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Starcore International Mines Ltd T.SAM

Alternate Symbol(s):  SHVLF

Starcore International Mines Ltd. is engaged in precious metals production with focus on Mexico. The Company is engaged in extracting and processing gold and silver in Mexico through the San Martin mine in Queretaro, Mexico. The San Martin mine is located about 47 about kilometers (km) in straight line, northeast of Queretaro City, Queretaro State, on local road No.100 and about 250 km northwest of Mexico City, near the towns of Bernal, Tequisquiapan and Ezequiel Montes. The San Martin mine complex consists of eight mining claims that cover 12,991.7805 hectares (ha). Its Kimourko Gold Project is located in the Lac region of central Ivory Coast, about 40 km south of the capital, Yamoussoukro. Its other projects include the El Creston Project, the Opodepe Project, and the Ajax Project. The El Creston molybdenum property is located in the State of Sonora, Mexico. The Ajax Molybdenum Property consists of about 11,718 ha and is located 13 km north of Alice Arm, British Columbia.


TSX:SAM - Post by User

Post by scissors14on Aug 28, 2008 5:00pm
489 Views
Post# 15417730

Jay Taylor Recommends Starcore as a Buy

Jay Taylor Recommends Starcore as a Buy

New Buy Recommendation

Starcore International Mines Ltd.

Business: Exploration, development, and mining

of gold and silver in Mexico.

Traded TSX Venture: SAM

Shares Outstanding: 60,690,789

Price 8/22/08: $0.15

Market Capitalization: $9.1 Million

Gold Reserves: 133,590 oz.

Silver Reserves: 1,579,191 oz.

Progress Rating: “A”

Telephone: 604-602-4935

Web Site: www.starcore.com

Take a look at the chart above if you have not already done so. If we purchased and recommended stocks on

the basis of chart formations, we would clearly not be telling you to buy Starcore International Mines Ltd.

(SAM) now. We might at least suggest you wait for the stock to bottom out and build a base before buying it.

While that might be a good conservative approach when buying stocks in decline, I have two problems in

waiting for that to happen with respect to SAM. First, there is no guarantee that you will get a nice U-shaped

bottom. Second, given the fact that this gold and silver company is already producing operating cash flows

that are equal to approximately half its current share price with a 15+ year mine life, we feel now is a good

time to add this stock to our position.

Starcore purchased the San Martin Gold Mine from Goldcorp Inc. in January 2007 for $26 million, $24

million of which was paid in cash and $2 million in stock. SAM financed the $24 million with $13 million

loan from Investec Bank (U.K.) Limited (Investec), and the remaining $11 million was financed with cash

raised via an $18.75 million pre acquisition private placement. The loan requires the company to sell a total of

81,876 ounces of gold forward at a price of $731 per ounce at the rate of approximately 1,135 ounces per

month over the life of the loan starting on Feb. 28, 2007 to the maturity of the loan on January 31, 2013. As of

April, 2008, 65,132 ounces remained to be paid under the forward sales contracts required by Investec. On that

date, the company’s total long-term debt obligations stood at $8,743,000 of which $1,904,000 is due over the

next 12 months. Presumably, with 1,135 ounces of gold having been sold each month since April under the

forward contract, we would expect the remaining gold payment obligations would be 60,592 ounces by the

end of August.

While we would always rather not have the companies on our list selling any of their production forward in a

bull market, we recognize forward sales is frequently the best option available if it means not putting a mine

into production at all. And now as the gold bull market is into its sixth year, we give less credence to the

argument of waiting for a multi thousand dollar gold price to sell your gold. While we think a gold price

measured in 4 digits rather than 3 is imminent, we also recognize that when the gold price approaches its peak,

you want to be there producing and not in the planning stage. Starcore is there now and in a position to grow

the company considerably with an ongoing successful exploration program.

In case you are wondering why Goldcorp sold the San Martin Mine, the answer is because it is simply too

small for a company the size of Goldcorp. In fact, I would argue that the 40,000-ounce production level is too

small for SAM as well, because after factoring out corporate overhead, per-share returns are not all that

positive to get excited about. However, the very experienced management team at SAM did not acquire this

project to produce a mere 40,000 ounces of gold per year. The thinking here is that the property has very large

exploration potential, and so far, exploration results have been very positive. What San Martin does now is

fund exploration and development without further diluting cash flow.

Project Economics & Results

During the fist nine months of this year, the company generated $3.8 million of operating cash flow from the

production of 24,100 ounces of gold and 213,100 ounces of silver. That works out to a gold equivalent of

28,200 ounces over the first nine months ending April 30, 2008. Due to some potential unsafe mining

conditions, the work around a problem area resulted in lower average grades during the first nine months of

this year. Whereas the average grades during FYE 7/31/07 were 3.23 grams gold/tonne and 46.7 grams

silver/tonne, grades for the first nine months of this year averaged 2.17 grams/tonne gold and 24 grams/tonne

silver. As a result, the average cost per ounce of equivalent gold production during the current fiscal year

through nine months was $487/oz., compared to $301 per gold equivalent ounce in 2007.

It is my understanding that beginning with the current quarter and into next year, higher grades more akin to

those of 2007 will be reported and with that should come more positive earnings. The important thing to keep

in mind is that operating costs have reportedly been running between $33 and $34 per tonne. So, as grades

improve, the level of production as well as unit costs will likely decrease.

A very positive note with regard to future economics at San Martin is the fact that the company is currently

running only at between 58% and 67% of the mill capacity. Currently, SAM has been processing

approximately 700 tonnes to 800 tonnes of ore per day through their mill, but the capacity is in excess of 1,200

tonnes per day. In other words, if the company’s very aggressive exploration program is successful in outlining

substantially more ore of similar or higher grade, SAM should be able to step up production substantially,

without needing to raise significantly more capital, at least with respect to the mill.

With regard to exploration, SAM has some real meaningful advantages at this time when it is difficult and

expensive to secure drill rigs and get assays back in a timely manner. SAM has its own drill rigs including a

jumbo rig for deeper drilling and for exploration. And it also has its own 43-101 laboratory that can be used to

quickly gain drill data that should be helpful, not only in keeping the market up to date with exploration

results, but also in helping management to plan its ongoing drill program.

Other Properties

SAM’s main focus is on the San Martin Property, where it is not only producing, but also, owing to its large

size and highly prospective nature, will keep the company busy for some time to come in its search to build a

+1 million gold deposit. However, a couple of other properties are worth mentioning. Most significant could

be the San Pedrito Project, which is very close to the San Martin. In fact, it is so close that potential ore mined

from that property could be processed at the San Martin mill. However, at this point in time, this is not a

mineable deposit, because the water level from which a nearby town derives part of its water supply is above

the deposit. It is my understanding that management has been talking to the city about pumping this water at a

faster rate so that the water table would be lowered beneath the mineral deposit. Where that discussion stands

now, I do not know. Suffice it to say that over time the San Pedrito could add shareholder value.

Another property of seeming merit is a silver-lead-zinc property known as the Cerro Dolores Property, also in

Mexico. This property, which is 80% held by SAM and 20% by Goldcorp, is not currently a focus of SAM,

given all it has on its platter at San Martin. However, in time this too could add value shareholder value,

though frankly we consider this of minor importance at this point in time.

MANAGEMENT

Robert Eadie, President & Director - In the past 15 years, Mr. Eadie has been actively involved in public

resource companies raising over 50 million dollars for various exploration and development projects around

the world. Over the years, Mr. Eadie has built an impressive network of contacts in Europe, North America

and Asia and has established a reputation as the catalyst behind various successful start up resource companies.

He brings extensive marketing and public relations expertise to the board and makes executive decisions based

on long-term sustainable growth.

Mr. Eadie advocates open dialogue between management, directors, and shareholders as a key ingredient to

success. Mr. Eadie resides in Vancouver, B.C. where he is a predominant business figure, family man and

compassionate community member. Mr. Eadie's unique past experience as a private business owner reflects his

down-to earth approach to business and dedication to company growth.

Gary Hawthorn P.Eng., Director - Gary Hawthorn is a mining engineer, specializing in mineral processing,

with over 40 years of practice in the resource sector. He has assisted in developing mining projects in over 12

countries, throughout his career. Mr. Hawthorn recently supervised the design, construction, and

commissioning of 140-tpd flotation plants in South Korea for Ivanhoe Mines. Mr. Hawthorn worked for seven

years at Cominco Ltd. and then eleven years for Placer Development. Mr. Hawthorn is currently the principal

of Westcoast Mineral Testing Inc.

Gary Arca CA, Chief Financial Officer & Director - Mr. Arca is a Chartered Accountant and has been a

member of the Canadian Institute of Chartered Accountants and British Columbia Institute of Chartered

Accountants since 1980.

Mr. Arca was a partner with public accounting firms until 2005, providing auditing, consulting, accounting and

taxation services to various clients in the mining, oil & gas, financial, bio-tech, high tech and retail and

wholesale sectors. Mr. Arca has extensive experience dealing with public companies and start-ups both from

the perspective of management and as a consultant, and has served as a director of several publicly traded

resource companies.

Federico Villaseñor, Director - Mr. Villaseñor is Director of Financial Planning for Luismin. He obtained a

B.Sc. in Mining Engineering from the University of Guanajuato in 1972, a Master of Science from Columbia

University of New York City in 1976, and a Finance Degree from the Instituto Tecnologico de Mexico in

1985. Mr. Villaseñor is a member of the Mexican Mining Chamber Board.

Charles A. Jeannes, Director - Mr. Charles A. Jeannes was former Executive Vice President, Administration,

General Counsel and Secretary of Glamis Gold from 1999 until its merger with Goldcorp Inc. in November

2006. Prior to joining Glamis, Mr. Jeannes worked for Placer Dome at its San Francisco and Vancouver

offices as Vice President of Placer Dome North America. He holds a B.A. degree from the University of

Nevada and graduated with honours from the University of Arizona School of Law in 1983. He practiced law

from 1982 until 1994 and was the head of the natural resources section at Woodburn and Wedge in Reno,

Nevada. He has experience in mining transactions, public and private financing, permitting and international

regulation.

Arturo Prestamo Elizondo, Country Manager & Director - Mr. Prestamo has a Certified Public

Accountant Degree from the University of Monterrey, Mexico, a Masters in Business from EGADE -

I.T.E.S.M University and an Executive Business Education program degree from IPADE Business School. Mr.

Prestamo has served at the Board le vel and was a member of various committees of several Mexican

companies.

Mr. Prestamo has over 12 years of administrative, public accounting, and corporate finance experience with

different public companies listed in Mexican and US financial markets, serving as manager and director of

companies involved in diverse industries, including the mining industry. Prior to joining Starcore, he was

Director of Planning and Investor Relations Officer of a large Mexican public company.

SUMMARY & CONCLUSION

Through the first nine months of the current fiscal year ending 7/31/08, SAM has generated $3.8 million of

operating cash flow. On an annualized basis that amounts to approximately 9 cents per share. At present, the

stock is selling at approximately $0.16, which means the stock is selling at less than 2 times annualized

operating cash flow. It is possible, with grades improving back toward those of FY 2007, the last quarter and

quarters into next year could see higher cash flows, assuming as we do that average metals prices will remain

similar to those of the past 12 months.

In this market environment where it is very difficult for exploration companies to raise capital via stock sales,

it is especially important that companies can grow from internally generated cash flow. Given extensive

exploration potential and major excess mill capacity combined with a highly capable and proven management

team, we think SAM is in the cat bird’s seat to grow production and profits during the next several years. We

have no problem seeing this stock doubling or tripling from its current paltry price of $0.17, if it continues to

produce positive cash flows and build up its mineable resources. For all those reasons, we are recommending

this stock to our subscribers, with the usual caveat that for the sake of good, prudent investing, you not allocate

more than 5% of your portfolio to this or any other one stock.

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