Excellon Resources - Mexico's Highest Grade Silver Mine
Sep 6 2013, 07:44 | by: The Investment Doctor | about: EXLLF.PK
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EXLLF.PK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
In this article I'll have a look at Excellon Resources (EXLLF.PK), which operates the Platosa mine which is the highest-grade silver mine in Mexico (according to the company). The company's stock also trades as EXN on the Toronto Stock Exchange. I will first look at the operational side of the company and analyze the Platosa production profile. Thereafter I'll move on to the financial side of things and briefly discuss the company's financial situation. I will also dig deeper into the company's expected cash flow profile and will run some numbers based on different silver prices.
As I'll prove in this article, because Excellon is mining a project with an average grade in excess of 20 ounces of silver and 15% zinc-lead per tonne of ore the company is able to table a low cash cost for its operations, as it produces silver at an all-in cash cost of $14/oz. I expect this cost to decrease a bit further as the company will be opening additional development faces this quarter.
Excellon is one of the best silver plays around and will be able to weather any storm thanks to its low cash cost profile. The company had some problems with a road blockage last year but everything seems to be solved now, and I hope Excellon will be able to continue its production for another 10 years.
The company acquired this 40,000 hectare property in 1996, discovered the Mantos zones in 1998 and started production in 2005 so the Platosa mine has been up and running for almost a decade now and the current resource estimate supports the current production profile well into the next decade.
Excellon has stepped up its exploration efforts at La Platosa as it hopes to find so-called 'Carbonate Replacement Deposits' which are usually polymetallic mineralized zones of approximately 10-15Mt with very simple metallurgy (because those deposits are limestone-hosted). As these deposits will have a lower grade than the zone which is currently being mined, Excellon will have to expand its current processing plant to be able to maximize its returns from the lower grade ore. A mill upgrade sounds expensive, but can actually be constructed at a limited budget.
Platosa's current output and cash cost
Excellon Resources produced 565,000 ounces of silver in the first half of this year, despite the lower throughput in the second quarter of this year. This lower throughput in Q2 was caused by development works at the mine, and the planned new faces should be up and running at this moment, so I consider this lower throughput to be just a bump in the road.
The company reported a cash cost of $12.07/oz in Q2, but this was also caused by the lower throughput of the ore. In a normalized situation, the company is aiming for a cash cost of $6.5/oz and a total cash cost (which includes capital expenditures as well as G&A costs but seems to be excluding exploration expenses) of $14/oz, which is roughly in line with last year. The current development works should allow the company to produce (conservatively estimated) 1.5 million ounces of silver next year at an all in cash cost of $14/oz (as the exploration and G&A costs will be spread out over more produced ounces).
In the next paragraph I'll discuss its expected cash flow profile
I'll now have a brief look at the expected operational cash flow of Excellon Resources, by using an expected output of 1.5 million ounces of silver at an all-in sustaining cost of $14/oz.
As you can see, at the current silver price of $24/oz, the company would make approximately $15M in annual cash flow, which is very decent for a small operation like Platosa. And even at a silver price of $18-20 like we experienced just a few months ago, Excellon would still be profitable. This is the main reason why I think Excellon offers excellent exposure to the silver price at a relatively low cash cost compared to other Mexican silver producers such as Great Panther Silver and Endeavour Silver who both need silver prices in excess of $20/oz to be cash flow positive.
Why I prefer this company over its Mexican competitors
There are quite a few possibilities to invest in mining companies which are producing silver in Mexico. In this paragraph I'll compare Excellon Resources with its most widely known competitors, Great Panther Silver (GPL) and Endeavour Silver (EXK) as these companies also operate (relatively) high-grade silver in Mexico.
The next table provides a good summary of the different company's market capitalizations, annual output and cash cost per ounce of silver.
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Expected 2013 output (pure silver ounces, no AgEq ounces) | | | |
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C1 cash cost/oz (2014 estimate) | | | |
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As you can see, Excellon will be the cheapest silver producer of the three companies, as its cash costs will be substantially lower than the cash costs of Great Panther and Endeavour Silver (but Endeavour's cash costs could be positively impacted by a rising gold price).
It's also not a matter of economies of scale, as Excellon will produce just a bit less than Great Panther Silver, and the huge difference in cash costs show how important the average grade is these days, as Excellon's average grade is more than twice the grade Great Panther Silver is mining.
There's however one small negative sidenote, it's obvious Excellon has a much lower working capital position and thus has a smaller cushion against unexpected expenses at its operations. But there's progress in sight. As soon as Excellons new underground faces will be ready, I expect its working capial position to increase by approximately $2.5-3M per quarter if the silver price stays at the current level whilst Great Panther's working capital position will not increase as much and might actually decrease as the company will have to step up its development efforts again after scaling those back.
A look at the financial side of things
In this paragraph I'll discuss the company's balance sheet. As at the end of June of this year, Excellon had a working capital position of $6..7M, which mainly consisted of income tax receivable ($3.6M) and marketable securities ($2.6M). The interesting part is that those marketable securities are actually units in the Sprott Physical Silver Trust(PSLV), so approximately $0.04/share (after correcting for the recent price increase in the securities) is being held in units of PSLV.
The company's current ratio is a healthy 2.42. A ratio higher than one means Excellon has sufficient current assets to cover the current liabilities.
I also like the fact the company only attributes a total value of $55.2M for the plant, property and mineral rights, which seems to be a very conservative value for a project which will generate approximately $100M in cash flow over the next decade.
Even though Mexico can't be considered as safe as Canada or the US, it is one of the most preferred mining countries as there has been mining in Mexico for several hundred years. The Durango state is known for its silver mines, and other producers or wannabe-producers have not encountered any problem to keep their mines up and running. So I don't think there's a huge political risk.
Is there a problem with the local communities? Not at all. The company's access to the mine site was blocked for approximately two months by a local union, but after talking with local community members the union removed the blockade. This is an excellent example of how well the company gets along with the local communities. After seeing the protest from the locals, I don't think the union will try to pull this trick again.
The highest risk is obviously the silver price, but in a previous paragraph I showed the company should be able to survive another downturn in silver, as Excellon should remain cash flow positive as long as silver is trading higher than $15/oz.
Is the management compensation acceptable?
Excellon pays its executives a decent but relatively low base salary. The Executive Chairman makes $190,000 per year and the 'newly' appointed CEO will have a base salary of $240,000 per annum which is a 20% reduction from the base salary of $300,000 which was paid to the previous CEO.. This is relatively low compared to other Mexican silver companies such as Golden Minerals, which pays its CEO $450,000 per year, even though the company isn't producing anymore.
A salary of $240,000 is very acceptable and it shows the executives aren't seeing Excellon Resources as their personal cash cow.
Excellon Resources offers excellent exposure to investors who are looking to increase their holdings in a cheap silver miner. At the current silver price, the company expects to generate at least $15M in cash flow next year, so Excellon is currently trading at an EV/cash flow multiple of just 6, which is quite low considering the mine life will be extended well into the 2020s. I would prefer to buy Excellon instead of a free cash flow negative company like Great Panther Silver or a company with a much higher EV/cash flow multiple such as Endeavour Silver.
The main risk for investors is obviously the price of silver, but as I showed in this article, even at a silver price of $15/oz this company should at least break even. I think the reason why Excellon is trading so cheap compared to peers is the fact its silver output will be relatively limited with just 1.5 million ounces per year. But on the other hand, Great Panther Silver produces just a tad more (1.6 million pure silver ounces).
The company is further exploring its 400 million square meter land package and is zeroing in on so-called CRD-targets which could contain several million tonnes of silver-lead-zinc mineralization. A few of these finds could extend the mine life of Platosa by a few dozen years.
I currently don't have a position in Excellon yet, but might initiate one within or after 72 hours, depending on the share price.