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.
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