Santacruz - A New Silver Producer on the Rise
The latest price declines of gold and silver resulted in mining stocks tumbling heavily, whereas some stocks notably bottomed and started healthy rebounds most recently. Among our favorite stocks for short- and long-term recoveries is the new silver producer Santacruz Silver Mining Ltd. (TSX-V: SCZ; Frankfurt: 1SZ) which announced the start of commercial production of its 100% owned Rosario Mine in the Mexican state San Luis Potosi last week:
“The commissioning of various mill circuits commenced in December 2012 and was ongoing through January 2013. During February and early March the Company ran low grade mill feed through the mill circuits and confirmed that all circuits were functioning to specification. The initial mill feed used for commissioning was extracted from veins exposed on surface at the Rosario Mine. In the last half of March the Company began milling ore and making final adjustments to the mill circuits with the result that effective April 1, 2013 the Rosario Mine is in commercial production. In addition, Santacruz has negotiated the purchase of approximately 5,000 tons of ore from a nearby private mining operation to ensure continuous mill operation.”
The costs of mine construction (CAPEX) was solely 10 million CAD and thus well below the budgeted 12.5 million CAD. Management achieved the tremendous work of becoming a producer in only 8 months. For 2013, a production of around 500,000 ounces silver equivalent is expected, whereas an output of more than 2 million ounces silver equivalent is planned for 2014.
Aside Rosario, Santacruz fully owns 2 very prospective exploration projects in Mexico (polymetallic silver-gold-lead-zinc deposits as well):
San Felipe (Sonora):
The PEA (“Preliminary Economic Assessment” study) shall be published until the 4th quarter 2013 in order for production to commence in late 2014 already. We expect a yearly production of around 3 million ounces silver equivalent starting from 2015. This year, an aggressive drilling program totalling 25,000 m is planned – hence, a relatively strong newsflow is on the horizon with the likelihood of positively affecting the stock price.
Gavilanes (Durango):
Most recent surface sampling indicated high-grade mineralization with more than 1 kg/t silver and 4 g/t gold. This promising project has a historic resource (“inferred”): 1.2 million t ore averaging 420 g/t silver – which represents some 15 million ounces of silver. However, this resource calculation is solely based on 500 m of the known 1,000 m strike length of the GSA vein and solely on 3,200 m of drilling from the year 1990. Alone in 2013, Santacruz plans to drill more than 16,000 m. We consider it probable to start production no later than early 2016. Additionally, Santacruz successfully identified 6 other veins on the property with the Descubridora vein being the most promising vein besides GSA (Guadalupe Soledad Aranzazu).
Santacruz enjoys an increasing popularity among analysts, foremost Canaccord (“Speculative Buy” with a price target of 4 CAD), Raymond James (“Outperform” with a price target of 2.50 CAD) and Dundee Securities (“Speculative Buy”). Raymond James calculates 2013 production costs for Rosario in the magnitude of only 9.75 CAD per ounce of silver equivalent (2014: 11.40 CAD with a yearly output of 1.4 million ounces silver equivalent; 2015: 12 CAD with 2 million ounces).
According to Canaccord, Santacruz is on the way of producing a total of 8.5 million ounces silver equivalent per year until 2016. This would mean that Santacruz overtakes other major silver producers such as Endeavour Silver Corp.(NYSE: EXK; TSX: EDR) which company produces approx. 6.5 million ounces silver equivalent per year (with a current market cap of 460 million CAD). Hence, we value Santacruz – with a current market cap of solely 120 million CAD – not only as a short-term bargain, but also as a long-term outperformer.
What makes Santacruz so special and valuable for todays shareholders is the fact that current and future development of resources and mines is to be financed with the cash flow generated from the Rosario Mine. Thus, dilution can be reduced to a minimum – especially when considering that the company successfully completed a financing in February with the issuance of around 22 million shares at 1.85 CAD resulting in an inflow of cash of more than 40 million CAD.
The management of Santacruz has a compelling track record and itself holds more than 38% of the outstanding shares thus having a plausible interest of participating as shareholders in the success of building a major mining company:
Arturo Prestamo (President & CEO)
10 years experience in the mining sector, arranged financings in the area of 500 million CAD.
Francisco Ramos (COO & Director)
30 years experience in the mining sector, he was the Co-Founder of Great Panther Silver Ltd. (NYSE: GPL; TSX: GPR; Frankfurt: G3U).
Dante Rodriguez (VP Explorations)
25 years experience in the mining sector, among others discovered the Tayolita and San Martin deposits.
Marc Prefontaine (Director)
25 years experience in the mining sector, he was the former CEO of the Mexican exploration company Grayd Resource Corp. (taken over by Agnico Eagle Mines for around 275 million CAD).
See Chart #1 here: http://www.makrocheck.ch/benutzerdateien/23/scz1.png
Technically, a strong upward trend started in mid-2012 that lifted the stock price from 0.80 to 2.50 CAD in only 3 months, wherafter a consolidation commenced taking place until today and having reached the 1.20 CAD level recently. This 7 month consolidation period (typical after strong price increases) is set to come to an end shortly, because it took the form of a (blue) triangle which apex (at 1.40 CAD) was reached a few days ago. Typically, the final movement of a triangular price formation (the so-called thrust) starts immediately after the apex: a new and strong up- or downward trend, yet we are convinced that the thrust will finish to the upside).
The lower part of the upper chart shows the stock price of Santacruz relative to the HUI mining index: this rising ratio shows that Santacruz performs much better than the HUI since mid-2012. We expect a new and strong upward trend soon.
See Chart #2 here: http://www.makrocheck.ch/benutzerdateien/23/scz2.png
DISCLAIMER: Please the read the full disclaimer at www.rockstone-research.com, whereas it should be noted that the author, Dipl. Kfm. (FH) Stephan Bogner, may hold and sell shares of the mentioned companies any time. The author was not instructed by the companies mentioned herein to conduct this content and was not remunerated in any way by these companies.