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Buy Scorpio Mining Corporation (SPM on the TSX)
Scorpio Mining Corporation (SPM-TSX)
This is a company that has had difficulties. Scorpio Mining is an exploration and mining company listed on the Toronto Stock Exchange, with operations in central Mexico. It has a producing mine - the Nuestra Senora Mine - and a number of excellent prospects. It is primarily a silver producer, and the production of the other minerals is considered an offset to the cost of producing silver. At a cut-off of 60 g/t, the 2012 43-101 resource estimate showed an average value (net of equivalents - being the value of other minerals realized in the operations) of 180 g/t silver or roughly $155 of silver in each ton of rock. This is very valuable. The resource showed roughly 2,400,000 tonnes of Silver and Silver Equivalent in Measured and Indicated and an additional almost equal amount in Inferred Resources. This is a major deposit, and proper mining operations should yield a very profitable company.
The company was not managed to its potential after the resource and mine were established, with costs being too high, and silver recovery being too low. Efforts were slow to confirm an expanded resource and other nearby potential resources on lands owned or controlled by the company.
The disappointing results were reflected in the stock price. In 2010 the stock traded at a range usually over $2.00 in anticipation of a profitable silver mining operation. As results did not live up to expectations, the stock was punished, trading down to a low in the $0.50 range in August of 2012. As operations were corrected, the market moved the stock up slightly and it now trades in a range between $0.90 and $1.20.
How the Situation Was Corrected
The company recognized that it had to correct matters. Management of Scorpio Mining went through a number of publicized changes, and most recently changed its CEO yet again, reinstalling one of the founders (Peter Hawley) as "Interim" CEO. Mr. Hawley was a founder of the company and has stepped in until a new CEO is engaged. Upon his re-appointment, changes were implemented, and a significant effort was put into straightening out the mining operations resulting in vastly improved metal recovery and a significant decrease in the cost per ounce of silver produced. Cash flow was also utilized to explore and put into production excellent additional resources already owned by the company. One of those other resources is expected to actually go into production this year, which should result in an substantial increase in metal production.
Looking at the most recent published financials, Scorpio Mining announced the results of its 3rd quarter operations (3 months) with both a positive cash flow and an EBITDA of approximately $2,800,000. This is a significant improvement over previous periods, and the company boldly states that operations will continue to be improved. On an annualized basis, even at this level, this is a cash cow with an expected annual cash flow exceeding $11,000,000. But the story gets much better.
Scorpio Mining is a major land holder in the Cosalá district with holdings of approximately 26,819 hectares spanning an area of approximately 23 km x 19 km. The land position covers numerous exploration targets, advanced deposits and historically producing mines. This is a very significant land position, with exploration potential and previously producing mines, that should yield new resources for many years to come. Mining companies are valued on a mix of their resources and their cash flow. As Scorpio Mining's resources expand, so will their valuation.
What is more immediately significant, is the commencement of mining at the Company's El Cajón property. This operation is anticipated to commence shortly, resulting in the substantial increase in throughput, and the company expects a corresponding increase in the amount of ore that it processes as a result. The ore will be trucked over a road from the new deposit to the existing mill. The increase in output is expected to be very significant.
The improvements and changes to this company will not easily be recognized by the market. Once disappointed, investors are sometime slow to return. Yet this company is poised for a major improvement. The stock may not recognize these changes for some months to come, until results are published for a further number of quarters. Yet for patient investors, the value seems to be very evident.
Whats-Hot-or-Not - Historical Picks
February 2, 2013 E Mini (ES - CME) June 2013 or, IYY ETF
February 10, 2013 Scorpio Mining Corporation (SPM-TSX)
We may or may not have positions in the securities we name under 'Whats-Hot-or-Not'. Whether an investment is made in a particular security depends on many factors, including portfolio balancing, timing, cash and capital reserves, asset allocation and numerous other factors. Readers are advised to do their own research on our picks and decide in light of their own circumstances, whether an investment is appropriate.
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