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SLR - Silver Lake Resources Limited

Silver Lake Resources (ASX:SLR) is an ASX 200 gold producing and exploration company with an inferred resource base of 3.6 million ounces of Gold in highly prospective regions including Mount Monger and the Murchison goldfields of Western Australia. Silver Lake has a clear strategy to build a disciplined and high margin gold business producing from multiple mines in multiple mining centers.

Silver Lake's Mount Monger Operation contains the Daisy Milano, Daisy East, Rosemary & Haoma underground mines 50 km south east of Kalgoorlie.

Mount Monger has additional multi mine potential, underpinned by emerging open pit production from the Wombola Dam, Wombola Pit and Magic deposits.

Gold ore from Mount Monger is transported to Silver Lake's Lakewood Gold Processing Facility, located 5 km south east of Kalgoorlie and 45 km from the Daisy Milano mine. This facility is currently processing 900,000 tonnes per annum in Mount Monger which is forecast to yield more than 100,000 ounces of Gold each year.

Silver Lake's strategy is to develop a second mining operation with multiple mines feeding a central processing facility. Accordingly, the focus is on extending resources, particularly below a depth of 100 metres, to sustain a 100,000 ounce per annum operation. A 1.2 million tonne per annum mill has been acquired for this project.

Silver Lake's exploration program is targeting 5 million ounces of Gold in resource by June 2012. In addition, there is significant potential to increase the resource beyond that target over time.

In fact, on Friday 8th June 2012, Silver Lake completed the purchase of the Great Southern project from Phillips River Mining Limited (ASX:PRH) which provides the company with another 1 million oz resource and makes the actual inferred resource base 4.6 million ounces of Gold.

Does this business have a sustainable competitive advantage?

Silver Lake Resources is a gold producer. It has current production of around 100,000 ounces of Gold per annum from its Mount Monger operations.

The Murchison project is anticipating production of Gold to commence in 2013.

Silver Lake is targeting production from both mines of 200,000 ounces in 2013 and 300,000 ounces of Gold per annum in 2014FY.

Silver Lake has confirmed resource base of 449 thousand ounces of Gold and a total indicated and inferred resource of 4.6 million ounces of Gold. The company is anticipating confirmation that this resource base is actually 5 million ounces of Gold in the near future.

As a breakdown:

The Mount Monger goldfield has an indicated and inferred resource of 1.7 million ounces of Gold with a further 160 square kilometers of prospective tenements.

The Murchison Goldfield has an indicated and inferred resource of 1.8 million ounces of Gold with deeper drilling programs indicating additional gold exploration results.

The Great Southern project has an indicated and inferred resource of 1 million ounces of Gold.

In the north-east of the Murchison goldfield, the company has discovered a high grade copper deposit at Hollandaire. Hollandaire is part of the Eelya complex at Murchison.

Silver Lake is also an Australian producer which removes the sovereign risk element that many other mining companies operating in Asia, Africa and South America face.

What are the risks facing this business?

The obvious risk to Silver Lake's profitability is a collapse in the gold price. However, with governments in Europe, USA, UK and Japan among others faced with the two poor choices being either deflationary policies such as austerity measures or inflationary policies such as quantitative easing, governments are more likely to choose the lesser of two evils which is inflationary monetary policy settings. Inflationary policies will be good for the gold price. And, the pattern over recent years of a higher gold price due to gold's perception as a haven in uncertain economic times appear set to continue.

If you believe that gold's price will not remain relatively near current levels, this probably is not the right company for you.

The second risk is that the company does not meet production targets it has set itself which would reduce the profitability of the business.

Is it run by able and trustworthy management?

Silver Lake's management has strong corporate, gold mining operations and exploration experience. In fact, word on the street is that Les Davis, the Managing Director and founding shareholder is considered an industry legend.

Silver Lake boast that their management team comprises a group of highly credentialed individuals with more than 150 years combined resource sector experience.

As at December 2011, the business is run with a net cash position of $93 million in the bank which equates to about 42 cents a share.

Is it trading at a bargain price?

Silver Lake is currently producing 100,000 ounces of Gold, selling at about $1,550 an ounce and operating costs of $600 ounce. So, at 100,000 ounces with a net difference of about $950 an ounce, at current prices, it is easy to see that there is a sustainable business model in place.

With 2013FY production expected to be 200,000 ounces and 2014FY forecast to produce 300,000 ounces of Gold plus anticipated decline in operating costs to about $525 ounce, Silver Lake's future looks bright.

However, Silver Lake has committed to an exploration program of $18 million per annum to discover more gold deposits. The company has commenced a $20 million exploration program at Hollandaire. And, the company has also tabled capital expenditure of $60 million to develop the infrastructure and processing facility at Murchison. These costs will come straight off the bottom line.

With $93 million on hand, these costs will be self funded with no need for taking on debt and can also be funded out of the cash flow produced from Mount Monger's production.

In my calculations, I am trusting that the capital expenditure tabled by the company is accurate and their production targets are filled. I am using a conservative gold price of $1300 an ounce for 2013 and 2014 when calculating my values. Of course, changes in these variables ie capital expenditure, actual production and actual gold price will make similar changes to my valuations as time goes by.

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

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Summary

In summary, Silver Lake is a high quality company with strong and forecast growing profitability, good cash flow, plenty of cash on hand and experienced management. The company has committed to plans to expand the business and is acting in line with these commitments. The company operates in Australia which takes out sovereign risk issue that offshore gold producers face.

Disclosure: Dean Mico has accumulated shares in Silver Lake Resources in the past month.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.