Santacruz lands US$28.4M deal to fund second mine

Santacruz Silver Mining (TSXV: SCZ) has signed a US$28.4-million prepaid silver-purchase agreement to help fund its San Felipe silver-lead-zinc project in Sonora state, Mexico.

The silver deal, with Texas-based JMET LLC, will see Santacruz sell 4.6 million oz. silver to JMET over five years.

Under the agreement, the junior has a one-year grace period during which no silver will be delivered. After that, it will deliver 7,500 oz. silver per month for 18 months, followed by 150,000 oz. silver per month for 30 months — or 1.8 million oz. silver a year — ending in August 2019.

JMET will pay the spot price for silver, minus a fixed discount.

Santacruz is in the middle of a production ramp-up at its first operation, the Rosario silver-gold-lead-zinc underground mine in San Luis Potosi state.

The mine is expected to reach full production capacity of 1.8 million equivalent oz. silver in the fourth quarter, when the project’s third ball mill will be installed and operational.

In a press release, Santacruz stressed that the agreement allows it to keep 100% of any upside in metal prices and that it does not need to issue shares, options or warrants.

“The funding allows us to continue our plans to advance the San Felipe project in a non-dilutive way under a flexible and favourable financial structure, while at the same time maintaining the upside on the price of silver,” Santacruz president and CEO Arturo Prestamo said.

“With the Rosario mine starting to hit its targets, robust economics at our San Felipe project, and this non-dilutive financing now in place, we are well positioned to take the next step in becoming a mid-tier silver producer.”

Canaccord Genuity mining analyst John Kratochwill raised his price target on Santacruz to $1.60 from $1.40 following the news.

“While on surface it appears this is a streaming agreement, we view it as more of a fixed-period loan carrying a 12.7% interest rate, with scheduled repayments,” he commented in a client note.

“We view the transaction as positive, as we feel the implied interest rate is fair to fund a development asset in the given commodity environment.”

Kratochwill said that the financing takes care of most of San Felipe’s US$36.3-million development cost, outlined in a recent preliminary economic assessment (PEA).

“With the financing and near-term balance sheet concerns removed, the final piece of the puzzle remains the successful ramp-up of Rosario, which we expect to achieve significant improvements by year-end, compared to first-half 2014.”

Kratochwill said Santacruz would still need to raise $6 million to develop its second mine by early 2016, presumably through an equity financing.

Santacruz recently released a positive PEA on San Felipe. The study showed that an open-pit and underground mine at the project would return a US$61.2-million after-tax net present value and a 37.7% internal rate of return at a 5% discount rate, and US$19.91 per oz. silver price.

Capital costs for the 1,250-tonne-per-day project, which will produce 3.2 million equivalent oz. silver per year over 7.5 years, were estimated at US$36.3 million.

On the news, Santacruz shares gained as much as 10¢, or 11%, to 99¢ before settling at  a 92¢ close. The company has traded in a 52-week range of 67¢ to $1.34, and has a total of 103.5 million shares outstanding.