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Santacruz Silver Mining: The Market Still Doesn't Get It!
Contributed Opinion

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Ben Kramer-Miller Ben Kramer-Miller, chief analyst at miningWEALTH, notes that Santacruz Silver Mining has been a top pick since March, and while shares have risen ~70%, he still believes there is substantial upside ahead.

Santacruz Silver Mining’s Project Map

Santacruz Silver Mining Ltd. (SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE) is focused right now on two projects. The first is Rosario in San Luis Potosi, Mexico. The company has been operating this underground mine for a couple years now, and it is currently mining at a rate of ~1 million silver-equivalent ounces per year (mostly silver with zinc and lead as coproducts). Rosario contains a mill with capacity that exceeds the mining rate, and as a result management has acquired the right to mine on another property 40 km away—Cinco Estrellas—where it mines mostly gold with some silver.

The second is Veta Grande, which is less than 200 kilometers away from Rosario in Zacatecas. The company doesn't own the project, but has an exclusive right to explore and mine it from owner Minera Contracuña. Santacruz receives 60% of the profits for its trouble (55% should the silver price rise above $22/oz). The company has not declared commercial production here yet, though the mine and mill are fully operational. Long term, the company is very ambitious with respect to its production targets at Veta Grande.

Management has shifted its focus to these two projects, though it still controls two interesting late-stage exploration projects—Gavilanes and San Felipe. These are "back burner" projects that provide in-ground optionality to metal prices (silver and zinc, mostly).

The company is inexpensive relative to its in-ground silver and its productive capacity, and there are likely a few reasons for this:

  • In Q1/15 there was a tailings dam rupture at Rosario, which caused a stop in production. The problem is fully resolved now.
  • In 2014 the company sold silver forward in order to finance the development of San Felipe. The project did not move forward and these forward silver payments had to come from Rosario. This happened right before the tailings dam rupture—talk about bad luck!
  • Veta Grande does not have a NI-43-101-compliant resource estimate or a mine plan, yet management expects it to generate most of the company's production. Cinco Estrellas doesn't have a resource estimate either, meaning most of the company's production is from projects without resource estimates.

The first two issues are largely in the past and the fallout (e.g., unwanted dilution, punitive debt payments) has already impacted the company. However, the third issue continues to be a big deal. Not only does it add to the perceived risk (e.g., what if the company's informal/internal projections are overly optimistic?), but due to the regulatory environment Santacruz is prohibited from discussing several of the positive aspects of its Veta Grande and Cinco Estrellas projects.

The latter concern is purely a cosmetic one, though it is a big deal because it means that the company cannot promote its story to the market in the same way as its competitors can. With respect to management's confidence level in the project, we note a few things that make management's knowledge of Veta Grande relatively robust:

  • The three producing Veta Grande veins are all past-producers.
  • Santacruz has processed tens of thousands of tonnes of ore from Veta Grande veins. In fact, it had processed ore from Veta Grande prior to its arrangement with Minera Contracuna. This ore was analyzed for composition and grade in the company's lab. While the company's work doesn't fit the NI-43-101-compliant feasibility study mold, it is arguably more extensive than what one would expect to find for a typical project at this level of development.
  • There are similar projects in the area currently in production, notably Capstone Mining Corp.'s (CS:TSX) Cozamin Mine.

Investors should also note the amount of time and effort it takes to compile a resource estimate. Oftentimes this is worthwhile as it provides valuable information. But Santacruz already has critical pieces of this information, and the added confidence that would come from compiling an NI-43-101-compliant resource estimate or feasibility study isn't worth the lost time.

So where does Santacruz stand now?

Santacruz is currently processing ~300 tpd at its Rosario mill. This includes production from Rosario and Cinco Estrellas. This mining rate is lower than previous expectations of 350–400 tpd, and the reduced mining rate is a function of the company reducing production at the Rosario mine and replacing it with production from Cinco Estrellas. Note that the latter project contains a wider vein that is easier to mine at a faster pace. Once the normal production rate is reached we expect annualized production from the Rosario mill to be just over 1 million silver equivalent ounces.

At Veta Grande the company has not yet declared commercial production, though based on discussions with management and my recent trip to visit the mill it appears the company is close to doing so. Upon doing so the company will be officially producing ~450 tpd (270 tpd attributable) with grades that are slightly lower than at Rosario/Cinco Estrellas. Attributable production should be ~600,000 silver equivalent ounces per year. With publicly announced plans to bring production up to 1,500 tpd (900 tpd attributable) by mid-late 2017, Santacruz is positioned to produce nearly 2 million attributable silver equivalent ounces per year at Veta Grande, making it a 3-million-ounce-per-year producer. We anticipate production costs to be ~$12-13/oz, meaning that the company can comfortably exceed $10 million in annual operating cash flow assuming a flat to slightly lower silver price. That's pretty good considering the company's ~$45 million valuation! And we haven't even considered the company's non-producing assets!

In addition to this production, we expect the company to release some more technical information to the market. For instance, management hopes to release a resource estimate on some of the veins it acquired from Golden Minerals Co. (AUM:TSX; AUMN:NYSE) earlier this year (Golden Minerals had done exploration work but did not compile it, and Santacruz is working on this now). We expect, as the company begins to generate more cash flow, that it will have the resources to compile more formal reports on its Veta Grande veins, along with those at Cinco Estrellas.

The combination of growing production and cash flow along with this additional information should generate market enthusiasm for the shares, and we expect them to trade substantially higher long-term.

Ben Kramer-Miller is the chief analyst at miningWEALTH. He is well respected for his unique ability to find under-the-radar precious metals opportunities, as well as for his extensive research into rare earth elements and other critical materials. His research has been featured by Nasdaq, Kitco,, The Financial Post, The Globe and Mail, Investing News Network and RealClearDefense, among others.

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