Very interesting & Informative PostThe following post was made recently on another message board so I thought I would share.
I just got off the phone after a long conversation with management. The news is very good for the ongoing development at San Rafael and they are already tuning the mill to handle ore. Development ore should be processed to test the plant within days, and the company could announce commercial production in September.
There is some wiggle room here on how long they continue running development ore until they declare full commercial operations. It comes down to a financial distinction because income from operations will be credited against cap-ex until they formally declare commercial operations. As it stands now the entire development will probably come in on time, and below cost. If they hold off until November, the total cap-ex budget will come in slightly higher than the lowest forecast number of $18 million.
Some interesting info from the call:
They locked in some of the lead production @ $1.11 per pound, which is near the highs for the metal. This will carry through to the end of the year and it basically puts a profitable operating range for the Galena operations.
The lower USD has been good for the bottom line, as the company reports profits in USD but pays costs in Pesos. However, over the longer term they anticipate a stronger Peso, and in any case if the Peso stays low they expect they will have to pay the miners more to earn a living wage, so the benefits are not going to be huge either way.
Some production has been stockpiled from El Cajon, as they expected that Nuestra Senora would run out of mine inventory prior to getting San Rafael into production. However, they have continued to find ample high grade ore feed from Nuestra, and therefore they now have the bonus stockpile from El Cajon that can give a boost to production in the future, of serve as a measure of safety if an unplanned production halt arises.
The CEO was very clear that the company has excess mill capacity to increase production if they choose. But he stressed it makes no sense to run higher silver output now when the company would barely break even. Instead, they will focus on high grade zinc and lead ore, and make a great cash flow windfall from operations. They can earn a profit and maintain a low cost structure, while holding the high grade silver ore in reserve for when silver prices rise. This is a huge fundamental fact that is going to be overlooked by most investors but I think its a luxury to have this kind of operating flexibility to hold off until silver prices rise.
Meanwhile, if and when we finally get a sustained window of higher silver prices, USA will be able to rapidly increase output (and profits) while most other producers are already running flat out and burning their mineral inventory.
The last point is that USA will be in position to report cash flow per share that will blow the doors off the entire sector when San Rafael is in full production. With such a tight share structure after the rollback last year, and the potential for low cost / high profit operations, the cash flow per share could surpass $2 per share next year. For a stock that is below $5 today, I think that suggests a much higher share price just to price in a reasonable cash flow multiple.
Given that the new mine appears to be nearly completed and on budget, most of the risk is now gone. The company did not have to issue new shares or take on new debt to build the mine. USA has a strong balance sheet and profitable operations today, but will very shortly see the cost structure fall to the lowest in the peer group, while earnings per share will rise to the top quartile.
I think this one is a screaming buy here. I own shares and I will be a buyer of more.
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