Top Mining Equities for 2011

 |  Includes: AUY, FSM, JAGGF, SLW, SSRI
by: Hyperinflation

For the first year out of the last two, Silver Wheaton (NYSE:SLW) is not in my top 5 picks for 2011. My top picks include 3 silver miners and 3 gold miners.

Silver Picks:

Fortuna Mining- (FVITF.PK): An emerging mid-tier producer with incredible upside potential. Q3 production was just released and they were stronger than expected, a trend I expect to continue into the future. What I think will drive Fortuna in addition to excellent operating results is the anticipation of the San Jose mine (their flagship) coming online in 1h 2012. With Fortuna likely to exceed 7m ounces in 2012 and 10m ounces in 2012, Fortuna looks like a takeover target as well. It wouldn't;t surprise me to see them expand their San Jose mine as much is unexplored to produce silver in excess of 12m ounces a year. This would be more than Hecla which trades with a market cap over 1B, while Fortuna is right around 300m. Ideally Fortuna would use their OCF after the San Jose mine is built to make strategic acquisitions if they manage to stave off being bought themselves.

Year end PT 11' - $5.50-$6.00

Bear Creek- (OTCPK:BCEKF): What makes Bear Creek's assets absolute gems are the incredibly high internal rates of return (in excess of 70%). In other words, the capital requirements to construct these mining operations are very low, allowing Bear Creek to bring these mines on-line without having to do a ridiculous amount of financing. This is especially important to companies not yet generating operating cash flow. The following are some highlights of their projects.

Santa Ana – Expected to produce 5M ounces annually starting in 2012. The expected LOM is 12 years. But both these numbers are likely to increase in 2011 as they recently increase M&I resources by 39%.

  • Initial Capital Outlays: $51 million
  • Average Cash Costs: $7.40/oz.
  • High exploration potential on the northern side
  • 136M oz. In total resources

Corani – Expected to produce 25M silver equivalent ounces, which is a dramatic increase from the original estimate of 15-20M. An increased throughput of 22,500 is being evaluated, but the rhetoric from management has expressed this will be the likely outcome. There is also the possibility they attempt to extract 25,000 Tpd.

  • Initial capital outlay: $ 400M
  • Cash Costs net of bi-products: $1.07/oz.
  • Gross cash costs: $4.09/oz.
  • 470M Proven and Probable Reserves
  • Mine life: 27 years – @ 22,500 Tpd – 20 years

A recent article on MineWeb talks about the fact Bear Creek is poised to become a primary silver producer.
Vancouver junior Bear Creek may be a top primary silver miner by 2014

With two advanced silver deposits, including a potential world-class mine, and 320 million reserve ounces, Bear Creek may be on the fast track as a future major silver miner.

Silver Standard Resources- (NASDAQ:SSRI): Now that SSRI has cleaned up their act quite a bit, it is their time to shine. I have no doubt SSRI will become one the world largest Silver Producers over the next 5 years. Silver Standard has the best pipeline of projects in the industry and it is only a matter of until it is reflected in the price. They boast one of, if not the highest resource bases relative to their peers, a majority of which will be converted into 2p reserves. To date they boast 2p reserves of 286m, M&i of 1.114B and Inferred of 519m
A brief rundown of their mines:

  1. Snowfield- Ongoing drill programs- expected to produce 600k GEO and 1.5m silver when online. Expected to produce 607k of gold annually
  2. Brucejack- Huge deposit recently discovered 19m oz gold with projected output of 330k of gold annually but 3B capital costs
  3. Pitarilla- Underground feasibility study in q4 - expected production of 7-8m oz silver(2013 startup)
  4. San Augustin- exploration- expected production of 7-8m oz silver(2011 startup)
  5. San Luis- High quality asset expected to produce 78k gold and 1.86m silver
  6. Berenguela- exploration
  7. Challacollo-exploration
  8. Pirquitas Mine- 2010 production of 7m ounces
  9. Diablillos- PEA ongoing.

Production Estimates - 2011 (10m oz) - 2015 (25-26M)

Summing it up Pirquitas was the only producing mine in 2010 with the near term growth drivers being San Luis, Pitarrila, San Augustin and Diablillos. Snowfield and Brucejack will add tremendously if they are ever brought online, which is a problem due to the multi billions in capital costs. My guess is that by 2016-2017 Snowfield will be brought online with Brucejack being sold to help with the financing. Berenguela will also add to this total. I expect between 2016-2018 SSRI will start producing 60m silver equivalent ounces. Remember the assumptions being made are a sale of Brucejack to finance Snowfield and a 50:1 gold to silver ratio. The other alternative is to a JV on both projects and/or sell silver streams to raise the appropriate financing. Either way, I expect SSRI to become at least a 50m ounce producer and possibly a 60 or 70m before the end of the decade.

2011 Price Targets - Using DCF and the prevailing price of silver
Fortuna: $5-$5.75
Bear Creek - $14.50-$16
Silver Standard- $36-$40

Gold Miners

Jaguar Mining (JAG): Like Bear Creek, I recently talked about this but before expanding on the company, let me provide my rationale. It took on multiple expansion/Development projects in Q2 along with operating troubles and very high cash costs $1,000/oz. But this has happened a million times with companies brining new mines online and increasing mill throughput as problems with the mill or crusher are more common than the market seems to think, Now if this continues for another two quarters, I will have cause for concern. If Jaguar can execute it is a deep value play for the coming year.

A larger producer could bring down cash costs faster as well as higher production via higher mill throughput at two of their flagship mines, notably their brilliant purchase of Gurupi. I expect to take a lot of guff for sticking to assessment of this company but sometimes you have to play they waiting game. Mines:

  1. Turmalina - 75k in 2011 - 110k by 2014-2015
  2. Paciencia - 70k in 2011 - 200k by 2014-2015
  3. Caete - 80k in 2011 - 150k by 2015
  4. Gurupi - 100k in 2013 - 140k in 2013 and beyond

Valiuation: Depending on how well they can execute my price target ranges from $16-$21

Yamana Gold (NYSE:AUY): Top mid-tier producer for 2011 - Yamana shed the fat by selling San Vicente, San Andres and San Francisco to Aura minerals in June of 2009 and ever since its stock price has stagnated despite the company firing on all cylinders. This provides a great opportunity to get abnormal returns from a mid-tier producer.


  1. El Penon (Flagship)- 425k in 2011- 10 year mine life
  2. Chapada- Next flagship - 140k in 2011 - due to gold discovery and Oxide gold potential total GEO goal is 200k per annum- mine life 13+
  3. Jacobina- 125k in 2011 for 15+ years
  4. Gualcamayo- 175k in 2011 with target of 190k for 9+ years
  5. Minera Florida- 120k in 2011 - 8 Year mine life - 150k by 2013
  6. Fazenda Braileiro- 75k in 2011

  1. Mercedes- Coming On-line in 2012 - 120k annual production - 10 year minelife
  2. pilar- Coming online mid-2013 - 120k annual production for 9+ years
  3. Ernesto/Pau-a-Pique- 2012 start-up - 120k for 7 years
  4. Agua Rica
  5. C1 Santa Luz = Coming online 2012 - 130k annually for 10 years

Yamana has one of the most robust pipeline out there yet it trades at rather substantial discounts to its competitors - El Dorado, RandGold, IamGold etc. These depressed price gives investors a huge bargain for a mid-tier producer. The El-Dorado lovers can talk about the low cash costs all they wanted but Yamana GEO cash costs are less than $200 and excluding bi-product credits, $365/oz. Yamana is poised to become a 2m ounce producer by the middle of the decade especially if they go ahead with agua rica.

Production: 2011 (1.15m), 2012 (1.5m), 2013 (1.7m)

Using DCF: $20- $22
Using Relative Valuation - $18

My last Gold Pick is a streamer:

Sandstorm Resources- (SNDXF.PK): One of my favorite royalties, which most people have yet to hear of, is Sandstorm Resources. Aside from Silver Wheaton (SLW) trading at just over $3/share back during the peak of the financial crisis, I have not seen such a potentially attractive valuation among the Royalty Companies. Sure Royal Gold (NASDAQ:RGLD); Franco- Nevada (FNNVF.PK) will provide investors with high annual returns over the next decade, but nothing compared to the returns some miners will produce. I'm a strong advocate of investing in mining companies, but believe having one or two royalty companies should be a core part of an individual’s overall investment in this industry. Over the last two months, I have been watching two precious metal royalty companies most have yet to hear of and am very impressed with one of them in particular, personally initiating a generous core position which I look to incrementally increase throughout the next year

About Sandstorm Resources (SNDXF.PK) - A gold royalty company focusing on advanced stage or producing mines. Though they have only been operating for a basically a year and a half or so, they have already completed four royalty acquisitions. This is amazing accomplishment given they are a micro/small cap company (<200m market capitalization). They have an amazing management team headed by CEO Nolan Watson (former CFO of Silver Wheaton). They are very well capitalized, following an acquisition in early March, with nearly 90m of cash on hand. This gives them ample room to deploy at least 60m of their cash balance off in the near term (as they have a bit over 100m in long term debt). Available funding will dramatically increase, however, over the year as three of their four royalty streams will come online, with the fourth expected in 2011. They can also revert back to more equity financing (which I personally think they should do ) as they recently moved up to top tier status on the venture exchange, thus they will attract more attention. They have made it clear they are and will continue to be very aggressive on the acquisition front going forward, recently commenting they are in several advanced stage talks with various companies.

Similarities to Silver Wheaton - Silver Wheaton is recognized for their superior management as they have been able to grow future peak production levels from 0 in 2004 to 45m by early 2010 (expected to be reached in 2013-2014). But what stands out is the fact they have been able to make these acquisitions on extremely favorable terms, with all in costs amounting to more or less 8.00/oz of silver with the exception of a few deals such as Rosemont. One would expect having the former CFO of Silver Wheaton as CEO of Sandstorm, acquisitions would be on comparable terms. In fact, they are currently the lowest cost producer relative to Royal Gold, Franco-Nevada and Gold Wheaton. The average cost per attributable ounce is less than $400/oz. Additionally, like Silver Wheaton, they have little tax liability, another comparative advantage to Royal Gold and Franco-Nevada. The following is a brief rundown of their royalty agreements thus far:

  1. Aurizona Project - 17% of attributable gold production for LOM, which will initially produce 60k oz/year, ramping up to 80k year with cash costs of $400/oz. They also have the option to purchase 17% of the gold produced from the underground mine (should Luna Corp decide to develop it). In this case annual gold production will increase to a range of 100k-125k/year.
  2. Saint Elena - 20% of attributable of the projected 40k annual production. The kicker here is the purchase price of just $350/oz. Additionally this mine has underground potential which Sandstorm will have claim to should they develop it. This would bring total mine production to an estimated 60-70k/year.
  3. Summit Mine - Sandstorm will initially receive 50% of the first 10k mined, followed by a 22% interest in this small mine. Production estimates are expected to be between 12-14k/ year. Cash costs again are at the low end $400/oz. The operator also has the right to offer Sandstorm an additional 25% interest. This is a key example of generating immediate cash flow (indicated through the provision above).
  4. Ming Mine - Production expected to commence in mid 2011. Initially Sandstorm will receive 25% of the first 175k produced followed by 12% thereafter. Gold production is projected to range from 20-25k annually, with excellent upside potential.

In other words, Production levels will grow from approx 10k in 2010 to 30k by 2012 (assuming none of the companies decide to pursue underground mines and Summit mines does not offer the additional 25% interest) or approx 36-38k assuming they do. This seems like small pickings relative to the other royalty companies but you have to put it into perspective. Investments are made in hopes of making the highest possible return given the risk involved. Sandstorm resources offer just that: When it comes to valuation, assuming a long term gold price of $1,300/oz, my valuation ranges between $1.72-$1.90/share. Of course valuations are very subjective with regards to required rate of return, LT gold price, etc, but such a price to value disconnect in the valuation mentioned above makes it worth a look.

Price Target: $1.75- $2.00

Others to watch for:

Avion Gold
Colossus Minerals
Orvana Minerals

Disclosure: Long: 2013 Yamana Options, 2012 SSRI Options, BCM.v., warrants,