Silverstone makes move into gold

Vancouver — Silverstone Resources (SST-V, SVRCF-o) has secured life-of-mine silver and gold production from Sherwood Copper’s (SWC-V, SWOPF-o) Minto copper mine in the Yukon.

The move should more than double Silverstone’s silver-equivalent sales in 2009 to 4.5 million oz. and, as Silverstone president and CEO Darren Pylot noted in a conference call, it marks Silverstone’s first foray into gold.

The Minto mine, though primarily a copper mine, has proven and probable reserves that translate into 204,000 oz. gold and 2.1 million oz. silver — or around 16.4 million silver- equivalent oz. assuming Silverstone’s 1:70 ratio of gold to silver ounces.

In 2009, Sherwood forecasts production of 30,000 oz. gold and 300,000 oz. silver as a byproduct of copper processing.

To get its hands on that and future production, Silverstone will pay Sherwood US$37.5 million upfront, plus US$300 per oz. gold and US$3.90 per oz. silver on production up to 50,000 oz. gold. Over 50,000 oz. gold, Silverstone has the right to 50% of gold and silver.

Sherwood will immediately receive US$12.5 million with the rest to follow within two weeks of signing a letter of intent.

Silverstone will draw about US$10 million from a US$15-million line of credit to make the payments, Pylot said, with the rest coming from its US$28-million cash reserves.

As part of the deal, Silverstone also gets the right of first refusal on potential silver and gold production from Sherwood’s Kutcho copper project, in northern B. C. If Kutcho goes to production, it would be about 80% the size of Minto in terms of contained metal as a byproduct, Pylot said, which would primarily come as silver.

Prior to the agreement with Sherwood, Silverstone was focused on buying silver byproduct.

Although Silverstone didn’t have an explicit goal to diversity into gold, Pylot said it was becoming difficult to find quality silver assets “with zinc and lead prices the way they are and silver suffering.”

That is the main reason for the company’s interest in Minto, where Pylot says Sherwood can still operate at prices as low as about US$1 per lb. copper.

Gold, just happened to be the main byproduct (in terms of value) at a project where, more importantly, the underlying fundamentals impressed Silverstone.

“We want to get bigger by minimizing risk by getting mines that will run at all times of the cycle,” Pylot said.

Minto fit that criteria. With the mine on its roster, gold and silver’s share of Silverstone’s 2009 sales will respectively be about 40/60. The company does not have an explicit goal to diversify further but won’t say no to good deals outside the “silver space,” Pylot said. “If gold comes up again, we will do that.”

Pylot estimates that Silverstone will generate about US$27 million from Minto over the first 12 months.

For his part, Sherwood president and CEO Stephen Quin said in a statement that given Sherwood’s pending merger with Capstone Mining (CS-T, CSFFF-o), announced in September, “some of the benefit to Silverstone from this transaction should flow back to Sherwood. . . since Capstone owns about 22% of Silverstone.”

On news of securing production from Minto, Silverstone’s share price climbed 6 to close at 74.

Silverstone has similar offtake agreements with Capstone for silver from its Cozamin copper-silver-lead- zinc mine, in Mexico’s Zacatecas state and Lundin Mining (LUN-T, LMC-n) for silver from its Neves-Corvo (copper-zinc) and Aljustrel (zinc) mines (the latter of which has been put on care and maintenance due to slumping zinc prices). It also has the right to purchase 12.5% of the potential life-of-mine silver from Aquiline Resources’ (AQI-T, AQLNF-O) Navidad silver project.