RE: Doug Casey discusses Wheaton vs. SilverstoneRight now, the company has 154 million Measured & Indicated ounces of attributable
silver (including 77 million in Proven & Probable mining reserves), plus 81 million
Inferred ounces, plus (for whatever they are worth) 75 million historical ounces.
That’s still small potatoes compared to SLW, but if we apply the valuation ratio we’ve
developed in our sister publication BIG GOLD (based on proven and probable mining
reserves), SST weighs in at about 0.29 vs. SLW’s 0.77 (lower is better), so it’s looking
undervalued. If you do a simple ratio of Enterprise Value to ounces of production, SST is
trading at about a 67% discount to SLW based on projected 2008 production.
And the show is just getting on the road.
Property – Exploration
In addition to the silver off-take deals just discussed, Silverstone has 100% interest in five
silver-gold projects in the Mexican Sierras (Sinaloa and Durango), with combined historic
resources north of 75 million ounces of silver.
The most advanced of these is the Copala project area, covering 5,710 hectares with multiple
past-producing mines right off the main Mazatlan-Durango highway. We were able to inspect
several of these old mines, including the El Muerto mine on the Animas-Refugio vein trend.
This deposit was only mined a couple hundred meters along the vein at depths no more than
50 meters below surface because there was too much water for the old-timers to deal with.
But they took out ore from an exceptionally thick vein that left a cavernous space behind –
with no reason to believe that the mineralization stopped at the water table.
And it doesn’t. SST has drilled about 22,000 meters in the Copala area, including under the El
Muerto workings, with some excellent hits, such as 6.23 meters of 7.23 g/t gold and 1,677
g/t silver. Not all were that high grade over such thicknesses (the average of 130 holes along
this structure is 2.5-6 meters of thickness and about 1.4 g/t gold and 325 g/t silver), but the
drilling does show that there’s plenty of ore left, and the company is working on a first 43-
101-compliant resource calculation that’s due out by the end of this month. That calculation
will include the Colorada (San Jose) area that has an almost flat-lying vein that should be
open-pitable.
The Promontorio property covers 2,188 hectares with an extensive vein system,
including the Promontorio and Periclos veins, with an estimated historic production of
250,000 tonnes of 3,500 g/t silver and 20 g/t gold. Promontorio’s high-grade epithermal
veins are traceable for more than 2 kilometers. Mega Silver (V.MSR) is earning 60% of
this project, as well as SST’s Montoros project (another epithermal vein target in
Durango), for $5.0 million in exploration spending, at a minimum rate of one million per
year. MSR can earn another 10% in either or both projects by taking them to feasibility,
at which point Silverstone can elect to claw 20% interest back from Mega (resulting in a
50/50 JV). Just as we go to press, SST has announced that MSR intends to spend $1
million on each of these two projects, an encouraging development that will put a lot of
Other People’s Money (OPM) to work on a potential discovery SST shareholders could
benefit from.
Other projects include the Claudia project in Durango City, where the Aguilarena vein
(one of five major veins on the project) has received about 2,000 meters of drilling,
3,400 meters of drifting and a 90-meter shaft. So far, a small area grading 200 g/t silver
and 3.8 g/t gold has been outlined over a shallow of this vein.
There’s more, but these are the top priorities, and our main reason for buying is the
revenue stream from the silver off-take. During our site visit, management was openly
considering spinning the exploration properties out in one way or another, to make
Silverstone the world’s second “pure silver producer.” It’s not that these properties are
not highly prospective – they are – but that the exploration and pure silver production
models attract different kinds of investors. Management says that most of their
shareholders aren’t as interested in the discovery potential of the exploration projects as
they are in seeing new deals that increase pure silver production.
We’re not surprised; we feel the same way. But there is value in these assets, so we
expect them to be monetized after the resource calculation is published. Whether it’s
some kind of JV or a new company, we’re sure management will ensure that the deal is
beneficial to existing shareholders.
Promotion
Management feels SST is undervalued, but the change to profitability is very recent, so
it’s actually a testament to their promotional abilities that the company commands the
market cap it does. The show they put on in Mexico explaining their plans was certainly
effective. Now that the company is generating substantial revenue, this story will start
picking up steam on its own, but management is keenly aware of the need to promote it,
and is putting the necessary resources into doing so.
Politics
The producing assets are in Mexico and Portugal, low-risk areas. Besides, the mines are
already producing and, as in other things, objects in motion tend to stay in motion.
Aquiline’s Navidad project is in Chubut province, Argentina; it’s not the worst, but not
the mine-friendliest province in that country either. SST has mitigated the risk with its
either-or options.
We see no reason for elevated concern on this score.
Paper & Phinancing
The company does have a lot of paper out, but not excessively so for a producer.
Furthermore, it didn’t get this way from a long history of diluting shareholders; large
chunks of the paper were issued in the acquisition of the company’s producing assets.
The most recent financing was last November, done at C$2.90 with no warrant, to raise
C$50 million to retire acquisition debt. Now that that’s behind it, there’s no debt, and the
company is paying $3.90 and $4.00 per ounce of silver it can sell at spot.
There are 2.2 million special warrants left in Capstone’s hands, exercisable at no
additional cost. Capstone is holding them to avoid going over 20% ownership. We do not
see this as any sort of threat; Capstone’s interests are highly aligned with Silverstone’s –
management isn’t about to shoot itself in both its feet by dumping these shares and
swamping the market.
But will $20 million in the kitty be enough to buy the next revenue stream? Probably
not. Management tells us they have discussed an estimated credit facility of about $60-
$70 million with Scotiabank and are ready to act on new opportunities quickly.
Push
The new resource on the Copala projects may give the stock a kick upwards, and there
is discovery potential this year, but most of the attention is on the pure silver stream. As
the revenues ramp up and show on the bottom line, we expect the share price to head
north – perhaps with bigger jumps upwards when new, pure silver production streams
are added to the story.
Price
Silverstone has retreated from a high of C$3.60 just over a month ago on no bad news.
This is a clear buying opportunity, in our view, and we think the current share price will
work out very well in the end. But that’s no reason not to take advantage of market
malaise. If these shares dip under C$2.00 on Shopping Season weakness ahead, we’ll be
backing up the truck for more.