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Undiscovered Growth - SilverCrest Mines

|Includes:SilverCrest Mines, Inc. (SVLC)

Chances are that you've never heard of SilverCrest Mines (OTC:STVZF). They are a small Canadian company which mines gold and silver in Mexico. First, let's get the basics out of the way.

Company Silvercrest Mines
US Symbol STVZF
Market Cap $177.8 million
Enterprise Value $148.9 million
EPS (ttm) 0.22
Cash $35 million
Debt 0
Click to enlarge

Executive Summary

The company is only recently profitable. They completed development of their Santa Elena open pit mine (in Sonora, Mexico) and reached commercial production by July 13, 2011. As a result Q3 of 2011, had break-even earnings. By Q4, they were earning $0.11/share. By Q1, 2012, they retired their bank debt ahead of schedule, and earned $0.07/share.

Currently, their Santa Elena mine's production rate is about 9,500 oz Au and 130K-140K oz Ag per quarter. Q2's production dipped a bit to 8,585 oz Au, and 139,850 oz Ag. In Q2, we saw silver and gold prices decrease from Q1, so there will most likely be a drop in price when earnings are announced. That might be a good entry point.

The company is recently profitable, and funding expansion plans through current operations. Should the price of silver and gold up significantly from the current $30 and $1600 levels, then profits will soar. As a result, there is large upside potential, once the market becomes aware of Silvercrest mines.

Silvercrest Mining Strategy and Funding

As of 2012-Q1, Silvercrest derives 28% of it's revenue from silver sales, and the majority of revenue comes mostly from gold sales. In terms of reserves, the dollar value of silver reserves and gold reserves is about equal. This means they are mostly mining gold now, as well as some silver. This may seem odd from a company called Silvercrest mines, but it's actually quite ingenious.

Operating Mines - Gold and Silver

They basically financed and paid for the Santa Elena open-pit mine based on gold sales. But that is not the end of the story. Santa Elena is throwing off cash now (again mostly from gold sales). That cash is being plowed right back into an underground expansion plans, and a new CCD mill. As a result, the expansion can be paid for through current operations. They are expecting this expansion to be completed around 2013. By 2014, the underground expansion and new mill will double their production. At Santa Elena, Silvercrest expects peak production to occur by 2015, when it will be mining between 5-6 million Ag equivalent oz per year.

So, it would seem that Silvercrest management is mainly a gold play, and not silver. But the upshot of all this gold mining, while leaving silver mostly intact, is that there is a lot of silver left to be mined, with the equipment and plant paid for from gold sales. Also, if you believe that silver will outperform gold, that means that the silver to gold ratio will drop significantly in the future. At that time, Silvercrest will still have a considerable amount of silver underground to be mined. At that point, it would become a silver mine which also mines some gold.

Exploration Property - Silver and Copper

Silvercrest also has an exploration property called La Joya, in Durango, Mexico with silver, copper, lead, zinc, and possibly some gold. The inferred resource summary is about 51.3 million oz Ag, 333.4 K oz Au, 270 million oz copper. At current copper and silver prices, the silver and copper are worth about the same dollar value.

If earnings continue at the 0.07 / quarter for the rest of the year, that's 0.28/share in earnings. The S&P normally has a PE ratio of around 21. If we project this PE onto 0.28/share earnings, then we could see a stock price of $5.08. But Silvercrest is a growing company, and growth stocks typically have a PE of 35-40. In this case, we could see a price $8.90-$10.17. Currently the share price is around $2.05, so there is plenty of room for price appreciation.

By 2014, we should see production double, so revenues should also double (if silver and gold prices are higher, then revenues will more than double). If Silvercrest can manage to contain its costs, then earnings should explode, and the share price even more so.

This stock is undiscovered, which means that Wall Street doesn't know it exists, and it is undervalued. It also means that liquidity is fairly light, and the average daily volume is only 32,588 shares. Management is currently making presentations to institutional investors, so this situation might not last for long. Interestingly, this is a time when precious metals companies have been beaten down in price, so it's possible that institutions might not buy into Silvercrest until metals prices start going back up again.

Conclusion - Undiscovered Growth and Leverage to Metals Prices

Silvercrest is growing, and financing its growth through current operations. They should double production by 2014. In addition, they are also a leveraged play on the price of gold and silver from the current $1600 and $30 levels. If we see gold and silver go to prices of $2000 and $50, then Silvercrest's earnings will soar (their expenses remain largely fixed, while their revenue increases dramatically). The company is currently largely unknown, and the upside potential is huge.

Disclosure: I am long STVZF.PK.

Stocks: SVLC