Ben Kramer-Miller, chief analyst at miningWEALTH, notes that Santacruz Silver Mining has been a top pick since March, and while shares have risen ~70%, he still believes there is substantial upside ahead.
Santacruz Silver Mining Ltd. (SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE) is focused right now on two projects. The first is Rosario in San Luis Potosi, Mexico. The company has been operating this underground mine for a couple years now, and it is currently mining at a rate of ~1 million silver-equivalent ounces per year (mostly silver with zinc and lead as coproducts). Rosario contains a mill with capacity that exceeds the mining rate, and as a result management has acquired the right to mine on another property 40 km awayCinco Estrellaswhere it mines mostly gold with some silver.
The second is Veta Grande, which is less than 200 kilometers away from Rosario in Zacatecas. The company doesn’t own the project, but has an exclusive right to explore and mine it from owner Minera Contracuña. Santacruz receives 60% of the profits for its trouble (55% should the silver price rise above $22/oz). The company has not declared commercial production here yet, though the mine and mill are fully operational. Long term, the company is very ambitious with respect to its production targets at Veta Grande.
Management has shifted its focus to these two projects, though it still controls two interesting late-stage exploration projectsGavilanes and San Felipe. These are “back burner” projects that provide in-ground optionality to metal prices (silver and zinc, mostly).
The company is inexpensive relative to its in-ground silver and its productive capacity, and there are likely a few reasons for this:
The first two issues are largely in the past and the fallout (e.g., unwanted dilution, punitive debt payments) has already impacted the company. However, the third issue continues to be a big deal. Not only does it add to the perceived risk (e.g., what if the company’s informal/internal projections are overly optimistic?), but due to the regulatory environment Santacruz is prohibited from discussing several of the positive aspects of its Veta Grande and Cinco Estrellas projects.
The latter concern is purely a cosmetic one, though it is a big deal because it means that the company cannot promote its story to the market in the same way as its competitors can. With respect to management’s confidence level in the project, we note a few things that make management’s knowledge of Veta Grande relatively robust:
Investors should also note the amount of time and effort it takes to compile a resource estimate. Oftentimes this is worthwhile as it provides valuable information. But Santacruz already has critical pieces of this information, and the added confidence that would come from compiling an NI-43-101-compliant resource estimate or feasibility study isn’t worth the lost time.
So where does Santacruz stand now?
Santacruz is currently processing ~300 tpd at its Rosario mill. This includes production from Rosario and Cinco Estrellas. This mining rate is lower than previous expectations of 350400 tpd, and the reduced mining rate is a function of the company reducing production at the Rosario mine and replacing it with production from Cinco Estrellas. Note that the latter project contains a wider vein that is easier to mine at a faster pace. Once the normal production rate is reached we expect annualized production from the Rosario mill to be just over 1 million silver equivalent ounces.
At Veta Grande the company has not yet declared commercial production, though based on discussions with management and my recent trip to visit the mill it appears the company is close to doing so. Upon doing so the company will be officially producing ~450 tpd (270 tpd attributable) with grades that are slightly lower than at Rosario/Cinco Estrellas. Attributable production should be ~600,000 silver equivalent ounces per year. With publicly announced plans to bring production up to 1,500 tpd (900 tpd attributable) by mid-late 2017, Santacruz is positioned to produce nearly 2 million attributable silver equivalent ounces per year at Veta Grande, making it a 3-million-ounce-per-year producer. We anticipate production costs to be ~$12-13/oz, meaning that the company can comfortably exceed $10 million in annual operating cash flow assuming a flat to slightly lower silver price. That’s pretty good considering the company’s ~$45 million valuation! And we haven’t even considered the company’s non-producing assets!
In addition to this production, we expect the company to release some more technical information to the market. For instance, management hopes to release a resource estimate on some of the veins it acquired from Golden Minerals Co. (AUM:TSX; AUMN:NYSE) earlier this year (Golden Minerals had done exploration work but did not compile it, and Santacruz is working on this now). We expect, as the company begins to generate more cash flow, that it will have the resources to compile more formal reports on its Veta Grande veins, along with those at Cinco Estrellas.
The combination of growing production and cash flow along with this additional information should generate market enthusiasm for the shares, and we expect them to trade substantially higher long-term.
Ben Kramer-Miller is the chief analyst at miningWEALTH. He is well respected for his unique ability to find under-the-radar precious metals opportunities, as well as for his extensive research into rare earth elements and other critical materials. His research has been featured by Nasdaq, Kitco, Mining.com, The Financial Post, The Globe and Mail, Investing News Network and RealClearDefense, among others.
Want to read more Gold Report articles like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Ben Kramer-Miller: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: None. The companies mentioned in this article were not involved in any aspect of the article preparation. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview/article until after it publishes.
( Companies Mentioned: SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE, )