It's been a while since I wrote an article, and what a run it has been for the mining sector. Stocks I wrote about have gone up drastically, such as Silvercorp (OTC:SVM), Impact Silver (OTCPK:ISVLF), and wow look at First Majestic (NYSE:AG) what a run since I wrote about them when it was trading at a value of roughly 3-4 dollars a share. But speaking of First Majestic, this new company I am writing about could be the next First Majestic. Let me explain for a brief moment.
In 2009, First Majestic was not the 20 million ounce silver producing bar setting miner it is now. In 2008, it only had 3 mines, and it was looked at as a junior resource company at one point When it comes to the next First Majestic, only two companies really come to mind with me is, one Alexco (NYSE: AXU), and the other is Santacruz Silver (OTC: SZSMF). One thing these two stocks had in common was that roughly a year, or 18 months ago, I wasn't sure if these companies were going survive the bear market that is now currently behind us. But both stocks even though they have run up quite a bit, they both are still trading way below their 2013, and 2014 trading prices.
In terms of Santacruz, in 2014 it was trading in a range between $0.39 cents to $1.13 per share. Currently it's trading at around $0.37-$0.39 cents a share. So even though it had a nice little run lately, it is still well below its historical price value.
In terms of valuation, Santacruz does not seem to be trading very favorably. In terms of its OCF/EV valuation, it's trading at a number of 27. In terms of cash per share, it's trading about 39 times its cash per share value. Its price to book value though is favorable, were its trading at only 1.5 times its book value.
But the main reason I bought back in is not because of valuation, startup companies rarely have strong valuations. But it's because the market has changed and this company has plenty of growth in its pipeline.
Its first project is its Rosario mine, which is reporting to have an all in sustaining cost of $14.10 per ounce. This mine has increased its production by 13 percent from last quarter, while improving its grades from 178 AG per tonne, to 217.65. In terms of production at this mine, in 2016, they have stated that they are at production rate of 350 tonnes per day (TPD), and are at stage 3 of production in their 7 step process. But once the Veta Grande mill reaches full capacity, they will be able to double current production from this existing mine Its next mine is its San Felipe project. This project is estimated to produce 3.2 million ounces of silver equivalents with a life of 7.5 years with costs that are estimated to contain an all in sustaining cost of $12.72 dollars per ounce. This project is also projecting to maintain an after tax internal rate of return of 37.7 percent. It's after tax payback time period is estimated to be 2.3 years. This was all done at an estimated price of $19 dollars per silver ounce.
Its next project is its Gavilanes property. This property has indicated resources of 6.143 million ounces of silver equivalents, with 4 unexplored veins, which offer additional potential. Its grades are reported to be at 200 grams per tonne. This is in a purely exploration potential, but can add a lot of value to the company. Any good exploration results can send this stock higher.
In terms of its financials, this company posted a net income of negative 3 million dollars last quarter. I didn't see any impairment or large depreciation charges, so I would like to see a better number here, but what was encouraging was its improvement in cash flow. Its operating cash flow has improved drastically on a year over year basis from negative 1.92 million to positive 2.33 million dollars. And now, they are generating free cash flow of $569,000 dollars last quarter, so operations and true profitability is improving drastically.
In terms of its balance sheet, it has negative working capital of 7.894 million dollars, but its total assets to total liabilities ratio is 1.9, I would like to see 2, but this is an upstart company, so they have burnt a lot of money and with silver now in a bull market, they are starting to add cash .
In conclusion, this is not a Buffett value style company. This is a pure speculation, which will probably be bought out in the future. This company just restructured its pre-payment agreement were they issued 3.75 million warrants Just remember this is not a core holding, it's a speculative purchase for your portfolio, a company such as Silver Wheaton (SLW) would be a core holding.
Disclosure: I am/we are long ISVLF, AG, SVM, SZSMF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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