As a follow-up to my article on the next generation of mid-tier silver miners, the following contains a list of the silver companies I expect to outperform the group as a whole. In order to avoid repetition I will summarize some of what is included in the aforementioned article, provide operational updates and additional companies.
5) Great Panther (GPRLF.PK)
Great Panther owns two operating mines in Mexico, Guanajuato Mine Complex and Topia Mine. The company developed a three year growth strategy (2010 to 2012) where the goal is to reach 3.8 million ounces of silver per year by 2012 and 4.6 million ounces per year by 2015. In the second quarter of 2010, the company reported a positive net income of $1.6 million for the first time due to increasing production and higher commodity price. A great valuation story here, although many were lucky enough to grab it in the 50-, 60- and 70-cent area. They are known for getting mines into production faster than normal and using the cash flow for further exploration and expansion. In 2010, Great Panther was using $20 million on exploration and expansion on their current mine. It is also a great story as most miners take 10 plus years to bring production online, while they have managed to do it in six years.
The Company's Core Mines:
Guanajuato Mine Complex - Guanajuato Mine Complex is the company's prize possession and one of the oldest mines in Mexico. The estimated historic production range from 700 million to 1.5 million ounces of silver as well as 4 to 7 million ounces of gold. The new technology and equipment will benefit this mine because there is still an abundant amount of deposit left on this land that was not mined due to the technological restraint in the early years. This underground mine produced 1.5 million ounces of silver in 2009. In the third quarter, it is reported that it produced 1 million ounces in 2010. They have several zones with high grade silver. The Los Pozos zone is up to 783 g/t for silver over a width of 9.6 meters, the San Ignacio Mine was drilled in October 2010 and found high grade silver in various veins.
Once Great Panther can increase production, they will be able to use the cash flow to explore Guanajuato more in depth and width for higher grade silver that was not touched by the miners in the early years (18th century).
Topia Mine - Another mine with great potential is Topia Mine. It produced 661,000 ounces of silver in 2009 and it is close to surpassing that amount in 2010 with 627,000 ounces as of the third quarter of 2010. Due to high cost of producing silver in 2008, Great Panther was forced to focus on exploring veins with high grade silver. The Recompsensa vein was drilled and they found high grade silver ranging from 175 to 850g/t and also found high grade at around 15 g/t.
In June 2010, they drilled the Don Benito, San Jorge, Cantarranas, El Rosario, San Gregorio, El Desierto and La Prieta vein in Topia Mine and they had amazing drill results. The grades from the drill result ranged from the 200s to 2,080 g/t.
4) Bear Creek (BCEKF.PK)
Bear Creek is a pure silver producer from Peru. They own two mines that will make them a top silver producer by 2014. 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 in relation to their expected cash flow generation, allowing Bear Creek to bring these mines on-line without having to do massive amount of financing. This is especially important to companies not yet generating operating cash flow. Bear Creek has all the qualities one would want in a silver miner, including a great internal exploration program, one of which has already showed great potential. For every one share of Bear Creek, it buys over 7.6 ounces of silver. Therefore, you are buying silver at a discount when you buy shares of Bear Creek. The following are some highlights of their projects.
Santa Ana Mine - Santa Ana is expected to produce 4.5-4.9 million ounces annually starting in mid- 2012 and it will make Bear Creek a 20 million ounce silver producer with the addition on the Corani Mine. The expected life on mine is 12 years. However, both these numbers are likely to increase in 2011 as they recently increased measured and indicated resources by 39%. Santa Ana has 136 million ounces of resources with high exploration potential on the northern side. The average cash cost is low at $7.40 per oz and the after tax internal rate of return is 21.8%. Below are some other IRR scenarios. The most recent updates include 63 million ounces of M&I resources converted in 2P reserves, further bolstering their enormous reserve base (greater than what is considered a Senior Producer in Hecla Mining (HL).
Corani - Corani is expected to produce 18-25 million silver equivalent ounces, which is a dramatic increase from the original estimate of 15 to 20 million. 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 will attempt to extract 25,000 Tpd. The life of the mine is expected to be 27 years and it already has 470 million ounces in reserves. The gross cash cost is $4.09 per ounce and the cash cost net of bi-product is $1.07 ounce. The expected payback of the mine is in three years however the stock price continues to soar due to the potential.
3) First Majestic (AG)
First Majestic brings a lot to the table including top-notch management, a great organic production growth profile, and strong margins as silver Dore helps them become a low cost producer. With their flagship mine, La Encantada exceeding expectations on many levels, recently exceeding its name plate capacity coupled with operational and developmental execution at their other mines, First Majestic is transforming into a high quality senior producer as we speak.
Near Term Growth Drivers:
La Encantada – Although management’s objectives are being met with respect to operational execution, optimization has yet to be achieved. My guess is they will be closer to producing 5 million ounces annually instead of 4.
La Parilla – By 2012, production will be approximately 3m ounces annually as they expand the mill toward 1600 Tpd, up from its current 850 tpd capacity.
Del Toro – Will join La Encantada as the second flagship operation following mill upgrades by 2013, to a currently projected 2,000 tpd or 4m+ ounces annually.
Aurcana has two mines, one in operation and a second larger mine set to come online in 2012. It has geographical diversification with mines in Mexico and Texas, the latter (the Shafter Mine) will become its flagship operation once in production which should pave the way for possible acquisitions to further growth down the line. Historic mining in Presidio Country (South Texas) had high grades to the tune of 15oz/t. While Aurcana possesses more risk relative to many peers it also has more potential upside. At first glance, Aurcana looks cheaper than it really is as they have done a very large equity offering to fund development of Shafter and buy-back a 50% on La Negra. That being said, I still think the upside in this company could be many fold.
La Negra – Aurcana’s first producing mine is a great start to transforming them from an exploration company to a commercial producer, providing positive operating cash flow as of Q4 2010, which will increase over the course of 2011 due to higher year over year metal prices and ramp up toward peak production. There still remains upside potential as five new deposits have been identified, likely to be given more attention once the Shafter mine is up and running. Cash costs remain relatively high at $8.25/oz but will come down due to the structure of the mine and pillar mining methods. Higher grade ore is expected which should also help bring down extraction costs over the next couple of years.
Shafter Mine – Located in Texas, is Aurcana’s flagship property boasts an incredible internal rate of return and is set to commence production in a little over a year. Aurcana is cashed up via an equity financing deal in addition to operating cash flow generating by La Negra. Silver Dore will be produced on sight, which will reduce costs, especially important for aggressive growth mining companies. The most bullish aspect of this project is the incredible internal rate of return. At $21/oz silver using a 5% discount rate, it is a staggering 73%. The Shafter Mine will produce 3.8m ounces in the first two years of operations, increasing to 4m ounces thereafter with cash costs of $8.27/oz.
Recent Updates - Aurcana has resolved its liquidity and solvency concerns via a $60m equity offering to help fund margins and total production from La Negra as it repurchased a 50% stream sold to Silver Wheaton (SLW) for $25 million. Aurcana presents a rare opportunity in the silver arena which has been decreasing as many silver producers have doubled many times over. So seeing an $80m company increasing production from 1m ounces in 2010 to over 6m ounces by 2012-2013 is one incredible deal.
1) Alexco (AXU)
Recently commenced commercial production in one if not the best silver mining camps in Canada, Keno Hill. It is composed of extremely high grade ore, leaving the door open for incredible exploration potential. One illustration of this was its announcement that the average head grade on the low grade material, exceeding a kilo per ton. I expect further exploration in the Keno Hill camp to provide many catalysts for Alexco in 2011 and beyond. Many identified mineralizations in Keno hill and elsewhere remain largely unexplored, such Lucky King, Silver Queen and Onek as well as their newly operating mine, Bellekeno.
Bellekeno - While Bellekeno is only expected to produce 2.5 million ounces annually, the necessary steps are being taken to increase the mill throughput by 60%, increasing production to between 4 million to 4.2 million ounces. There is one caveat to this exceptional story that has just begun: 25% of the silver produced in the Keno Hill district is payable to Silver Wheaton which gave them up front financing to bring Bellekeno into production earlier than initially expected. However, this only applies to the silver produced and not the gold or Indium bi-products.
Brewery Creek Mine - The Brewery Creek Mine is a great addition to Alexco’s portfolio adding a past producing gold mine. Alexco obviously has great taste as this has historically boasted high grade gold. Alexco’s drill results are indicative of significant gold mineralization as they struck several extremely high grade intercepts over 12 million or greater.
Additionally, due to the fact they have concentrated on developing Keno Hill, Brewery Creek provides vast upside potential. The story here has its positives and negatives as Novagold has a back-in right to acquire a 70% interest in the property after Alexco has spent $50,000 more on advancing the property. This may also be beneficial as the capital requirements to bring the mine back into production will be significantly reduced.
McQuesten Property - Another gold property with good drilling results thus far, though not to the degree seen in Brewery Creek, but impressive nonetheless. This is another great addition to Alexco’s portfolio of very high grade assets. The past drill results indicate a broad continuous mineralization. Since Alexco has mines providing operating cash flow, they will be able to bring McQuesten into production in a timelier manner.
Although I left out several other high quality companies, I expect these five to do the best. I excluded SLW as it not a miner.
Disclosure: I am long AG, AXU, BCEKF.PK, GPRLF.PK.