SilverCrest pushes ahead with Las Chispas

Three years into exploring the Las Chispas district in Sonora, Mexico, SilverCrest Metals’ (TSXV: SIL; NYSE-AM: SILV) Las Chispas project is picking up speed. The company secured financing shortly after Mexico’s environment ministry gave SilverCrest the green light to develop the project.

The Las Chispas property consists of 28 concessions totalling 14 square kilometres. The project is located 180 km northeast of Hermosillo and 12 km south of the community of Arizpe, with a population of 2,200.

Geologically, host rocks at Las Chispas are volcanic tuffs, rhyolites, agglomerates and rhyolite breccias. The historic Las Chispas mine produced spectacular silver mineral specimens, including polybasite, stephanite, native silver and pyrargyrite.

On July 18, 2019, SilverCrest received an operating permit from the Secretaria de Medio Ambiente y Recursos Naturales (Semarnat), giving the company conditional approval to build a 3,000-tonne-per-day underground mine and a conventional processing facility, with dry-stack tailings and underground backfill. The permit, which expires on July 17, 2033, covers 1 sq. km of the project. Semarnat says it plans to inspect the project in the second half of 2019.

On Aug. 15, SilverCrest announced that it raised $25 million by issuing 4.3 million shares at $5.85 apiece in a bought-deal financing. In response, SSR Mining (TSX: SSRM; NASDAQ: SSRM) exercised its equity participation right to pick up 780,000 SilverCrest shares for $4.6 million to keep its 9.9% interest in the company. After the two transactions, SilverCrest says it has $49 million in cash.

Analysts applauded the fundraising effort and SilverCrest’s general direction.

“The amount of institutional interest in the offering was very significant, and not something we have seen in recent times,” says Raj Ray, a mining and metals analyst with Desjardins Securities in Toronto.

Workers in front of a portal at SilverCrest Metals’ Las Chispas silver-gold project in Mexico. Credit: SilverCrest.

Desjardins gave SilverCrest a “buy” rating, citing strong potential for resource upside. A research note on July 17, says the company has enjoyed a positive start to the year, driven by the third resource update in March 2019, and a robust preliminary economic assessment (PEA) in May 2019.

“Recent exploration results have been encouraging and point to continued resource upside, supported by SilverCrest’s ongoing 2019 drill program, which is targeting zone extensions and entirely new veins,” the research note states. Desjardins also increased its target price for SilverCrest shares from $6 to $7.25, driven by higher gold-price assumptions, and and an incrementally larger resource.

Mining analyst Michael Curran with Beacon Securities in Toronto says it is “definitely a positive sign” when shareholders keep their pro-rata interest on financings. “We consider SilverCrest Metals to be an attractive investment opportunity of future mine development of a high-grade, silver-gold deposit in Mexico,” Curran said in a research note on Aug. 16.

Mining analyst Ryan Thompson from BMO Capital Markets kept his “outperform” rating for SilverCrest. Thompson says the company deserves a premium multiple, given the exploration potential and high grades of the Las Chispas deposit, and receipt of the operating permit.

According to the PEA released in May, the Las Chispas project has an after-tax net present value of US$407 million with a 5% discount rate, and a 78% after-tax internal rate of rate of return (IRR) over a nine-month payback period, based on US$16.68 per oz. silver and US$1,269 per oz. gold.

Ray says the high IRR is driven by a relatively low initial capex — pegged at US$100 million — and the flexibility to mine higher-grade and higher-margin ore early in the mine life.

Curran says the after-tax IRR is realistic. “The overall high-grade nature of the deposit, coupled with the even higher grades expected to be mined in the early years, should see very low operating costs and result in a higher-than-normal, after-tax IRR,” he notes.

The project is forecasted to have an average annual production of 5.4 million oz. silver and 55,700 oz. gold, and an initial 8.5-year mine life. To maintain a production rate of 1,250 tonnes per day, the development plan will require at least 11 underground working faces to feed the process plant, before ramping up to 15 working faces by the fifth year. Miners will use cut-and-fill methods and split blasting in narrower stopes.

“This is one of the better-quality PEAs we have seen for junior, development-stage companies,” Ray says. “We see potential for further upside to mineable resources, compared to the 89 million equivalent oz. silver estimated in the PEA.” The capex and operating-cost estimates for the project are backed by SilverCrest management’s strong technical expertise, he adds.

The PEA is based on the February 2019 resource estimate for the Las Chispas project, which shows an indicated resource of 1 million tonnes grading 6.98 grams gold per tonne and 711 grams silver per tonne for 224,900 contained oz. gold and 22.8 million contained oz. silver. Inferred resources stand at 3.6 million tonnes grading 3.32 grams gold and 333 grams silver for 388,300 contained oz. gold and 38.9 million contained oz. silver.

The PEA focused on the initial development and production of high-grade veins that produce an average of 13.7 million oz. silver equivalent per year for the first four years at all-in sustaining costs of under US$5 per equivalent oz. silver. The PEA suggests that Las Chispas could be a high-margin project, even at low metal prices.

Resources used for the PEA consist of 10 — out of 30 — known veins that were drill-tested near the surface. SilverCrest has 14 rigs running on-site to test, expand and upgrade the resource. The company is also reconciling underground grade on the Babicanora vein, with drilling and underground work to better understand the grade difference between recent underground vein sample results and the resource model.

SilverCrest CEO Eric Fier says the company will evaluate a number of optimization opportunities identified in the PEA as the company proceeds with a feasibility study, which it plans to complete in the first half of 2020.

Drillers at Silvercrest Metals’ Las Chispas gold-silver property in Sonora, Mexico. Credit: Silvercrest Metals.

The recent change in Mexico’s political leadership may have raised concerns on how the political landscape will affect investors and the companies that are developing resources. Andres Manuel Lopez Obrador was sworn in as Mexico’s new president on Dec. 1, 2018, after a general election in July 2018. The left-wing politician has promised to bring about change and rid the country of corruption and drug wars through peaceful means.

While there are concerns over certain regions in Mexico, Curran regards Sonora state — where Las Chispas is located — as one of the better mining jurisdictions in the country. “The trepidation we often have with management teams, as they attempt to transition their company from explorer to producer, is significantly lower with SilverCrest Metals,” Curran says.

He adds that the company’s management team built and operated a similar mine in the region — the Santa Elena silver mine — before First Majestic Silver (TSX: FR; NYSE: AG) acquired it from SilverCrest in 2015.

For Ray, Sonora state is safer than  some other parts of Mexico. He adds that President Lopez Obrador’s unofficial announcement that the country would not hand out new mining concessions does not affect the company, which has all the mining concessions it needs.

“Any jurisdiction presents some risks or other in terms of tax rates, labour laws, security or other factors determined by the government,” Ray says. Since Las Chispas has received its operating permit, “we see that as a significant de-risking event, given some investor concerns about potential delays in the process with the new government.”

On Aug. 22, 2019, SilverCrest announced that it obtained full ownership of all mining concessions containing vein mineral resources at Las Chispas by exercising its outstanding option agreement to fully acquire the remaining four of the 28 concessions. It has also acquired local water rights and received a general explosives permit to advance underground exploration for the Babicanora vein, in both the Santa Rosa decline and Babicanora historic adit.

Mexico ranked 29 out of 83 for investment attractiveness in the Fraser Institute’s 2018 survey of mining companies.

With the rainy season in Sonora coming to an end, the company says it plans to increase the number of drills from 14 to 17 — 15 on surface and two underground — in September. It expects to drill another 50,000 metres in the second half of 2019.