Bear Creek optimistic despite silver’s slide

As the New York spot price of silver quickly retreated to US$34.40 per oz. in early May from its 31-year high of US$48.70 on April 28, one of the formerly best-performing stocks in the junior silver space, Bear Creek Mining (BCM-V, BCEKF-Q), tumbled along with it. 

Shares of the company, which traded as high as $12 in March, fell another 58¢ to a six-month intraday low of $6.90 on May 5, before closing the day at $7.20. Silver shed US$4.73 to US$34.50 per oz. on the day, its fifth straight decline amid significant pullbacks in the prices of many commodities.

Several factors pressured the metal throughout the week. Rising margin requirements for silver futures, recent strength in the U.S. dollar, a flight from safe-haven investments following the death of Osama bin Laden, large hedge fund selling and overbought technical indicators were all partly to blame.

Meanwhile, concerns over the outcome of a presidential run-off election on June 5 in Peru, where Bear Creek’s six projects are located, have also dogged investors’ confidence in miners active there.

Ollanta Humala, a nationalist leftist candidate proposing a windfall mining tax, is in a close race with Keiko Fujimori, an advocate of Peru’s free market-oriented status quo and the 35-year-old daughter of imprisoned former president Alberto Fujimori.

“It’s kind of a double witching hour,” explains Bear Creek’s chief executive officer Andrew Swarthout, in a telephone interview with The Northern Miner. “You’ve got the volatility in the silver market, of course… It’s amazing to me that silver goes from the high US$40s to the mid-US$30s and people become apocalyptic. These projects are extremely robust that we’re developing. We were very happy when we just put in US$17-US$20 prices, so these silver prices are still very, very good.

“The other part of the double-witching is the Peruvian political landscape right now, which is sort of a movie we’ve seen before in 2005, when we had a very similar situation running up to those elections.

“Some of the polls are now starting to suggest that… Keiko Fujimori is one or two points ahead of Humala, who is everybody’s concern. We are seeing Keiko gain a lot of traction as her campaign gains credibility.”

Having spent the better part of two decades exploring for minerals in Peru, Swarthout remains optimistic: “It’s going to be a nail-biting period through the June 5 elections, but we’ll see some stability and clarity coming within the month of June. Bear Creek is in a position, like many other companies when these things happen, to see some really good rebound potential.”

Brokerage firm Raymond James agrees and has issued a buy recommendation on the stock with a six- to 12-month price target of $15.25. In a May 3 research report to clients, it lists Bear Creek as one of its top 10 mining picks while the company progresses the development of the smaller Santa Ana silver project in Peru and advances the much larger Corani silver project nearby toward a construction decision.

“We believe Bear Creek’s share price will benefit as it continues to de-risk these two projects,” the report states, noting that Bear Creek currently trades at a price to net asset value ratio of 0.7, below its current primary silver producer developer group average of 0.9.

While the stock has provided shareholders with excellent leverage to rising silver prices over the past year, it has also been liable to significant pullbacks when the metal underperforms.

As for its current projects, Bear Creek completed a positive feasibility study for a heap-leach operation at Santa Ana in October 2010, outlining an 11-year mine life producing 5 million silver oz. per year for the first six years. With life-of-mine operating costs expected to total US$8.72 per silver oz. and an initial capital cost of just $70.8 million, Bear Creek hopes to bring Santa Ana on-line no later than the second half of 2012. 

Having already defined a 63.2-million-oz. silver resource in the proven and probable categories (37 million tonnes grading 53 grams per tonne silver, as well as 0.34% lead and 0.58% zinc), the company now awaits approval of its environmental and social impact assessments, followed by the final mining permits.

In the meantime, it is completing detailed engineering studies and arranging for long-lead-time equipment so that construction can begin later this year.

Bear Creek is also fast-tracking development of its much larger Corani project, for which it expects to complete a feasibility study next quarter. The company acquired Corani as a grassroots project from Rio Tinto (RIO-N, RIO-L) in 2005 and has since delineated a “proven-and-probable” level resource totalling 258 million silver oz., 2.8 billion lbs. lead and 1.4 billion lbs. zinc (from 139.6 million tonnes grading 57.5 grams per tonne silver, 0.94% lead and 0.45% zinc). 

According to a positive prefeasibility study completed for the project in 2009, Corani’s initial capital cost is estimated at US$339 million. The company expects annual silver production of 10 million oz. for the first six years at cash costs of about US$1.06 per silver oz., net of base metal credits.

Providing further upside potential are four other early-stage prospects, all in Peru. Bear Creek has scheduled second-stage drilling in the second quarter of 2011 at the Tassa silver-gold prospect, some 160 km from Santa Ana and nearly the same distance from Corani to the north. The company also plans mapping, sampling and stage-one drilling at its Sumi and Alejandra gold projects in central and northern Peru, respectively.

Lastly, Bear Creek has a joint venture agreement with Japan Oil, Gas and Metals National Corp. to further advance its La Yegua copper-gold-molybdenum project, for which second-stage drilling is expected later this year.

Raymond James notes that other positive news in the near term might come from the company completing the acquisition of surface rights to Santa Ana, expected later in this quarter.