VANCOUVER — It’s been a challenging twelve months for SilverCrest Mines (TSX: SVL; NYSE-MKT: SVLC), but the producer has adapted to lower metal prices at its Santa Elena epithermal silver-gold mine, 150 km northeast of Hermosillo, Mexico. The company has transitioned to underground mining and commissioned a 3,000-tonne-per-day mill and processing facility, which will form the foundation of its operations over the next decade.
SilverCrest kept a strong balance sheet while accomplishing its goals, and is aiming to use future cash flows to fund Santa Elena’s expansion via regional exploration.
On March 31 the company unveiled an updated prefeasibility study based on revised reserves that maps out Santa Elena’s future as a mostly underground operation. The study answers questions for SilverCrest followers, including Santa Elena’s mine life and how transitioning away from open-pit mining will impact operating costs.
Underground probable silver-gold reserves have jumped 8% compared to a prefeasibility study filed in 2013, and now total 4 million tonnes grading 1.67 grams gold and 115 grams silver for 214,000 contained oz. gold and 15 million contained oz. silver. Based on Santa Elena’s nominal 3,000-tonne-per-day mill, the company calculates an eight-year mine life at press time.
“What the market needs to recognize is that we’ve almost fully replaced two years’ worth of production,” chief operating officer Eric Fier said during an interview. “We’ve discussed it in our press releases, but I don’t think a lot of people caught on that we’ve really done something exciting here.”
In its model, the company focuses on mining long-hole stopes (89% by reserve volume) at lower costs, with a small reserve being mined using cut-and-fill stopes (11% by reserve volume). SilverCrest envisions blending at different rates to reach optimum throughput.
“The process was a bit longer then we’d hoped. We ran into problems in terms of underground mining since we brought in a new team to run our production drilling,” Fier explained. “The delays really came down to improper drilling of the long holes, and that took several months to figure out. Now we’re right where we want to be, and I have a good degree of confidence moving forward. From a big-picture standpoint, the grade reconciliation looks really good.”
SilverCrest says it should crank out operating revenue of US$555 million from sales of 12.6 million oz. silver and 270,700 oz. gold under the new mine plan. Undiscounted pre-tax cash flows are pegged at US$163 million, while the study calculates a post-tax net present value of US$119 million at a 5% discount rate.
“At current silver prices our numbers for revenues sit around a 60-40 split in terms of gold versus silver,” added CEO Scott Drever. “It’s really almost a perfect hedge depending on what metal you’re interested in. I don’t necessarily like equivalent numbers because so much hinges on your ratio. Maybe at this point in time we’re more of a gold company, but that’s the beauty of Santa Elena.”
SilverCrest hopes to build on record production achieved in 2014, when it produced 2.8 million equivalent oz. silver at all-in sustaining cash costs of US$14.35 per oz.
SilverCrest achieved 93% of its annual production guidance — which was expected to range between 3 million and 3.3 million equivalent oz. silver — despite the open pit closing early, and short-term delays related to its first underground stope.
This year the company aims to crank out between 4 million and 4.4 million equivalent oz. silver at all-in cash costs ranging from US$14 to US$15 per oz.
“When you look at last year it’s important to note we were transitioning to the underground from the heap leach, and building a US$70-million mill,” Drever elaborates. “If you discount the impairment we reported — which wasn’t associated with Santa Elena — we did very well as a corporation. Our balance sheet is very strong, and we’re doing positive cash flow.”
The company reported a US$1.5-million net loss, or 1¢ per share in 2014, but finished the year with US$31 million in cash and US$15 million in an undrawn credit facility. SilverCrest’s exploration budget for the year is expected to total US$2.8 million, which will likely include 6,000 metres of drilling to advance shallow exploration at its Ermitano I & II and Cumobabi concessions.
Total sustaining capital costs are an anticipated $31 million, including life-of-mine underground drill programs and 2015 surface exploration expenditures. SilverCrest indicates that the El Cholugo zone — located next to the Main Mineralized zone (MMZ) — is a priority target this year.
“We really view Santa Elena in two categories. We have the operational side, which involves reserve growth, and we have the regional exploration opportunities,” Fier commented. “From an operational standpoint we’re looking at things around the MMZ, which are primarily El Cholugo I & II and Tortuga. We’ll be drilling at Cholugo and our highest priority is to expand that resource and subsequent reserves, and design that into the new mine design and hit it by 2016. It’s basically a sub-parallel off shoot of the MMZ.”
In November 2014, SilverCrest strengthened its land position around Santa Elena via an option agreement with Evrim Resources (TSXV: EVM; US-OTC: EMRRF) to acquire a 100% interest in Cumobabi, which sits next to Ermitano. The latter will pay US$75,000 upon signing and US$50,000 on each anniversary thereafter, completing at least US$500,000 in exploration expenditures by the second anniversary, and delivering a production notice within five years.
The concessions host the same early Tertiary andesite and rhyolite volcanic rocks, with major structures that host the Santa Elena silver-and-gold, low-sulphidation epithermal mineralization. When combined with the recently acquired option on Ermitano, SilverCrest controls over 300 sq. km in the Santa Elena area.
“There always seems to be something out there where people say to us: ‘Let’s see how you perform.’ First it was the heap-leap operation, and can we really do it for that dollars,” Drever commented.
“Then it was can we build the mill and get it working, and now we need to prove we can optimize and sustain the underground. We’re always going to have something out there that people might not be comfortable with, but we’ve succeeded each step of the way. Now we’re looking at the opportunities near the mine site, and the exploration potential on the greater package is truly extraordinary,” he said.
Shares have traded within a 52-week window of $1.31 to $2.42, and closed at $1.39 at press time. SilverCrest has 119 million shares outstanding for a $166.4-million market capitalization.