Revett Is Developing The U.S.'s Largest Silver Mine

| About: Revett Mining (RVM)

It's not only the U.S.'s largest silver mine, but one of the top 10 in the world! Contrary to the biggest mineral deposits, which are typically developed by large-market-cap companies, this one is being developed by a relatively small company. So any success/failure has a much greater impact on the stock price.

How much upside potential? It's hard to say, since we don't know exactly how much dilution will be required. However, as you read I think you'll agree dilution will be minimal, and the upside could be 5 - 10 fold. How much negative impact? Best guess, hardly any - maybe $0.50/share. Again as you read on, the logic for minimal downside will be apparent.

A majority of large deposits that move towards producing mines are developed by large mining companies. Once completed, these successful mines will help to increase the share price. However, since they're already large companies, the addition of these mines will not change the economics as much as smaller companies would (obviously).

Smaller companies will struggle mightily due to high cap-ex, and the technical nature of these projects. In addition, these smaller companies struggle through permitting, raising capital and finding the right partners - no easy feat. Of course, there's a lot of upside and downside with these one-hit wonders.

So a better risk/reward trade is to find small companies developing large deposits that already have significant cash flows. This cash flow is critical, as these small companies move from deposits to developing world-class operating mines. Without cash flow, massive dilution is usually required and shareholders will pay the ultimate price with much less ownership of the asset.

In addition, by operating another mine(s) close by the deposit, they developer gains vast technical experience and they develop relationships with regulators with proven successes and safety record from the existing mine(s). By operating another mines, it also helps greatly with community relations, another very important aspect of developing mines.

To further reduce the risk for the shareholders, we need to stay within mining-friendly jurisdictions. As an added bonus, we need a company trading at such a low valuation that the existing cash flow will support the current valuation, just in case the large deposit faces terminal challenges.

We need a company in which "heads we win, tails we lose nothing" - or just a reasonable vig. And, since we're asking for a lot, we might as well require this to be a US company. There is one company that has everything we require. The name of this company is Revett Minerals (NYSEMKT:RVM), currently trading down from a high of $5.90, to $3.80/share.

RVM has 37M shares outstanding (diluted), no debt, no preferred, for a market capitalization of $140M. They have $28M in the bank, and will generate roughly $30M in cash flow every year (assuming silver and copper stay in the range). This cash flow is from their existing Troy Mine, and will go on for many years, some have speculated 20 years or more. Troy Mine is located in the same vicinity as their developing deposit, Rock Creek (RC).

In my opinion, RVM's current price reflects zero value for their giant silver/copper deposit Rock Creek. So in the event of failure to gain a permit to construct RC, it should not result in much more downside than current price, if any. The existing Troy Mine would still generate roughly $30M/year in cash flow, and I believe the current price of 5 times cash flow is quite conservative as a valuation metric.

Over the next 4 years of cash flow, plus their existing cash, should be enough to fund approximately 40% of the total RC development costs. This will leave a deficit of roughly $180M to fund RC to full construction. Given the economics of this project, the remaining deficit will likely be bank financed or combination of bank and a silver stream. It's worth noting the one of the largest investors in this company is Silver Wheaton (NYSE:SLW). It's not a coincidence they are involved.

Rock Creek contains 300M oz. silver and 2.5B pounds of copper. It should produce 6M oz silver and 50M pounds of copper annually. This mill should run for at least 25 years. Their ongoing/operating Troy Mine should continue generating 1.4M oz. silver and 11M pounds of copper as well.

There are still a few hurdles left to jump before the final permit to construct RC is issued. But it should be noted RVM has worked hard on this process, and are 10 years into the process. They have won numerous legal challenges and as of now, there are no legal barriers preventing them from building this mine. Since this is below ground, they will not face the more difficult above-ground challenges.

So what's this company worth in a few years when this country's largest silver mine goes into production? As you look at the comps of other similar miners in the US, a ten-fold increase in the stock price is quite reasonable. But, I'll leave that to you as you review the publicly available research.

This idea piece is not meant to be a research report, as there is enough written about the valuation metrics of RVM. In fact, I would highly recommend anyone with interest in this name to look at all the available research and do your own work. I think you'll come up with the same analysis. I believe you'll find no better risk/reward trade in the precious metals space.

Disclosure: I am long RVM.