SilverCrest Mines Is Looking Far Into the Future

Source: http://www.flickr.com/photos/sirqitous/

SilverCrest Mines is a small gold and silver producer in Mexico. The company owns and operates the Santa Elena Mine in Sonora. It also owns a large late-stage exploration project called La Joya in Durango, which will be producing gold, silver, and copper in the coming years. Finally it owns a smaller potential mine on its Santa Elena property — Cruz de Mayo, which will be a small silver and gold producer beginning in 2019.

Recently, the company made a very small deal, but one that I believe speaks to management’s commitment to long-term production growth and value creation. On January 14, the company made a deal with a tiny mining company called Evrim Resources to option the Ermitano property, which is adjacent to its Santa Elena property. Basically this means that if SilverCrest does what is stipulated in the contract then it will gain lawful ownership of the property.

The terms of the deal are as follows. First, the company paid $75,000 to Evrim. In the future, SilverCrest will owe $50,000 annually to Evrim until it comes up with mine and construction plans within 5 years. SilverCrest also has to spend $500,000 in the first year on exploration. The reason that Evrim is interested in SilverCrest developing this mine is that it is retaining a 2 percent net smelter return royalty on the metal produced at Ermitano. This basically means that Evrim will receive 2 percent of all of the revenue from the metal produced at Ermitano minus the cost of refining it.

As I mentioned this deal is very small from SilverCrest’s perspective — in all the company’s financial obligation comes to just $825,000 while it had $30 million in working capital at the end of the third quarter. However, this deal shows that management is looking far into the future.

The company needs long-term expansion plans — as profitable as the Santa Elena mine has been (even in a low metal price environment) it has a limited life-span that barely goes into the 2020’s assuming the mine isn’t expanded. While La Joya will fill this gap, as it is scheduled to produce from 2016 to 2025, SilverCrest’s management evidently realizes that this may not be enough to maintain production (Cruz de Mayo is a nice addition, but too small to fill this gap).

Thus, it makes sense that management would go out and find an additional project, and Ermitano is a good choice. There are two reasons for this. First, it is a huge land package spanning 165 square kilometers. Large land packages naturally have higher probabilities of yielding profitable mines. Second, Ermitano is situated next to SilverCrest’s Santa Elena property. Not only will SilverCrest’s exploration team understand the particulars of this geologic structure, but statistically speaking, it is more likely that the company will find a new mine next to an existing or past-producing mine.

Ultimately, the Ermitano deal adds little quantifiable value to SilverCrest shares, but it show’s management’s commitment to growth. Seeing that it will take (presumable) 5 years to develop a mine plan and perhaps two years to build a mine, we can expect production, should resources be found, in 2021. This is impeccable timing if we consider the project’s timeline in the context of SilverCrest’s portfolio.

  • Santa Elena produces from 2014 — 2022
  • La Joya produces from 2016 — 2025
  • Cruz de Mayo produces a small amount from 2019 — undetermined
  • Ermitano produces from 2021 — undetermined

Thus, not only does Ermitano form the next link in a chain of new projects coming online every 2-3 years, but it fills the gap at Santa Elena if management cannot expand the mine. Such dedication to a long-term plan merits investor enthusiasm.

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