South American Silver Advances a World-Class Silver Discovery

South American Silver Corp. (SOHAF.PK) received its first NI 43-101 compliant Preliminary Economic Assessment (PEA) study on its 100% owned silver-indium Malku Khota project in Bolivia. Because the study is the first un-optimized study and includes only about 3.5 km of the project’s 15 km strike length, we believe the project has significant upside. We consider Malku Khota, with an established silver indicated resource of 145 million ounces of silver, to be one of the largest silver discoveries in the current metal cycle. The Malku Khota project also includes an indium indicated resource of 845 kg (indium is in demand for use in solar panels and flat screen televisions).

Malku Khota Project Location Map

Source: South American Silver

South American Silver was one of our 2009 Developer Picks. On December 31, 2008, South American Silver shares closed at $0.18 per share, slightly above cash of $0.17 per share held in the company’s treasury. This was down slightly from $0.21 per share in September following the 2008 Silver Summit in Coeur d’Alene. Following the announcement of the PEA, South American Silver closed at $0.41 per share, up over 100% in less than 60 days.

Malku Khota Project Summary

Malku Khota project in Bolivia is shaping up to be a world-class asset. Malku Khota has a strike length of about 15 km (5,475 hectares) where mineralization is contained within a sedimentary package, in a highly exposed ridgeline, suggesting a low strip ratio. The project is at a high elevation, in a relatively uninhabited area, and within 20 to 25 km from a main highway and power. There is dirt road access to the project from the cities of Oruro and Cochabamba.

Malku Khota Project Map

Source: South American Silver

The Limosna, Wara Wara and Sucre targets at Malku Khota have multi-kilometer strike lengths within sandstone ridges hosting silver and indium mineralization. Indium trades at about $700 per kg and is in demand for a growing number of applications. A NI 43-101 compliant resource estimates an indicated resource of 144.6 million oz. silver and 845,000 kg indium, and a separate inferred resource of 177.8 million oz. silver and 968,000 kg indium. This resource is based on 25,000 meters of drilling in 75 drill holes completed through August of 2008. These targets are a relatively small portion of the entire land package which is highly prospective for additional metals, including gallium, lead, zinc, antimony, and gold.

Preliminary Economic Assessment Summary

The PEA base case study suggested a conventional open pit mine and a 20,000 tpd heap leach operation, with estimated initial capital costs of $104.7 million, resulting in a NPV of $1,233 million (0% discount rate) and an IRR of 50.7% with payback of capital in about 2.2 years. The base case assumes average grades of 25.3 g/t silver and 5.92 g/t indium, and a silver price of $13.30 per ounce and an indium price of US$530 per kg, over the life of the project. As the base case plan suggests a mine life of 36 years, and exploration of Malku Khota covers only a fraction of the property, we see additional studies considering a larger project both increasing cash flow early in the project and boosting NPV and IRR.

Limosna Ridge, Malku Khota, Bolivia

Source: South American Silver

The robust economics for the initial PEA may be attributed to characteristics of the Malku Khota project. Given the elevated structure above the valley floor, the study suggests a strip ratio of only one to one. In addition, the project has an easily digestible cash cost of US$3.75 per ounce silver (net of credits). South American Silver completed early metallurgical assessments for a cyanide leach operation, typical of silver projects in Nevada, which would limit recovery to the precious metals only. Alternatively, the project receives a significant boost with an acid-chloride leach, which recovers indium and potentially other valuable minerals. In addition, an acid-chloride leach may also allow for the production on site of ore. This may result in other benefits including lower operating expenses and taxes.

Political Risk and Opportunity

We suspect that U.S. and Bolivian relations may improve during the administrations of Obama and Morales. While it is convenient to place Bolivia in a higher risk classification, we believe the jury is still out on Bolivian President Evo Morales. The long-standing issue requires addressing a redistribution of wealth between wealthy lowland ranchers and indigenous people. It appears clear that Morales earnestly represents the position of long suffering indigenous people. There is reason to believe that he will increase taxes on mining companies commensurate with other resource based nations. There is also good potential that he may limit his term in office as promised, but this will only be borne out with time.

It is evident that the administration of Evo Morales recognizes the importance of resources to Bolivia and the necessity of attracting investment and talent for further development. Companies investing in Bolivia, providing some level of confidence in the nation’s stability, include Sumitomo Corporation, Coeur d’Alene Mines (CDE), Pan American Silver (PAAS), Jindal Steel of India, and Petrobas (PBR) of Brazil. Bolivia is likely to remain of interest to mining companies for exploration and development.

Looking Forward at Malku Khota

South American Silver will focus on additional metallurgical work and engineering studies in 2009. This may lead to further surface exploration on the trend during the year. It is also considering a pilot plant. The timeline is still uncertain, but early analysis clearly suggests that Malku Khota merits attention for further development. We note that the pre-tax NPV (with a 10% discount rate) was estimated to be US$325 million, which based on 50 million shares outstanding, would imply a value at full commercial production of about $6.00 per share. Clearly, there will be intervening shareholder dilution during development, but Malku Khota stands out as the most interesting silver discovery of the current metal cycle.

Disclosure: The author is long SOHAF.PK.

Comments

[yellowhoard:]

Pretty sketchy politics down there. Not sure I'd want to depend on the locals honoring my property rights. I'm not sure if I trust the government here in the US to honor property rights.

Feb 26 08:41 AM

[Conan the B...:]

Bolivia is where CDE's major silver mine is located, its one of the reasons I keep a very close eye on whats happening down there and why PAAS also bears scrutiny.

Suggest taking a read on HL's latest earnings report and commentary. TC on moly is also interesting.

The only big income player outside the tax free muni sector that I haven't nibbled at is CQP, current yield is around 25%. Maybe this morning.

CDS holdings have kept MHI and MAV down, but if the Citicorp goes the way I think it will, both of these Tax Frees have a chance at 50% gains, in addition to a 9% yield.

Feb 27 04:38 AM

[Mad Hedge F...:]

ab ** $$With gold bugs, survivalists, and garden variety hedge funds running victory laps over the yellow metal’s recent breach of $1,000, it is easy to miss the move in silver that has been twice as impressive. Silver has run 30% this year to $14.60 an ounce, despite the steady deterioration in industrial demand. Silver ETF buying has exploded by 1,676 tonnes to bring their total to 9,929 tonnes. Sales of silver American eagle coins have doubled to four million ounces so far this year. The metal may have more to run. Hedge fund longs, which peaked last year at 50,000 futures contracts, have so far reached only 23,100 contracts in this round. But risk managers are going to have to keep an extra sharp eye on silver positions. A turnaround by the Dow or the yen against the dollar could suddenly take the air out of this bubble.

Feb 27 02:11 PM

[Clavis:]

Pretty pictures, but........

The whole premise of offering indium as a significant revenue generator at a $530/kg is nonsense.

The way that 0% discount to NPV calculations are presented as "the project economics" is downright nonsense.

Do you honestly believe that Bolivia will let a foreign junior miner in on world standard terms and make itself rich while the State sits back and applauds its initiative?

I am not sure that SAC.to does have surface rights at its Malku Khota concession.

Beware.

Feb 28 08:27 AM