan, but the strip ratio was too high at 3.53 and the cost per oz. silver came in at almost $20, compared to $14 with the pit they chose.
The polymetallic carbonate hosted skarn deposit at La Joya breaks down to a 28 million-tonne resource grading 0.28 gpt Au, 57.5 gpt Ag, and 0.48% Cu, for 259,000 oz. gold, 51.6 million oz. silver, and 288 million lbs. copper using the 60 gpt cut-off. The deposit also has arsenic, bismuth and antimony, which means penalties at the smelter, but the company is working on the metallurgy to reduce the charges.
As with Santa Elena, SilverCrest is taking a slow and cautious approach at La Joya, with Drever targeting 2017 for possible production. The resource at La Joya is entirely inferred, so the company has to upgrade the resource before it can move on to the prefeasibility stage. The plan had been to complete infill drilling by the end of this year, but the company decided to postpone the program to reduce spending. So this year saw only about $1.5 million in drilling on La Joya of the planned $6 million. The company now plans to start drilling again in mid-2014. In the meantime it wants to concentrate on finishing the expansion of its revenue generator, Santa Elena.
And while the company is being very tight with its funds, it actually has a healthy reserve of funds to work with. The company had about $24 million in cash and equivalents at the end of September and working capital of $30.9 million, despite $66 million in spending this year. SilverCrest also has an untapped $40-million credit facility with Scotiabank, which gives the company flexibility going forward. As Drever put it, the credit facility "allows me to sleep much better at night."
As with much of the industry, the company's stock price is down this year, but among silver miners it's fared better than most. SilverCrest's stock price has been hovering around $1.70, down from a January high of $2.74, while it has about 109 million shares outstanding. The company has strong institutional backing, holding 32% of shares, while 8% of shares are owned by management.
With a stable balance sheet SilverCrest is well placed to look at new opportunities in this depressed market. But the company already has a stable growth profile; along with La Joya the company also owns the Cruz de Mayo deposit sitting just 35 km from Santa Elena. That project has about 2.5 million Ag Eq oz. indicated and 13.7 million Ag Eq. oz. inferred.
But Drever, along with SilverCrest co-founders Eric Fier, president and COO, and Barney Magnusson, CFO, want to bring the company to a senior silver-gold producer level of more than 10 million Ag. Eq. oz., and are on the lookout for more projects. They think Mexico is the place to find them.
"To me, and our guys, we look at Mexico as probably Nevada forty years ago. There's just so much that hasn't been worked over properly. It has a huge future, as long as they can keep the taxation and the permitting environments in the reasonable areas," Drever said.
Taxation is somewhat of an issue these days in Mexico, with increases pending for next year. In October, Mexico passed the 2014 Tax Reform, which proposes a 7.5% tax on EBITDA, and a 0.5% environmental erosion fee based on gross revenues. The proposal also limits the deductions miners can make for exploration expenses, now limiting it to 10% amortization of exploration expenses per year.
But while the taxation issue has added pressure to Mexico operations, overall it remains an excellent place to work. There is great infrastructure, skilled labor, and if companies take their community relations seriously, the locals can be fine partners.
Drever, who said, "Corporate Social Responsibility “ (CSR) is probably the most important part of the mining business these days," has found that SilverCrest has excellent relations with the nearby communities. The company recently struck a deal with the local Ejido at Santa Elena to extend their access and exploitation contract for a further 20 years, as the company settles in for the long, steady road to prosperity in Mexico.
I have watched SilverCrest Mines successfully develop over the past decade. The company began as a successful exploration company with ambitions to grow into a miner. Today, the company has established itself as a profitable producer.
With the new expansion of Santa Elena completion set for Q1-14, the company is rapidly nearing the mid-tier silver producer status. This marks yet another milestone as the company moves closer to its future aspirations of becoming a senior silver producer.
These achievements are a reflection of a strong combination of people, property, place while maintaining an attractive share structure and now increasingly strong balance sheet. In a time where markets are pricing risk at high premiums, SilverCrest is in an exceptional position.
2014 looks to be a very exciting year for SilverCrest as their investments into Santa Elena begin to produce substantial returns. This will allow SilverCrest to further advance La Joya to become their second mine and likely give them greater opportunities to take advantage of in this depressed silver market.
I believe that this is an excellent time to be accumulating companies like SilverCrest, trading nearly ½-off their early 2013 highs as we reach an extreme in the silver market sell-off. Investors with mid to long-term focus should be well rewarded as their substantial production increases add even more value to the current share price.
As we have witnessed in prior rallies in the silver market, SilverCrest is among the first to move higher, a great indicator that they are among the best silver stock investments. This is also confirmed with Santa Elena having one of the lowest all-in cash costs ($12.72/oz silver-equivalent in Q3-2013) providing good margins even at these silver prices. The company is well positioned to continue setting itself apart by being a consistent sector out-performer.
- Peter Spina, President of SilverSeek.com
TSX-V: SVL | NYSE MKT: SVLC | FSE: CW5
Shares Outstanding | 109.01 million |
Warrants | NIL |
Options | 8885 million |
Insider Holdings: | 8% |
Market Capitalization (US$) | $191 million |
Peter Spina's experience with the precious metal markets started back in the mid-1990s, which led to the creation of GoldSeek.com back in 1995. Today GoldSeek.com ranks in the top three most popular global gold websites and its sister site, SilverSeek.com ranks as the most visited silver website in the world. Back at the start of the new secular precious metals bull market, Peter established the technically-focused subscription newsletter, which at the start of 2005 was merged into the more comprehensive Gold Forecaster (goldforecaster.com) service. In addition to the newsletter and websites, Peter frequently appears in the media including MarketWatch, Reuters, and Investors Business Daily.
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