SilverCrest's start of commercial production leads to reduced risk rating, says Fundamental

SilverCrest Mines (CVE:SVL), which just last month announced commercial production at its Santa Elena Mine in Sonora, Mexico, received recently a more confident outlook from Fundamental Research Corp, with the equity research firm lowering the junior producer's risk rating.

The company's flagship Santa Elena project, which began commercial output on July 13, has probable reserves of 11.71 million ounces of silver, and 0.28 million ounces of gold, within the current open-pit design.

In addition, the property hosts indicated resources of 11.82 million ounces of silver, and 0.19 million ounces of gold, as well as inferred resources of 7.98 million ounces of silver and 0.12 million ounces of gold.

Total production from the mine from September to June was 194,000 ounces of silver and 11,000 ounces of gold, with production, grades and cash costs improving every quarter, Fundamental noted.

Indeed, production shot up by 118% to 6,846 ounces of gold equivalent in the second quarter, up from 3,147 ounces of gold equivalent in the fourth quarter of 2010. Grades improved to 1.89 grams per tonne (g/t) of gold, and 44 g/t silver.

SilverCrest is aiming to produce 430,000 ounces of silver, and 26,000 ounces of old this year, and 478,000 ounces of silver and 32,000 ounces of gold in 2012 - the first full year of commercial production. 

"Overall, we were extremely pleased to see the company's ability to ramp up production since our previous report in October 2010, and that commercial production was achieved as per the expected timeline," Fundamental asserted in its report.

As such, the equity research firm lowered its risk rating from 5, or highly speculative, to 4, on top of its "buy rating".

There is also potential upside for the project, as the company comissioned a preliminary economic assessment (PEA) report last year to consider an expansion plan, which includes the construction of a conventional mill, developing the project into a 100,000 ounce plus gold equivalent-producing mine facility.

Positive results from the report were announced in April, with the study estimating a base-case pre-tax net present value of $131 million, at a 5% discount rate, using a gold price of $1,000 per ounce and a silver price of $18.00 an ounce.

If precious metal prices are lifted to current levels, net present value jumps to $491 million, SilverCrest said. 

The PEA also concluded the mine would have a life of 10 years, with annual throughput, of 2,500 tonnes per day, with the potential to increase to 3,500 tonnes per day. Initial capital costs were estimated at US$84 million, which includes costs for a new processing facility.

In addition to Santa Elena, the company also acquired the La Joya property last December, located 75 kilometres southeast of Durango, Mexico, and nearby several operating mines.

The company is currently undergoing a 25-hole drilling program at the new site, designed to confirm historical results. Encouraging results have been reported thus far, with assays from the final five holes expected this month. A resource estimate is anticipated in the fourth quarter, following a second round of drilling.

In May, SilverCrest also completed a C$30 million financing, giving it roughly $34 million in cash - a strong position to meet its debt obligations, as well as to fund capex of $5 million for the expansion project the rest of the year and further drilling at La Joya, stated Fundamental. 

Based on all this, Fundamental said its valuation for the company dropped to C$2.16 per share, down from its previous C$2.91 per share forecast, due primarily to the share dilution on account of the recent financing. However, this was offset by an increase in Fundamental's long-term gold and silver price forecasts since its previous report in October.

As a result, the firm's revised comparables valuation for SilverCrest is C$3.06 per share, up from its previous estimate of C$2.77 per share, it said.