Four muy caliente silver stock picks

To discern the winners from a crowded field of companies holding mines and development projects in Mexico, The Northern Miner asked two mining analysts, Nicholas Campbell of Canaccord Genuity and Christos Doulis of Stonecap Securities, for their best stock bets in the country.

While the analysts’ price targets have all been lowered recently because of the drop in precious metals prices, they believe their picks will outperform their peer companies.

SilverCrest Mines

Analysts: Christos Doulis, Stonecap Securities; Nicholas Campbell, Canaccord Genuity 
Price target: $3.55 (Doulis); $4.25 (Campbell)
Rating: Outperform (Doulis); Speculative buy (Campbell)
Recent price: $2.11; 52-week trading range: $1.55 to $2.96

Both analysts picked resilient junior SilverCrest Mines (SVL-V, SVLC-X) as one of their favourite Mexico-focused stocks.
The company put the open-pit, heap-leach Santa Elena gold-silver mine in northwest Mexico’s Sonora state into production in July 2011.

This year, SilverCrest expects to churn out 2.4 million equivalent oz. silver (579,000 oz. silver and 33,500 oz. gold) at a cash cost of US$8.50 per oz. silver, with production increasing to 4.6 million equivalent oz. silver in 2014.

“What I like about them is they built the Santa Elena heap-leach mine during the financial crisis, and that was the reason that they went heap leach instead of milling,” says Stonecap’s Doulis.

While heap-leaching was a less expensive option that allowed SilverCrest to move Santa Elena forward in a tough market, the company can boost metal recoveries by building a full processing mill at the mine. (Recoveries are currently under 40% for silver and around 65% for gold.)

“It’s called SilverCrest, but in reality it’s a gold mine with a massive silver credit,” Doulis says. “Once a mill is built at Santa Elena, SilverCrest’s revenue mix will be around fifty-fifty gold and silver.”

Now that the company has production and cash flow, it’s completing a $65-million expansion of Santa Elena that includes underground development and building a countercurrent decantation mill that should be operating by early 2014.

Doulis says he’s expecting the 3,000-tonne-per-day mill to nearly triple silver recoveries and increase gold recoveries by 50%.

An updated resource estimate for Santa Elena and a prefeasibility study on the mill and underground expansion was expected to be released earlier this year, but SilverCrest is holding off until late April or May so that it can incorporate positive results from recent drilling.

This drilling has extended the main mineralized zone 300 metres beyond the current resource boundary, and identified two new high-grade zones: El Cholugo and El Cholugo Dos.

Canaccord Genuity’s Nicholas Campbell says he expects an increase in the overall resource grade when the update does come out, with a doubling of the current mine life of five years in the upcoming prefeasibility study.

Proven and probable open-pit reserves at Santa Elena come to 21.7 million equivalent oz. silver contained in 3.5 million tonnes grading 1.96 grams gold per tonne and 87.3 grams silver. Indicated underground resources stand at 6.7 million equivalent oz. silver in 991,000 tonnes grading 1.83 grams gold and 109.1 grams silver. Inferred resources add another 10.3 million oz. at slightly lower grades.

The company also has the bulk-tonnage, low-grade La Joya silver-gold-copper project in Durango state. A recent update for La Joya outlined a higher-grade starter pit of 27.9 million tonnes grading 112 grams silver-equivalent at a cut-off grade of 60 grams silver.

Noting that bulk-tonnage deposits have sometimes not worked out that well in jurisdictions like Canada, Doulis says that “the jury is still out on La Joya, but I certainly don’t mind paying nothing for a lottery ticket.”

While Santa Elena is located in northern Mexico, Doulis says it’s a relatively safe area compared with parts of Mexico that have been plagued with drug-related violence.

Last word: “At current prices, you’re buying SilverCrest’s Santa Elena operation at a discount and not paying anything for La Joya,” Doulis says.

SantaCruz Silver Mining

Analyst: Nicholas Campbell, Canaccord Genuity
Target: $3.65
Rating: Speculative buy
Recent price: $1.40; 52-week trading range: 85¢ to $2.50

SantaCruz Silver Mining (SCZ-V) achieved production at its Rosario silver-gold-zinc-lead-copper mine, in San Luis Potosi state, in early April.

It’s one of Campbell’s top picks because “they have a phenomenal growth profile.” The company has three properties, all of which are former Hochschild Mining (HOC-L) projects that were too small for the major, but just right for a junior.

The small but relatively high-grade Rosario mine is forecast to produce 500,000 equivalent oz. silver this year, but at full production, that will rise to more than 2 million equivalent oz. silver.

While the Rosario mill was completed in January, a delay in getting a blasting permit for the mine, which the company had expected in January, postponed commissioning of underground operations. Campbell says many companies operating in Mexico have experienced permitting delays recently because of a government changeover in December.

In the meantime, SantaCruz has brought in ore from other sources to feed the mill, but the delay could affect Rosario’s near-term production numbers.

The junior has not released any economic studies on Rosario yet, but a prefeasibility study is due out at any time. Currently, measured and indicated resources stand at 981,000 tonnes grading 325 grams silver-equivalent per tonne (0.90 gram gold, 176 silver grams silver, 1.17% lead and 2.9% zinc) for 10.2 million equivalent oz. silver.

Inferred resources stand at 386,000 tonnes grading 203 grams silver-equivalent for 2.5 million equivalent oz. silver.

Production capacity at Rosario will expand in stages from 300 tonnes per day to 700 tonnes per day by year-end. However, average throughput will only be 150 tonnes per day initially, increasing to 500 tonnes in the second quarter of next year, when underground ramp development is completed and more ore from the Rosario I and II veins become accessible.

SantaCruz also holds the San Felipe polymetallic project, in Sonora state, and 100% of the Gavilanes polymetallic project in Durango state.

San Felipe is almost fully permitted and could be in production by late 2014 or early 2015. An updated resource and preliminary economic assessment (PEA) on the project are due out in the second half. San Felipe holds a resource of 4 million tonnes grading 70.2 grams silver per tonne, 5% zinc, 2.77% lead and 0.28% copper.

Gavilanes is an earlier-stage underground project that Campbell says could achieve 3 to 4 million oz. silver production by 2016 or 2017. An initial resource for Gavilanes is slated for the third quarter, with drill results hitting the market in the second quarter.

“What makes all these projects particularly interesting is that they all have good grade, and they all have low capital requirements,” Campbell says. He adds that in the current market environment, companies with lower capex projects and the potential to finance some growth through internal cash flow are the ones that are better positioned to outperform.

SantaCruz has to make one last payment of $18 million to Hochschild Mining for San Felipe in October 2014. However Campbell notes that the two are negotiating to defer some or all of
that payment to give the junior some financial flexibility.

Last word:“We believe SantaCruz Silver remains on track to start generating cash flow in the second half of 2013, even at spot prices,” Campbell wrote in a recent note.

Aurcana

Analyst: Doulis at Stonecap
Target: $1
Rating: Outperform
Recent price: 48 cents 52-week trading range: 35 cents to $1.26

Aurcana (AUN-V) started production in 2009 at its La Negra mine in central Mexico’s Queretaro state, and is transitioning from a junior silver producer to an intermediate producer by bringing on a second mine.

While Doulis sees limited expansion potential in La Negra above the 2 million oz. per year range — the mine produced 2.5 million equivalent oz. silver last year, a 45% increase from 2011 — he does attach a lot of value to it.

“Half of my value that I see in Aurcana is actually in La Negra because it’s got an exceptionally long life, based on the resource that they put out in August, and it’s a good little money-maker because the lead-copper-zinc by-products make this a fairly low-cost producer,” Doulis says.

Last year, total cash costs at La Negra were US$6.43 per oz. silver, net of by-product credits.

La Negra was first brought into production in the 1970s, and operated for 30 years under Industrias Penoles. Aurcana has expanded the underground mine to 3,000 tonnes per day from 800 tonnes per day in 2009.

For the growth it offers the company, however, Doulis really likes Aurcana for its Shafter silver mine — not in Mexico, but across the U.S. border in Texas.

The mine has the potential to bring Aurcana’s production levels to around 5 million oz. per year, which could make it a target for major silver producers like First Majestic Silver (FR-T, AG-N) and Hecla Mining (HL-N).

While commercial production was achieved at Shafter in December 2012, the operation’s ramp-up has been slower than expected.

The company has had technical issues with some of its equipment in the mill and processing plant. It’s also had trouble sourcing qualified, underground mine workers in Texas.

“It’s a problem these guys have never run into in Mexico with its long history and culture of mining,” Doulis says. “The challenge is that if you can’t get the guys driving the trucks underground, you just can’t pull ore fast enough to feed the mill.”
The company is aiming to boost Shafter to 1,500 tonnes per day in the fourth quarter. In the first quarter, however, the company missed its initial target of 600 tonnes per day. Doulis recently reduced his 2013 production estimate for Shafter from 1.1 million oz. silver to 565,000 oz. He forecasts total production for the year at 2 million oz. silver, down from 2.6 million oz.

The company is completing a one-for-eight consolidation of its 467 million shares outstanding, effective April 30.

Last word: Even with the disappointing ramp-up at Shafter, Doulis believes Aurcana offers good value.

“At current silver prices of around US$24 per oz., we see approximately 50¢ of value for La Negra alone,” Doulis says. “Thus, at current share prices, it appears you’re not paying anything for Shafter.”

MAG Silver

Analyst: Campbell at Canaccord
Target: $15.25 
Rating: Speculative buy 
Recent price: $7.02; 52-week trading range: $6.58 to $13.32

While MAG Silver (MAG-T, MVG-X) isn’t a producer, Campbell says it owns 44% of “one of the best undeveloped silver projects on the planet” — the high-grade Juanicipio silver project, in Zacatecas state.

Moreover, the company’s partner and project operator Fresnillo (FRES-L) is the largest silver miner in the world and operates three other mines in that district.

“So I’d say the level of execution risk on that is relatively low and it’s a great project, regardless of whether you like silver or not — it’s an incredibly high-value project.”

A PEA released mid-2012 shows that at a discount rate of 5%, the project has a net present value of US$1.2 billion and an after-tax internal rate of return of 43%. Initial capital costs are estimated at US$302 million with the ability to fund sustaining capital of US$267 million by operations.

The underground mine would have a life of nearly 15 years, producing an average of 10.3 million payable oz. silver per year at total cash costs of negative 3¢ per oz. silver, after by-product credits.

The study used metal prices of US$23.39 per oz. silver, US$1,257 per oz. gold, US95¢ per lb. lead and US91¢ per lb. zinc.
The PEA was based on an indicated resource of 5.7 million tonnes grading 702 grams silver per tonne, 1.9 grams gold, 2.2% lead and 4.2% zinc, plus inferred resources of 4.3 million tonnes grading 513 grams silver, 1.4 grams gold, 1.6% lead and 3% silver.

Fresnillo and Mag are currently conducting a $25-million underground permitting and development program at Juanicipio. Part of that program, the development of an initial 2,500-metre ramp, was scheduled to start in the first quarter, but a blasting permit delay has pushed that back to the third quarter.

Although Juanicipio is an exceptionally high-quality project, Mag’s share price has been beaten down lately, partially because of developments related to its Cinco de Mayo project in Chihuahua state. Last November, the local ejido assembly of local landholders voted to evict Mag from the project and declare a 100-year moratorium on mining.

Mag believes the meeting was called illegally, and Campbell says there is upside potential in the stock if the company can resolve the problem.

Cinco de Mayo holds inferred resources of 12.5 million tonnes grading 132 grams silver, 0.24 gram gold, 2.86% lead and 6.47% zinc.

Last word: Mag received an unsolicited takeover offer from Fresnillo in 2008, and Campbell says it’s still a takeover target. Arbitration after the last takeover attempt stipulated that any takeover would be a friendly deal and involve cash. But Juanicipio is right next door to Fresnillo’s Saucito mine, and consolidating ownership of the two projects makes sense for Fresnillo, who could speed-up Juanicipio’s development by up to 18 months by using Saucito’s infrastructure.

“If that doesn’t come to pass, it makes sense for somebody else — a larger-cap silver producer — to take a look at Mag,” he says. “Because it’s challenging to find high-quality silver projects, and Juanicipio is one of the highest-quality silver projects in the world. That should be attractive to any number of candidates.”