My Torrey Hills colleagues and I toured Revett Minerals' (TSX: T.RVM, Stock Forum) Troy silver and copper mine outside Noxon, Montana, 125 miles east of Spokane, Washington.
Troy dates back to the early 1980s, when ASARCO operated it before putting it on care and maintenance in 1993 when metals prices declined after the 1970s commodity boom. Revett was formed in 1999 to acquire it and the neighboring, significantly larger Rock Creek deposit, and subsequently put Troy back into production in late 2004. Of the mine’s 195 employees, roughly 150 have been on site for more than five years, including 12 dating back to the mine’s initial startup in 1980.
Aside from three mountainside adits, Troy’s footprint is barely detectable, epitomizing a “clean operation” in all aspects. The environmental impact is minimal, the flotation reagents are organic, and the silver-copper concentrates have no impurities and benign tailings, so much so that the tailings area does not require a liner. The value of Troy’s output is roughly half copper and half silver at current prices, but when silver approached $50/oz earlier this year, it was clearly more silver-dominant.
Revett produces 4,000 tonnes of ore per day via the “room and pillar” method, in which giant underground caverns, for lack of a better description, are created by methodically mining the ore body with huge earth-moving equipment. The ore, in turn, is primarily crushed underground, then sent by conveyor to a giant, state-of-the-art mill capable of measuring grade to the thousandth of an ounce. As noted above, the tailings facility is filled with benign material, not much different in consistency than beach sand.
Production is forecast to be 1.3 million ounces of silver and 11 million pounds of copper in 2011, a level expected to be maintained for at least the next seven years, based on the mine life indicated by the company’s resource/reserve calculation. However, since the Troy NI 43-101 report was written in 2004, nearly 15,000 meters of new exploration drilling has been completed, including roughly 7,000 in 2011 alone. An updated resource calculation is anticipated in early 2012, which will likely demonstrate that Revett has replaced all its reserves since restarting production in late 2004, as well as increased its Measured & Indicated resources.
2011 has been a watershed year for Revett, as six years of hard work at Troy has finally started paying off. Mining activity recently reached the high-grade “C-Bed” deposits, and the mine’s learning curve has finally been climbed, yielding significantly reduced operating costs and higher profitability. In the second quarter of 2011, the company reported EPS of 23 cents based on cash operating costs of 69 cents/lb. of copper (net of silver byproduct), or, conversely, $2.10/oz. of silver net of copper byproduct.
Assuming such profitability continues, the company is on an EPS run rate of 92 cents/share, compared to the current stock price of roughly $4.20/share. Moreover, given the company’s rising cash balance, Troy’s exploration program will continue aggressively, aiming to extend the mine’s life to 20-30 years. If such exploration is successful, it is difficult to see how P/E multiple expansion will not occur in the coming years.
Revett is not a “one-trick pony,” in that the aforementioned Rock Creek property could wind up significantly larger than Troy, perhaps by a factor of five times or more. Rock Creek, a geographically identical silver/copper property just 20 miles from Troy, was also acquired from ASARCO in 1999, but has not been developed due to permitting issues that have been ongoing for the past decade.
Rock Creek was last drilled in 1983, but irrespective has 43-101 compliant inferred resources of 2.0 billion pounds of copper and 229 million ounces of silver, not including historical (non 43-101 compliant) resources of 0.5 billion pounds of copper and 79 million ounces of silver. In fact, it is one of the largest undeveloped silver resources in the world, which is probably why Silver Wheaton owns 16% of Revett, and is likely to play a major part in financing Rock Creek once the permitting issues are resolved (current CAPEX estimates are $250 million over a five-year development period).
Fortunately for investors, a decade of discussions and work with local and Federal environmental groups appears poised to finally pay off. The only remaining issue relates to NGO challenges of the company’s 2007 Biological Opinion (“BO”) regarding the mine’s potential impact on the indigenous Bull Trout and Grizzly Bear populations, which Revett believes it has sufficiently addressed.
In July 2011, hearings were held in front of the Ninth Circuit Court of Appeals, with a decision likely to be rendered within the next three to six months. Management is confident of a favorable ruling, in which case the most likely scenario would be completion of a Supplemental Environmental Impact Study (SEIS) around mid-2012. Once the SEIS is approved mine development could begin in the spring of 2013.
To give an idea how large Rock Creek could be, the current 43-101 report projects an initial 20-25 year mine life, at average annual production rates of six million ounces of silver and 52 million pounds of copper. Positive developments in the Rock Creek permitting process could materially impact Revett’s stock price in 2012, particularly if Silver Wheaton pursues the project’s financing.
In my view, the most impressive aspect of the operation was Revett’s seasoned hard rock mining team. They have proven themselves by bringing Troy to an optimal level of efficiency, and are thus poised to do the same with the Rock Creek “sister property,” assuming it receives environmental approval.
For more information on this company, check the website at www.revettminerals.com
Andy Hoffman of San Diego Torrey Hills Capital can be reached at ahoffman@torreyhillscapital.com.
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