JDS Silver’s Silvertip project nears production in BC

In its first investment in a Canadian mining company, private equity firm Denham Capital is giving JDS Silver US$65 million to complete construction of Silvertip, a silver-lead-zinc mine in northern British Columbia.

The private mining company started building the mine in December 2015, and it is now on the brink of production, Caroline Donally, Denham Capital’s director, tells The Northern Miner, adding that the investment in JDS Silver also marks its first investment in silver.

“We like the team, they’re a team of mine builders — that’s what they do — and they have an asset,” Donally says in a telephone interview from her office in Houston. “Normally when we back teams they are still looking for assets, so they had an asset and a very good team.”

JDS Silver’s CEO Jeff Stibbard is a mining engineer who was responsible for the design, construction and operation of BHP Billiton’s (NYSE: BHP) Ekati diamond mine in the Northwest Territories, and for the 450,000-tonne-per-day Muskeg River oilsands mine. He cofounded Calgary-based Western Oil Sands, which was sold to Houston’s Marathon Oil Co. for US$6.2 billion in July 2007. (Stibbard’s office did not return requests for comment about Silvertip.)

“Jeff has been building mines for a long time, and his reputation definitely precedes him,” Donally says. “The JDS approach is to figure out a way of spending the least amount of capital to get a return as quickly as possible.”

“It’s not about bigger being better. It’s about finding the small, high-grade nut of a deposit, and using the cash generated by the asset to expand the process, and turn assets into far larger assets, if that’s what you want to do,” she continues. “That approach — getting into production quickly and getting capital quickly — aligns with our strategy.”

Silvertip sits within the Silvertip Creek valley in the Tootsee River watershed, 16 km south of B.C.’s border with the Yukon, and 90 km southwest of Watson Lake. It is a high-grade, silver-lead-zinc carbonate replacement deposit nestled in the Cassiar Mountains.

The deposit was discovered in 1957, and several companies have held mineral claims and undertaken extensive exploration there, resulting in the construction of a 26 km access road, 2.7 km of underground workings, 86,000 metres of drilling, two bulk-sample programs and 20 years of environmental baseline data and site infrastructure.

JDS Silver bought the project from Silvercorp Metals (TSX: SVM) for $15.5 million in November 2013. It then bought concentrating and milling equipment from Teck Resources’ (TSX: TCK.B; NYSE: TCK) decommissioned Sa Dena Hes mine, 45 km north of Watson Lake.

“It’s been a nine-month construction time frame, which is almost unheard of,” Donally says, pointing out that one of the reasons why JDS Silver could do it so quickly was because it negotiated with Teck to buy the processing plant and move it to site.

“That dramatically shortened the time for construction, and there had been quite a lot of work [done] on-site already,” she says. “There were underground workings, there was a camp on-site and the access road was already in. So you weren’t starting from scratch.”

Donally says she’s probably spent two years travelling to Canada to meet management teams in the mining sector.

“It’s a pretty lengthy process, and some people are somewhat put off by that, but what it shows is that we’re looking for specific people and teams that we can back with capital. I suppose private equity, not just us, is pretty picky about who they’ll back with capital.”

Once Donally met with Stibbard, however, a deal was signed quickly. After the initial meeting in May 2015, the parties agreed on terms and closed the transaction in July.

Denham Capital typically invests in base metals — copper, zinc and lead — but also has investments in metallurgical coal, as well as in niobium and tin.

So in the case of Silvertip, the private equity firm was particularly attracted to the deposit’s 30% zinc-equivalent grade, which makes it one of the world’s highest-grade zinc deposits, Denham Capital says.

In addition to developing the zinc resource, JDS intends to produce silver and lead in concentrate. “We were really attracted to the project by the base metals component, so depending where the prices are — it could be fifty-fifty silver to base metals.”

“Our approach is to try to find assets that are low on the cost curve so they can survive downturns in prices,” she says. “That’s difficult, but it’s impossible for us to put money into assets that don’t make money in this environment, so we do need margin businesses. So asking a view on where price is going and what it may or may not do for us — it’s almost irrelevant to our investment decisions — because our investments have to make money at low prices. And if prices run, that’s fantastic, [but] that’s not something we can rely on.”

When asked for specifics about the mine itself and details on costs and production, however, Donally said that being a private company, JDS Silver tends to keep that information to itself, “which is one of the things we like about being in the private space.”

Eventually, JDS could go public as part of an exit strategy for Denham, she says, or its assets could be bought by a public company at some point.

Denham likes the fact that the management teams it backs can concentrate on the work at hand.

“We want our management teams out there building the business rather than spending time raising capital … and attending road shows,” she says.

“We find it quite intriguing that investors will go to a lot of trouble to do due diligence and look for superior technical expertise, and then have the CEO go out and spend all his time fundraising.”

Looking ahead, Denham is searching for another team to back in Canada, but there is no short list at the moment.

“Jeff and his team have great skills and experience in northern and western Canada … so we’d like to put a team in place to operate in the eastern side of the country,” Donally says. “We’re talking to a few, but there’s nothing that has progressed to a term sheet, or anything like that.”

With offices in Houstin, Boston, London and Perth, Denham Capital is focussed on the oil and gas, mining and power industries. Its other mining investments include Auctus Minerals; Mining Ventures Brasil; Pangea Exploration; Pembroke Resources; Santiago Metals; Stellar Mining; Trinity Coal; and Upper Wilgat.