American Silver Corp.
(SAC � TSX, $1.43)
Metals Everywhere They Look: We
define electric metals as those elements that matter in the
building of hybrid or electric vehicles of all types, along with
the accompanying strengthening of the electric utility
infrastructure and the necessary generating capacity. We believe
that both copper (Cu) and silver (Ag) are electric metals. South
American Silver Corp. (SOAM) has these in abundance in its
Escalones and Malku Khota deposits, respectively. And with
relatively large quantities of two other electric metals at Malku
Khota, indium (In) and gallium (Ga), we believe that SOAM can
play an important role in the supply of some critical electric
metals in the years to come.
Processing Advantage: The
company's recent PEA has already shown that the use of its
proprietary acid-chloride leaching technology at Malku Khota,
allowing for the extraction of In and Ga along with precious
metals, is superior to a more conventional cyanide heap leach
that would only extract Ag and gold (Au). Our analysis will be
based on the use of the acid-chloride process.
Country Risk: While
Escalones is located in Chile, with a fairly minimal country
risk, Malku Khota is located in Bolivia. We will discuss the
country risk we perceive as existing, having had substantial
contact with the region for the last 30 months.
Strong Management: There
is no plainer way to express this than to simply say that this is
a strong group with a background that suggests that they can make
this project work.
Big Opportunity: We
believe that both Cu and Ag are not only electric metals, but
critical materials for industry. SOAM has a very good opportunity
to produce globally meaningful quantities of Ag, In and Ga from
Malku Khota, and large quantities of Cu from its Escalones project.
Our NPV analysis of the two projects suggests a conservative
target price of $2.75, based on the use of a 17% discount rate
applied to Malku Khota, and a 13% discount rate applied to
Escalones. Based on the current trading range, our target mandates
that we initiate coverage on SOAM with a SPECULATIVE BUY rating.
Please see end of this report for important
Introduction � Electric Metals Everywhere
figures in C$, unless otherwise noted
O/S Basic (MM)
South American Silver Corp., a mineral exploration company,
together with its subsidiaries, engages in the acquisition,
exploration, and development of mineral properties. It holds
a 100% interest in the Malku Khota silver-indium-gallium
project located in central Bolivia; and the Escalones
copper-gold project in Chile.
Hykawy, Ph.D., MBA
Clean Technologies & Materials
Associate, Equity Research
Some are going to wonder why we would care about a
company called South American Silver. And the answer is that we
view silver as an electric metal, one that is of direct interest to
us at Byron. We have published a comprehensive argument ("Silver and Tin �
The Demand is Electric, the Need is Critical," 29
February 2012), but most readers will understand that Ag prices are
supported both by the use of silver as an investment vehicle and
ornamental material, as well as by industrial use. For those who
have paid attention to Ag only to the extent of noticing that, given
the wholesale slaughter of the film industry by digital imaging,
the use of Ag in film must have dropped to zero, we have some
interesting news. And if this is the extent of analysis done, then
it will also surprise those same individuals to find that Ag has an
extremely robust and fast-growing demand in the electronics
While true that
film use has fallen dramatically, figures from the Silver Institute
suggest that the decline in annual Ag use in film is slowing. In
the meantime, the financial industry appears to have largely missed
a new and rapidly growing demand for Ag in electrical solders. The
RoHS (Reduction of Hazardous Substances) directive adopted by the
E.U. to exclude materials like lead (Pb) from solder have caused a
dramatic increase in industrial demand for Ag. In the past, solder
used in the electronics industry was composed of an alloy
containing 63% tin (Sn) and 37% Pb. This mixture was used for two
reasons, one being its relatively low melting point, which allowed
solder joints to be made with delicate electronic components
without undue risk of damage.
The other reason
is more technical. The old 63/37 mixture of Sn and Pb was what was
termed eutectic, meaning that all the components of the alloy
melted at the same temperature. In high-speed electronics
manufacturing, this is important because the solder is applied and
the parts are then moved down the manufacturing line rapidly. If
the solder alloy were to contain materials that melted at different
temperatures, it is possible that the solder bumps (or joints) on a
circuit board might become segregated, with some metals at a higher
concentration in one portion of a solder bump than another. This
can lead to cracking of the solder joint and an undesirable
warranty claim. One of a very small number of solder alloys that is
eutectic without containing Pb, and part of an even smaller group
with a reasonably low melting point, is an alloy containing Sn, Ag
and Cu. Additionally, very small amounts of manganese (Mn) or zinc
(Zn) can sometimes be used to help lower the melting point of this
Our conclusion is
that, at present, with roughly two-thirds of electronics
manufacturers using Sn-3.5Ag-Cu solders, we believe that the use of
Ag in the electronics industry represented some 110 million ounces
per year in 2011, roughly 14% of the global mine production level
of Ag of 778 million ounces. And with a long-term annual growth in
demand of 7% for electronics, anticipated by such firms as iSuppli,
this would see electronic solder demand for Ag growing by 7 � 10
million ounces annually. Adding in growth in demand from solar
photovoltaic modules, and the long-term 2% CAGR in mined Ag
production is insufficient.
We had previously
always assumed that "silver bugs" and currency hedgers
were the primary drivers for recently appreciating Ag prices. Now,
we admit that this supposition was likely wrong, that industrial
demand is likely contributing strongly to Ag price appreciation.
Nor do we see many options for that increase to slacken; while
increasing Ag prices do put upward pressure on solder prices, one
should note that the use of solder in, say, a cellular telephone
handset is probably well under 10 grams, making Ag use less than
0.35 grams, or less than 0.01 Troy ounces. For most OEMs, this will
either be undetectable for a time or is a cost that can quite
easily be passed on to customers.
macro view on Cu is positive. Cu use is likely to increase due to
the continuing emphasis on infrastructure advancement in China and
India, as well as our conjecture that increasing use of plug-in
hybrid electric vehicles (PHEVs) and fully-electric vehicles (FEVs)
in the developed world will necessitate reinforcing the grid,
especially into areas such as suburbs where drivers will be plugging
their vehicles in for the night.
Indium demand is
driven most largely by its use in the ITO (indium tin oxide) top
conductor used in liquid crystal display (LCD) screen production.
ITO is the best, by a wide margin, of a very few transparent or semi-transparent
electrical conductors. ITO is not a terrific conductor of
electricity, but all the other options are largely abysmal by
comparison, and especially for large LCD screens where good
conductivity of electrical signals to the extremes of the screen is
mandated by the desire for higher frame rates and the like, ITO is
an absolute imperative. World production of refined In is only
perhaps as much as 576 tonnes per year (according to the USGS).
Recycling does introduce additional material, but as with most
metals the use of recycling is highest when prices are high, and
cannot be relied on as a supply source.
Ga is even less
common. Only perhaps 100 tonnes of Ga are produced as a secondary
metal from aluminum refining (according to the USGS), with a lesser
amount being produced from scrap recycling. Ga has its greatest
value in the electronics industry, where it forms an integral part
of the chemical compound making up the substrates for some
important components used in microwave and infrared electronics,
and in LEDs and lasers. Small amounts are used per circuit, but the
large volume results in sizeable demand. And the price of Ga is
very inelastic; a small decrease in the price of Ga would likely
result in a fairly large increase in use, as the superiority of
circuits dependent on the supply of Ga, at a slightly lower price,
result in higher market share.
probably be considered fortunate that one company has accumulated a
pair of deposits and the technology required to produce all of the
above materials: Ag, Cu, In and Ga. Malku Khota and processing by
acid-chloride leaching yields a high level of Ag, owing to average
grades of 33.6 g/t Ag, 7.4 g/t In and 4.0 g/t Ga, along with
meaningful quantities of Pb and Zn. Escalones is host to a very large
Cu porphyry deposit, some 3.8 billion pounds of Cu contained in an
inferred 420 million tonnes of ore, grading approximately 0.44% Cu,
along with meaningful quantities of Au, Ag and Mo.
We will briefly
discuss the process to be employed at Malku Khota, along with the
likely process at Escalones. The capital and operating costs,
either established by the Malku Khota PEA or extrapolated from
similar operations in the case of Escalones, will enable us to
complete a DCF analysis for each project, and the sum of the value
of the two projects will represent our target value for the
Malku Khota � Silver Linings for the Electronics
Malku Khota is SOAM's advanced development project in the plateaus
of Bolivia. The closest city is Chochabama, 85 km away by road.
Malku Khota is a sediment hosted, oxide deposit containing a very
large quantity of heap leachable Ag. Along with its Ag, Malku Khota
would be one of the world's largest deposits of In and Ga, and
would also produce modest amounts of Cu, Pb and Zn.
Exhibit 1 � Resource of Malku
If a conventional cyanide leach were employed, which is entirely
feasible, then the Ag and Au content alone make Malku Khota a
perfectly respectable project. However, the PEA published on May 10
of last year clearly established that the use of an acid-chloride
leach, allowing for the recovery of the rare electric metals In and
Ga, provides superior economics.
acid-chloride leach utilizes a leaching fluid containing
hydrochloric acid (HCl), sodium salt (NaCl) and hypochlorite
(probably sodium hypochlorite, NaOCl). This fluid has high levels
of extraction for Ag, but also for In and Ga. The leaching solution
coming from the leach pads, after being circulated through mounds
of crushed ore, has a large amount of HCl extracted and returned to
the leaching process using commercial ion exchange equipment. The
remaining solution, pregnant with metals, is then processed, first
by "cementing" precious metals and any Cu onto scrap iron
that substitutes more soluble Fe ions into the solution, and then
by adding sodium hydroxide (NaOH) and precipitating out insoluble
In and Ga hydroxides. Further refining is necessary for all of the
metals at this stage.
grades at Malku Khota are shown in the exhibit below. Along with
those are the recovery levels for each of the two different process
routes, and the required capital and operating expenses to achieve
those recoveries, as estimated within the PEA.
Exhibit 2 � Life of Mine
Opex (per t)
Source: SOAM PEA, May 10, 2011
The math for the
two cases is inescapable. Given that the effective price of In and
Ga in the base case analysis within the SOAM PEA is almost $17 per
Troy ounce, with grades that total one-third the amount of Ag, the
higher recovery levels and the much higher revenues carry the day.
The total operational expense of the project must also include a
mining cost, estimated within the PEA at $1.08/tonne of ore.
One of the questions for investors is SOAM's ability to
successfully operate in Bolivia. Clearly, SOAM is not the only
foreign mining company in Bolivia. Indeed, there have been three
major mines built in the country, under the current administration,
in the past four years, including projects belonging to Sumitomo,
Coeur d'Alene and Pan American Silver. One of the largest mines in
the nation is San Crist�bal, the world's third largest primary
silver mine and sixth largest zinc mine, a 50,000 tpd Ag/Zn/Pb open-pit
mine, operated by Sumitomo. Coeur d'Alene's San Bartolome mine is
the second largest mining operation in its portfolio. In addition,
there are several very large scale mines being built, as well as
several international mining ventures under examination for
establishment within Bolivia. For example, a MoU signed last year
between KORES and the Bolivia Mining Corporation is structured to
allow South Korean firms to be involved in the development of Salar
de Uyuni, one of the world's largest undeveloped potential lithium
projects. In addition, Jindal Steel is investing $2.1 billion into
a very large iron ore project.
heavily dependent on the mining industry, its second-largest
economic sector after oil and gas. SOAM is not alone in its interest
in the mineral resources of Bolivia, and the Morales government has
been actively encouraging private investment into mining, over the
past six years, as a way to build Bolivia's economy and address the
fact that more than half of the nation's people live in poverty.
Recent bond upgrades by both Moody's and Fitch Ratings, based on
economic policies and growth, reduced political uncertainty and new
anti-corruption initiatives, appear positive. With Bolivia's entry
into the MERCOSUR regional trade organization, with Brazil as its
largest regional trading partner, and with increased overall trade
with Japan, Korea and China, Bolivia appears to be an increasingly
favourable emerging resource market for foreign investment.
Escalones � Lots of Copper
deposit in Chile is a very large Cu resource. The deposit is
located 100 km northeast of Santiago, and 35 km almost exactly due
east of El Teniente, Codelco's largest Cu mine and likely the
largest underground Cu mine on Earth. The company's current 43-101
resource indicates that the deposit contains as much as 420 million
tonnes of ore grading 0.44% Cu, with reasonable amounts of
molybdenum (Mo), Au and Ag, as well. For our purposes, we will
value any potential mine at Escalones on the basis of Cu, alone.
The site is
blessed with good existing infrastructure, including road access
and a natural gas pipeline across the property. The project sits just
east of the mining and smelting complex at El Teniente, providing a
number of development options for the project.
By far, the most
encouraging aspect of this deposit is its sheer size. The grade and
the nature of the porphyry deposit strongly suggest that this
relatively shallow deposit will be economical. The initial deposit
size of 3.8 billion pounds of Cu mean that even large-scale
production from the deposit by a global major mining company could
result in this site being exploited for decades. We expect that the
company's current drill program will expand the resource at
Escalones, and anticipate a PEA will be delivered before year end.
Management � Strong and Experienced
In this case,
there is no need to gild a lily. SOAM is run by an experienced and
strong management team.
Johnson � President, CEO
and Director: Mr. Johnson
became a Director of SOAM in 2009, and was appointed President and
CEO in April 2010. An exploration geologist with more than 25 years
of experience in the mining industry, Mr. Johnson was a co-founder
of NovaGold Resources and during his 12-year tenure there, he had a
key role as part of the management team that grew NovaGold from a
market capitalization of $50 million to more than $2 billion. While
at NovaGold, Mr. Johnson was prominently involved with the
acquisition and advancement of three world-class deposits, and the
completion of three feasibility studies. He was a co-winner of the
Thayler Lindsay International Discovery Award for his role in the
discovery and advancement of the 40-million-ounce Donlin Creek gold
deposit in Alaska. Mr. Johnson began his career with Barrick Gold
where he worked in the U.S. and International Exploration Groups,
with responsibility for projects from early discovery stage to
development and operations. He holds a B.Sc. (Honours) degree in
geology from Western Washington University.
Fitch � Executive
Chairman: Mr. Fitch is an exploration
geologist with over 40 years of international exploration,
management and field experience. He is one of the co-founders of
SOAM, and has founded or co-founded several other exploration
companies. Mr. Fitch was Chief Geologist and Manager of U.S.
Exploration for the Chevron Minerals Group. His extensive
exploration experience includes work in South America, Australia,
West Africa, South Africa and the U.S. Mr. Fitch is credited with a
number of major international discoveries and was awarded the
Chevron Chairman's Award.
Brodie-Hall � COO: Mr. Brodie-Hall is a professional engineer who
brings over 35 years of engineering construction and project
development experience to SOAM. His career has spanned nearly every
aspect of evaluation, feasibility studies and project development
in the mining and mineral processing industries. Prior to his role
at SOAM, Mr. Brodie-Hall was a senior Executive with the Bateman
Engineering group in Australia, a leading global mining engineering
service firm, where he had first-hand experience on challenging
projects in Australia, Southeast Asia, Africa, the Middle-East,
Eurasia, North America and South America.
Filtness � CFO: Mr. Filtness is a Chartered Accountant who has been
involved in the mining industry for over 25 years as a director or
officer of a number of public companies. Mr. Filtness has served as
CFO of SOAM since the company's IPO in 2007.
Mallory � VP, Operations
and Social Responsibility: Mr.
Mallory brings over 30 years of mining industry experience to SOAM,
in large-scale mine management, operations and construction in both
North and South America. Most recently, he was VP with Silver
Standard Resources, working on the start-up of the Pirquitas silver
mine in Argentina, as well as at other advanced development
projects in Peru and Mexico. Prior to that Mr. Mallory held
management positions with responsibility for operations and
sustainable development with Barrick Gold (Placer Dome) and
Malbran � VP, Exploration: Mr. Malbran brings over 25 years of exploration
industry experience to SOAM, and has served as VP, Exploration for
SOAM since its IPO in 2007. Mr. Malbran has been involved in a
number of major mineral discoveries, including Malku Khota,
Escalones and Vizcachitas. His career has included exploration for
precious and base metal deposits throughout Latin America, while
working with firms including Teck Cominco, General Minerals and
Geoestudios Consultants. Mr. Malbran holds a geology degree from
the University of Chile, and is a QP for SOAM.
Dreisinger � VP, Metallurgy: Dr. Dreisinger has been working as a metallurgical
consultant with the company since May 2006. In addition, he currently
holds the position of Professor and the Industrial Research Chair
in Hydrometallurgy at the University of British Columbia. Dr.
Dreisinger, with co-workers, has been actively involved in
developing and commercializing hydrometallurgical technology such
as the Mt. Gordon and Sepon copper processes in Australia and Laos.
Through the Industrial Research Chair in Hydrometallurgy, he is
actively engaged in both research and the teaching of technical
short courses to the global metallurgical industry. Dr. Dreisinger
also serves as a Director of PolyMet Mining Corp. and International
Nickel Ventures Corporation.
Clark � Manager of
Project Implementation: Mr. Clark has
over 30 years of experience in the design and management of
industrial, mining, materials handling, chemical and petrochemical
projects. These projects have ranged from feasibility studies
through to the commissioning and handover of completed facilities.
He has held a number of senior management roles during his career,
and has extensive international experience as a project manager on
projects located in Africa, Australia, the Middle East, Eurasia,
and both North and South America.
Gonzales Yutronic � GM
Compa��a Minera Malku Khota S.A.: Mr. Gonzales has over 20 years of industry experience
in the mining industry, encompassing the areas of finance,
logistics and community relations while serving with Comsur S.A.
(one of the largest mining companies in Bolivia), Glencore (Sinchi
Wayra) and Compa��a Minera Malku Khota. Mr. Gonzales has been part
of the successful development of many projects and mining
operations with the Bolivian Departments of Oruro, Potosi and Santa
Cruz, and he holds a business administration degree from the
Catholic University of La Paz.
Valuation � Electric Metals, Electrified
surprise no one that we are interested in Cu, as Cu is,
fundamentally, the principal electric metal. Cu is the conducting
metal of choice in practically every application, from grid
conductors to motor and generator windings to wiring within homes,
electrical and electronic devices, including automobiles. In fact,
we have heard it said, by Yucong Wang of General Motors, that while
it is entirely possible to build a hybrid or electric car without
rare earth elements (although he noted that he was unsure just how
good a product omitting REEs would yield), building any car without
Cu poses serious issues. While Ag conducts electricity better than
Cu, it is simply too expensive, and aluminum has demonstrated
significant long-term performance problems when used as a grid, or
even household, conductor.
Perhaps a greater
surprise is our interest in Ag. Until only five to six years ago,
Ag would not have been considered a major electric metal. Now, with
its use as a significant ingredient in RoHS-compliant solders in
the electronics and electrical industries, Ag cannot be ignored.
Because of the
growth in demand for both Cu and Ag as China and India continue to
grow, as electric transport gains market share globally, and as
electronics continues along its inexorable growth curve, we are
perhaps more bullish than most regarding our price deck for both Cu
and Ag. We will shortly publish our views on each of the
industries, but it is our belief that both will maintain higher
prices into the indefinite future, as industrial use helps to grow
the price of Ag while growing international demand potentially
moves Cu into a position of undersupply.
For the purposes
of valuing SOAM, and allowing for an apples-to-apples comparison
with projects as evaluated by other brokerages, we will use a
long-term Cu price of $2.95/lb ($6,500/tonne), and a long-term
silver price of $25/ounce. Our prices for In and Ga, per kilogram,
are $600 and $500, respectively, supported by growing demand in
electronics and LCDs. However, we will note what the valuation of
Malku Khota would be if we use our long-term price deck for Ag,
driven by demand increases for Ag in electronic solder and in
We choose to use
a discount rate of 17% for Malku Khota, primarily due to the
location of the project within Bolivia. The discount factor we
apply to Escalones is 13%, driven primarily by the earlier stage of
the project and its location in Chile. Our assumptions are that
Malku Khota can come into production in 2016, but that Escalones
will not reach production until 2018. Both projects are valued on
their primary products only, so Escalones is valued solely on the
basis of its Cu production, while Malku Khota is valued for its Ag,
In and Ga.
We assume that
Malku Khota is a 40,000 tpd open-pit mining operation, with mining
costs of $1.08/tonne, and processing costs of $6.41/tonne (as per
the SOAM PEA regarding the deposit). Capital costs at Malku Khota
total $550 million, with annual sustaining costs of just over $50
million. Our terminal multiple, taking into account the remaining
value in the project at the end of 2020, is 10x. Per all the above,
our NPV for Malku Khota is $196 million.
there is obviously less available information. However, we assume
that Escalones will be a 50,000 tpd mining operation, with mining
costs of $1.50/tonne and processing costs of $6.00/tonne of ore
(both values based on published costs of other Cu projects in South
America). Capital costs are, we assume, significantly higher than
those for Malku Khota, as much as $1.3 billion, and that the
project will require sustaining investment of just over $60 million
per year. With a terminal multiple of 10x in 2020, based on its
large deposit size, the NPV for Escalones is some $161 million, at
account the cash balance and value of in-the-money options and
warrants, our fully diluted value for the company is $396 million.
We recognize that some investors will place significantly different
strategic values on the different materials being produced by the
company, and so we apply a "holding company" discount of
12% to our calculated value, giving us a $2.95 NPV/sh. We will thus
establish a target price of $2.75, and we are therefore initiating
coverage with a SPECULATIVE BUY rating.
purposes, we also valued Malku Khota using our own long-term price
deck for Ag (published in our report "Silver and Tin: The Demand is
Electric, the Need is Critical"). In this case,
the relevant prices from 2016 to 2020 start at $57/oz, climb to
$69/oz in 2018, and we assume they will stay flat into the future.
Using all the same parameters as above, the valuation of Malku
Khota climbs from $196 million to $1,771 million, and the
discounted value for SOAM would be almost $15.00.
Conclusion � Electric Metals Everywhere
SOAM is one of
the most interesting mining juniors we have come across. There are
very few companies that have deposits containing so much of some of
the electric metals that we view as being in shortest long-term
supply. Management is solid and experienced, and is entirely
capable of continuing to build the team that can bring a combined
series of projects requiring some $2 billion in capital
expenditures to production. We are very bullish on the future of
both Ag and Cu pricing, and we agree with a number of independent
assessments that In and Ga are critical electric metals with good
pricing futures ahead of them, as well. For us, the electric metal
content of Malku Khota and Escalones more than warrant a target
price of $2.75, and we are initiating coverage with a SPECULATIVE
View "Exhibit 3 �
Valuation of South American Silver"
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Investment Rating Criteria
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is expected to appreciate significantly from the current price over
the next 12-18 month time horizon.
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the next 12-18 month time horizon.
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