Summary
- SilverCrest shares have corrected violently in the past couple months..
- Nevertheless the company has done a lot to generate long term shareholder value since I last wrote about the company in December..
- We now have a clearer picture of the future of Santa Elena and the financing of La Joya..
- The shares are fairly valued, but worth buying considering management's track record of generating shareholder value.
Since I last wrote about SilverCrest (SVLC) in December shareholders have been on a wild ride. The stock traded at $1.64/share when I wrote the article. By February they traded as high as $2.78 before plunging back to Earth with the rest of the mining sector.
SilverCrest's fall was particularly violent given two additional catalysts particular to the company. First, the company issued 8.9 million shares at $2.60/share, which added to the supply of shares on the market. Second, the company reported disappointing Q4 numbers on Monday, March 24th.
With the stock now sitting at $1.69 the stock is still a nickel higher than where it was in December, although the gold price is about 5% higher. This, among other things, indicate that the stock should have performed better, and this means that there is an opportunity in SilverCrest shares that is arguably even better than that which I pointed out in December.
First, the company has substantially improved its capital position thanks to a capital infusion from Sandstorm Gold (SAND) of $10 million, the aforementioned secondary offering, which raised $23 million, and the presumed positive cash flow in the first quarter of nearly $5 million. This brings the total to $63 million.
As a result the primary risk that I highlighted in December, namely that the company would have trouble funding construction of its starter pit at La Joya without issuing stock and diluting shareholders, has been mitigated. Of course the company wound up diluting shareholders, but it did so at an opportune moment.
This brings me to my second point, which is that management raised capital at an opportune time. Beyond the direct and obvious benefit to shareholders , confidence in management should be reinforced by this phenomenal market timing.
Finally the company has nearly completed the underground mine at Santa Elena, and production should be commencing soon. Furthermore, since Sandstorm Gold acted upon its option to continue the gold stream on the mine we now have a more accurate picture of its cash-flow going forward. This reduced uncertainty along with the fact that management demonstrated its ability to develop this mine on budget in a timely fashion add value to the stock.
With these points being made the general investment thesis for SilverCrest is largely the same now as it was in December. The company is a growing low cost precious metals producer that has a proven track record of execution and that offers good value at the current share price. But now I think there is less uncertainty regarding the value of Santa Elena and the path towards funding La Joya--the company's largest and potentially most valuable project. Given these points SilverCrest stands out as one of the better stocks in the junior gold mining space, and they are worth buying at $1.69/share.
Let us look at the specifics regarding the Santa Elena project and the logistics of funding the La Joya project.
Santa Elena
(*Note that the company often discusses figures for Santa Elena in terms of silver equivalents. However given the current gold/silver ratio of 66.2 it makes more sense to use gold equivalents, and so I will use gold equivalents in my calculations.)
The Santa Elena project is on the verge of starting underground production according to SilverCrest's April 7th news release.
The following chart outlines the company's expected production schedule:
(click to enlarge)
Production cash costs were estimated at $570/gold equivalent ounce. Additionally the company anticipates spending $40 million, or $5 million per year in sustaining costs. This will impact the company's all-in sustaining costs differently each year.
Before calculating the mine's value keep in mind that 20% of the mine's gold production will go to Sandstorm Gold at $450/ounce. This will lower the company's effective realized gold price. The following table shows the gold equivalent gold production that SilverCrest will sell at spot gold and silver prices, as well as the amount of gold that will be sold to Sandstorm Gold at $450/ounce.
| Year |
AuEq Sold At Spot |
Au Sold to Sandstorm |
| 2014 |
49,259 |
7,235 |
| 2015 |
55,773 |
7,921 |
| 2016 |
44,783 |
5,872 |
| 2017 |
48,369 |
5,511 |
| 2018 |
45,857 |
5,585 |
| 2019 |
72,520 |
10,761 |
| 2020 |
57,462 |
7,507 |
| 2021 |
19,590 |
2,245 |
Given this data we can estimate the current NPV of the Santa Elena Project now that it has been paid for and now that Sandstorm Gold has paid SilverCrest for the extension of the royalty. The following figures include taxes (including the new 7.5% royalty). All amounts are in millions of dollars.
| Discount Rate/Gold Price |
$1,200 |
1,300 |
1,600 |
| 8% |
$95 |
$114 |
$169 |
| 12% |
$83 |
$99 |
$146 |
Investors should take notice that the mine is comfortably cash-flow positive even if the gold price falls to test the June/December low of $1,200/ounce.
Funding La Joya
The La Joya project is, in all likelihood, going to become the company's largest and most valuable mine. It will get about half of its revenues from silver with the other half coming from gold and copper. Late last year the company released an initial mine plan for La Joya that focuses on one part of this enormous deposit--what the company calls a "starter pit." One of the appeals of SilverCrest is its potential to expand production beyond the "starter pit"
In my December article I expressed confidence in the mine's value after the release of the mine plan. However I was a little skeptical of the company's ability to fund it's $141 million price tag ($124 million without contingencies). This was before the company raised $33 million through the secondary offering and through the Sandstorm payment. I argued that the company would likely have to issue stock, and this turned out to be correct. However I was pleasantly surprised to see the company do so at $2.60/share when I made the prediction at $1.64/share--the secondary was far less punitive to shareholders than it could have been.
Now I am much more confident in SilverCrest's ability to finance construction of La Joya without destroying shareholder value.
The project has a $141 million price tag. As I mentioned above the company has an estimated $63 million in working capital. It also has a $40 million line of credit that is currently fully available to the company. This means the company needs only $38 million. As we saw from the above NPV of Santa Elena the company should be able to raise most of this from cash-flow assuming the gold price holds up. For instance in the next year the mine should be able to generate $20 million in cash-flow after taxes. While some extraneous expenses may lead management to issue a small amount of stock in the next couple of years there is a good chance that La Joya will be internally funded, and at higher gold prices SilverCrest may not even have to draw upon its credit line, although doing so wouldn't be a big deal considering that it would pay just 3% over Libor.
Assuming construction begins in 2015 the company will have expenses of $35 million in 2015 and $106 million in 2016. Afterwards the company provides the following cash-flow analysis of La Joya.
(click to enlarge)
Metal price assumptions include:
- $22/oz. for silver
- $1,200/oz. for gold
- $2.70/lb. for copper.
Considering current metal prices these assumptions are reasonable for a DCF NPV analysis.
The company calculates the NPV given these cash-flow figures at 5% to be $93 million after taxes. Unfortunately we need to make a couple of changes. First, 5% is too low of a discount rate. In what follows I will discount the cash-flow at 8% and 12% as I did for Santa Elena. Second, the tax rate is outdated. After the above figures were released the Mexican government imposed a 7.5% royalty on mining income, and this will hit La Joya's post tax cash-flow figures.
Making these changes we get the following revised NPVs for La Joya:
- $56 million at 8%
- $31 million at 12%
As low as these figures seem to be keep in mind that the La Joya mine plan currently only incorporates a fraction of the mine's total resources.
Conclusion: Valuing SilverCrest
At current metal prices the two mines are worth $170 million at 8% and $130 million at 12%. Considering the company's additional $46 million in non mining assets ($63 million in working capital minus $17 million in non current liabilities) these values rise to $216 million and $176 million at 8% and 12%, respectively. With the company's current price tag at $200 million we can conclude that purely on a DCF basis that the shares are fairly valued.
However this is not a reason to avoid the stock by any means. As Warren Buffet once said it is better to buy a wonderful company at a fair price than a fair company at a wonderful price. SilverCrest has been a wonderful company. It has grown production, generated cash-flow, and generated long term shareholder value.
As a result I think that precious metals bulls can purchase the shares at the current valuation.