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Friday, 26 July 2013
Jennings says SilverCrest prefeasibility study in line with estimates, continues apace toward expansion
Jennings Capital analyst Kwong-Mun Achong Low has maintained his buy rating and 12-month target price of $3.25 per share on SilverCrest Mines (CVE:SVL), a day after the junior miner released its prefeasibility study for its expansion plan at the Santa Elena mine in Mexico.
The report added more detail to the stellar reserve and resource figures released in May, which feed into the company's target to dramatically increase output at the site.
The headline financials boast a pre-tax net present value of $243.7 million, and a whopping 88 per cent internal rate of return (IRR), with eight years of mine life added after the company released updated reserve and resource estimates for the mine earlier this year, which in some cases doubled the estimates previously available for the 100 per cent owned project.
The economic analysis of the expansion plan, which uses base case metal prices of $1,450 per ounce of gold and $28 per ounce of silver, estimates total operating revenue of $684.9 million for the additional 8 years of mine life beginning in January 2014, from estimated sales of 12.11 million ounces of silver and 262,739 ounces of gold.
The pre-tax net present value is still strong, the analyst highlighted in the report, at an estimated $128.7 million even using lower metal prices of $1,250 an ounce of gold and $19.50 per ounce of silver, with an IRR of 49 per cent.
"By and large the PFS was in line with our expectations, although it had a number of areas for enhancement and optimization. For example, annual production of 3.5 Moz AgEq was 8% below our expectations, due primarily to the PFS assumption of a 2,800 tpd mill instead of the 3,000 tpd mill currently under construction," wrote Achong Low.
Key to the newly- increased figures, which include 19.7 million contained ounces of silver and 327,430 contained ounces of gold in probable reserves, is the mill to be built on the site, currently in the midst of construction but expected to be up and running by early next year with a view to achieving commercial production at the 3,000 tonnes per day (tpd) run rate by late March. With a nominal capacity of 2,500 tonnes per day currently, the Santa Elena mine’s open pit heap leach facility is expected to recover approximately 675,000 ounces of silver and 33,000 ounces of gold in 2013, with the mill set to have a substantial impact on the amount of production from the mine next year.
"Notably, capex and opex both stayed below our current forecasts with $43 million initial capex remaining to be spent, assuming the 10% capex participation by Sandstorm Gold for a 20% gold stream from the underground," noted the analyst, who also said he expects Sandstorm to buy in to the 20 per cent gold stream, as he calculates an accretive transaction for Sandstorm even if metal prices approached $1,000 an ounce per gold and $15 per ounce of silver.
SilverCrest is expected to present Sandstorm with a complete prefeasibility study and costs report in August, which would give the royalty stream company 30 days to notify SilverCrest of its decision to fund and another 90 days to finalize the agreement and make payments.
"Management indicates that related costs could go back as far as 2006, when exploration began to delineate the underground. We estimate the final cost for Sandstorm to consider (including sustaining capex) is on the order of $150 million, of which it would pay ~10% to earn-in to the 20% gold stream on the underground," explained the Jennings analyst in his research note.
Total operating costs of $282.2 million are expected, with average cash operating costs pegged at US$11 per ounce of silver equivalent. Total capital costs are estimated at $87.8 million, including contingency, but excluding sunk costs up to April 30 of this year. According to the company statement, total pre-tax cash flow is seen at $302.5 million, which includes an estimated US$5 million in cost deductions for closure, and working capital of US$1.8 million.
The payback period for the expansion plan is expected to be one year.
The next steps at the mine will be the complete detailed design over the next six months, with management expecting to further work on ground control considerations at depth, and also to refine metallurgy.
"We like that Santa Elena continues apace for a measured start-up toward the back half of 2014," Achong Low concluded.
Indeed, the company is looking to boost metals production to an estimated 3.5 to 4.0 million ounces of silver equivalent in 2014, up from the 2.37 million silver equivalent ounces it produced in 2012.