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Stonecap Securities Boosts Price Target On SilverCrest Mines As Hedge Book Retirement Provides "Enhanced Near Term Leverage To Gold"

Stonecap Securities increased its price target on SilverCrest Mines (CVE:SVL)(NYSE MKT:SVLC)(AMEX:SVLC) on Thursday in a Morning Advantage report, after the silver miner retired its Macquarie Bank gold hedge facility a day earlier.

Vancouver-based SilverCrest said yesterday it paid out the remaining balance of its gold hedge facility established with Macquarie Bank in June 2009 - making it a "completely unhedged" silver and gold producer.

The payment was as a condition of finalizing the project loan facility for the construction of its Santa Elena mine in Mexico.

The original hedge facility was comprised of 55,000 ounces of gold sold forward at US$926.50 per ounce and deliveries into the hedge facility were scheduled to continue into 2014.

During 2010 and 2011, the company made scheduled deliveries of 26,000 ounces of gold into the hedge facility from gold production at the Santa Elena mine, leaving a balance of 29,000 ounces of gold, which SilverCrest has settled in cash for US$ 23.25 million.

The payout of the hedge facility was financed with some proceeds from its recent C$34.5 million bought deal financing that closed at the end of October.

Stonecap analyst Christos Doulis notes that as the effective settlement price of US$1,728 an ounce is higher than its 2013 and 2014 gold price forecasts of $1,700 an ounce, and $1,600 an ounce, respectively, the transaction is "NAV" [net asset value] dilutive.

"Retiring the Macquarie hedge book provides SilverCrest with enhanced near-term leverage to gold and although mildly NAV dilutive, our short-term CFPS estimates for SilverCrest have increased significantly."

Stonecap maintained its "outperform" rating on the stock, and increased the price target to $3.85 from $3.75 previously.

While SilverCrest has eliminated its hedge book with Macquarie, the company's Sandstorm gold stream is still in place. Sandstorm has the right to buy 20 per cent of gold production from SilverCrest's Santa Elena mine in Mexico, at $350 per ounce of gold, rising to $450 per ounce of gold after the purchase of 50,000 ounces.

SilverCrest Mines is a Canadian precious metals producer whose flagship property is the 100 per cent-owned Santa Elena Mine, which is located 150 km northeast of Hermosillo, near Banamichi in the State of Sonora, Mexico.

The mine is a high-grade, epithermal gold and silver producer, with an estimated life of mine cash cost of US$8 per ounce of silver equivalent. SilverCrest anticipates that the 2,500 tonnes per day facility should recover around 4.8 million ounces of silver and 179,000 ounces of gold over the 6.5 year life of the open pit phase of the mine.

A three year expansion plan is underway to double metals production at the Santa Elena Mine and exploration programs are advancing the definition of a large polymetallic deposit at the La Joya property in Durango State.

Earlier this month, the company said it produced a record amount of silver during the third quarter, prompting it to hike its silver output forecast for the year.

The junior producer saw silver output of 151,368 ounces for the latest three month period from its Santa Elena mine, up by 42 per cent from the same period last year. The company cited improvements in recoveries for the higher-than-projected production.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.