South American Silver Corp.

This company looks to me to be an amazingly undervalued stock on the basis of its flagship property alone, which is the Malku Khota Silver-Indium Project in Bolivia. But on Dec. 19, the company also announced the discovery of a 4-billion-pound copper discovery on its Escalones Project in Chile.

Regarding the Malku Khota Project, the resource (all categories) there amounts to 370 million ounces of silver, 2,415 tonnes of indium, and 2,083 tonnes of gallium. This amounts to a silver equivalent of 594 million ounces. Despite this large-scale resource, only 4 kilometers of a 50-square-kilometer target has been drill tested to date. It has the potential to become one of the top silver and indium producing mines in the world.

A preliminary economic assessment (PEA) was completed in 2011 and shows very robust economics on the Malku Khota Project. Based on the resources noted above, 40,000 tonnes per year would be produced over a 15-year mine life. The average grade of silver would be 42.4 grams/tonne, and it would also contain 7.55 grams/tonne indium and 3.98 grams/tonne gallium. Using base case value of $18 for silver, $500/kg for indium, and $500/kg for gallium, the project would produce a net cash flow of $185 million and $1.26 billion over the 15-year mine life. Applying a 5% discounted present value, it would add $704 million of enterprise value for the company. Based on $35 silver, $650/kg indium, and $730/kg gallium, the project would produce $4.3 billion in life-of-mine value and $430 million per year. Under that assumption, the project would provide a 5% discounted present value of $2.571 billion.

Those are huge numbers, compared to the company's current market cap of about $136 million. But as noted above, the company also just announced a 4-billion-pound copper discovery on its Escalones Copper-Gold-Silver Project in Chile. Here are the highlights from the company's Dec. 19 independent 43- 101 report from the 100%-controlled Escalones Project:

�         Newly defined inferred resource of 420 million tonnes of mineralized material containing 3.8 billion pounds of copper, 56.9 million pounds of molybdenum, 610,000 ounces of gold and 16.8 million ounces of silver using a 0.2-per-cent Cu equivalent cut-off grade which represents approximately a copper price of $2.50 per pound.

�         This is a copper-equivalent content of 4.5 billion pounds of copper grading 0.49 per cent based on approximate three-year average metal prices of $3.00 per pound copper, $1,200 per ounce gold, $22 per ounce silver and $16 per pound molybdenum.

�         The deposit remains open to expansion laterally and down dip with 90 per cent of this first resource hosted in copper, gold and silver replacement-style mineralization, and one drill hole testing porphyry-style mineralization.

�         The 70-square-kilometre Escalones project is located in the world-class central Chilean mining district which includes the nearby El Teniente deposit, which is the world's largest underground copper mine.

�         A ZTEM and aeromagnetic survey potentially indicating areas of additional sulfide mineralization has been completed for the property and is being interpreted.

�         Two drills are currently being mobilized to the project for a Phase II exploration program with approximately 7,000 metres of drilling anticipated to begin in January and to complete in April.

"Escalones is the second major resource developed by South American Silver since the company's initial public offering in 2007, and was originally discovered by Ralph Fitch, Executive Chairman, and Felipe Malbran, Vice-President of Exploration. This resource estimate gives shareholders and other investors a tangible way to begin to value this outstanding second project in the company's portfolio. With 4..5 billion pounds of copper equivalent metal, this resource is already larger and higher grade than many much better known copper-gold projects in North and South America. To put this new discovery in context, the resource here is already approximately equivalent in value, size and scale to South American Silver's more advanced Malku Khota silver-indium project, effectively doubling the company's in-ground resources," commented Greg Johnson, President and Chief Executive Officer.

"With the scale of this first resource, along with the excellent infrastructure at Escalones and its similarity to the nearby giant porphyry system at El Teniente, we believe that the Escalones project will begin to attract market attention. Our team is committed to adding significant new value for shareholders in coming months as we demonstrate potential for further resource expansion at Escalones and advance Malku Khota to the prefeasibility level."

What are the risks here? First of all, given my views that the world has much further to go in the global credit/debt deleveraging process, I favor gold over silver, not to mention high-tech industrial metals like indium and gallium. That said, anything short of a downside, like Robert Prechter's new Dark Age scenario where the Dow plummets to 600, the world will continue to demand silver, indium, and gallium. In my mind, I assign the kind of new Dark Age scenario a probability of only about 10% over the next decade. That leaves a 90% probability of something less dire and possibly even a brighter prospect than yours truly envisions for the future. In that case, all the metals the company is working toward producing should do well. The biggest risk perception for this company is its exposure to Bolivia, where many fear potential left-wing confiscation danger.

Capital expenditures should range between $450 million and $550 million. Combining that with Bolivian political risks, the risk of raising capital could be significant. However, off-take agreements in exchange for providing startup capital from China or other countries that may not be as politically hostile to a leftleaning government may be possible.

So there are risks, as with all companies in the resource sector. However, based on the enormous upside potential for this company (the present value of the Malku Khota alone ranges from $704 million to $2.5 billion, compared to a $136 million market cap), I feel the risk/reward tradeoff is sufficiently exciting to justify an allocation of up to 5% of one's portfolio in this one stock.