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Southern Silver Exploration: Making Excellent Progress at Cerro Las Minitas
Contributed Opinion

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Thibaut Lepouttre Thibaut Lepouttre of the Caesar’s Report has combed through the data, done the math and provides this assessment on the mining firm.


Southern Silver Exploration Corp. (SSV:TSX.V; SSVFF:OTCQB; SEG1:FSE) has kept its promises and provided an updated resource estimate on its 40%-owned flagship Cerro Las Minitas (CLM; polymetallic) project in the second quarter of the year. We have combed through the technical report of the resource update and combined this with the previously reported results of the metallurgical test work on the different types of mineralization at CLM to build some sort of (very) preliminary economic model to check how the recent resource updates and more fine-tuned metallurgical test work has impacted the net present value (NPV) of the project.

All our calculations are based on what we think are reasonable assumptions, but keep in mind they are for educational purposes only and should definitely not be interpreted as Southern Silver's official guidance or expectations. The official preliminary economic assessment (PEA), expected to be published in late 2020, is the document that will really matter.

The pre-summer resource update was excellent

Southern Silver was able to update its resource estimate at the Cerro Las Minitas project right before the summer after completing an additional 10,157 meters of drilling. These additional meters added a lot of value as the indicated resource increased to almost 134 million ounces (134 Moz) silver equivalent (Ag eq) (consisting of 37.5 Moz silver, 35,000 ounces gold, 303 million pounds lead, a bit of copper and almost 900 million pounds of zinc).

There's an additional 138 million ounces of silver equivalent in the Inferred category, and of the 134 Moz, almost 46 Moz are pure silver, with the majority of the silver equivalent consisting of zinc. These results are based on a cut-off grade of 175 g/t silver equivalent (based on a $75/t operating, smelting and sustaining cost), but even at a higher cut-off grade of 250 g/t Ag eq the project would still contain in excess of 200 Moz Ag eq.

The resource estimate consists of four separate deposits, and the newly discovered Skarn Front zone is the main contributor to the updated resource estimate as this zone added almost 5 million tonnes of rock to the overall resource. The relatively low US$2M that was spent in 2018 on additional exploration resulted in adding 5.1 million tonnes to the combined indicated and inferred resources, and added 63 million ounces silver equivalent. Definitely a good return on investment!

The next table shows how the resource has increased over the past three years. The total amount of silver in all resource categories combined has tripled, while the zinc resource has doubled to almost 1.7 billion pounds.

Based on this updated resource, we can now update our preliminary and very much back-of-the-envelope economic model, which we published in 2018. Despite the additional data, our accuracy level will still be relatively low, as both different types of the deposit have different recovery rates. The Blind, El Sol and Las Victorias deposits have (slightly) higher recovery rates for silver, gold and lead, but the Skarn Front boasts a higher zinc and copper recovery rate. Additionally, Southern Silver is still working on optimizing the flow sheet to make sure the metals end up in the most favorable concentrate (as explained before, you would want the silver to end up in the lead concentrate, as the payability in the zinc concentrate is much lower).

A caveat

Before we dive into some numbers, we would like to emphasize (once again) that there will be a lot of assumptions and projections in this article. All of these projections will be based on publicly available material, but please keep in mind these are our own calculations and conclusions and should not be seen as an official point of view from the company.

The calculations (and corresponding explanations on how we get to our numbers) are only meant as a "back of the envelope" calculation, to have a first look at the project before Southern Silver publishes its PEA. This report should only be considered to be what it is—assumptions that we deem to be realistic, but not as refined as an official NI-43-101-compliant mine plan (which could use a different ore sequencing, have different initial capital expenditures and operating expenditures, etc.).

The importance of the September 2018 metallurgical update

The updated metallurgical test results that were published last year are actually very encouraging. There are no huge changes in the recovery rates of the lead, silver and gold, but two important elements deserve to be singled out here.

First of all, the zinc recoveries have increased by quite a bit: Approximately 89% of the zinc mineralization in the Skarn zone is being recovered into a zinc concentrate while the sulphide zones at Blind—El Sol showed an 78% recovery of the zinc in a zinc concentrate. The weighted average of both recovery rates thus increases to 86% (note: we realize a weighted average isn't 100% reliable, but it does show you the positive developments on the metallurgical front).

Looking at the zinc concentrate, it looks like there will now be a very small silver credit payable. The average grade of the silver in the zinc concentrate produced from the Skarn zone is 111 g/t. For the first three ounces of silver per tonne of concentrate, a company doesn't get paid anything, while the payability ratio is around 70% for the metal above this cut-off grade.

This means that, per tonne of zinc concentrate, Southern Silver should be able to be paid on 0.7 X 18 g = 12.6 grams of silver. That's around 0.4 ounces per tonne and just $6/t zinc concentrate at this point. Considering the total resource (Indicated and Inferred) would result in the production of approximately 1.2 million tonnes of zinc concentrate, the $6/t will contribute just $7 million over the entire mine life. So that's negligible. Also, because we just cannot assume 100% of the Indicated resources and 100% of the Inferred resources will make it to the mine plan, that's just not realistic at this stage, but exploration is obviously still ongoing). Needless to say we will not account for this small byproduct credit in our assumptions.

Second, in the metallurgical update, Southern Silver was also successful in producing a copper concentrate. In our previous back-of-the-envelope model, we didn't take the copper into account. But according to last year's test work, almost 68% of the copper was recovered in a concentrate with a marketable grade of 27.9% copper (in line with the standard specifications for a copper concentrate). Additionally, approximately 15% of the silver reported to the copper concentrate, and that's important because the minimum deduction for silver in the copper concentrate is just one, while the payability of the remainder is 90% ounce (meaning Southern Silver won't get paid for the first ounce in the concentrate, and $15 per ounce for the remaining silver, using a silver price of $16.5/oz).

It's very clear that producing a separate copper concentrate with a high silver content is much more valuable than seeing the silver end up in the zinc concentrate, so by producing the copper concentrate, Southern Silver wins on both fronts: It's now able to recover and sell the copper while it will increase its silver revenue.

And sure, while Cerro Las Minitas doesn't contain a lot of copper and the 68% recovery rate isn't that great, it does have the potential to move the needle. The Skarn zone contains 103 million pounds of copper in the Indicated and Inferred resource, and after applying the 68% recovery rate and 96% payability, the total amount of recoverable and payable pounds of copper would be 67 million. Assuming a copper price of $2.75, that's an additional US$185 million in net smelter revenue.

But the operating costs will obviously also increase a bit by adding the copper flotation circuit and it's unlikely every pound of copper will be mined. But more than the increase in the zinc recovery rate, being able to produce a separate copper concentrate could move the needle—not just on the NPV and cash flow front, but it would also allow Southern Silver to negotiate different offtake agreements with different parties for the copper, lead and zinc concentrates at Cerro Las Minitas, as different counterparties may offer different terms for each of the specific concentrates.

Putting everything together in an economic model

Now we have established the percentages of the metals that could be recovered and the percentages of the gross value of the concentrate that will effectively be paid by smelters, we can work toward establishing a net smelter return (NSR) model based on the average grades of the Indicated and Inferred resource categories. We are using the following commodity prices:

Again, these are just averages and in some years the net value of the rock will be higher than in other years, depending on the mine plan. This results in the following (average) net smelter revenue per tonne of rock based on the current resource estimate:

There are a few interesting observations to be made here. Although we are now using lower commodity prices compared to our previous model from last year (see the table below), the higher recovery rates and the addition of a copper concentrate to the product mix (last year, we excluded any potential byproduct revenue from the copper), we see a slightly higher NSR in the Indicated resource ($136/t versus $132/t last year) and a virtually unchanged value of the Inferred resource, where the higher silver grade is mitigating the impact of the lower zinc grade.

Applying last year's prices on the updated resource estimate would result in a NSR of $144/t for the Indicated resource and $127/t for the Inferred resource. So a marginal increase of the commodity prices does have a meaningful impact on the NSR.

Again, these calculations are merely meant for educational purposes. You can easily rebuild them in your own spreadsheet and apply recovery rates and metal prices of your choice.

Using the net smelter returns to complete a back-of-the-envelope NPV calculation

As mentioned last year, the La Parrilla mine owned by First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE)could provide a good basis to build an economic model. We are using the results from the 2017 technical report on the La Parrilla mine and have tweaked it a little bit (and are assuming the treatment charge/recovery charge (TC/RC) will be part of the indirect costs). TC/RC will be important as they could have a meaningful impact on the revenue generated by the zinc concentrate. For Southern Silver's zinc concentrate, with a grade of 50.7%, the difference between a TC/RC of $245/t (the current price) and $180/t (which is used by some miners as long-term cost) would make a difference of just over $0.05 per produced pound of zinc. Definitely an important factor to keep an eye on!

Note these costs (La Parrilla) are based on a throughput of up to 2,000 tonnes per day (tpd). As we will assume a 4,000 tpd throughput in the Cerro Las Minitas model (due to the higher tonnage in the resource estimate), it would be realistic to assume some economies of scale will take place as well, and the real operating cost could be a few dollar per ton lower. But for now, let's use $58/t.

Given the net smelter revenue of $136/t for the indicated resources and $121/t for the inferred resources, the net margins could reasonably be expected to be respectively $78/t and $63/t (on a pre-tax basis)

In 2018, we used an initial capex of US$280 million (US$280M) for a 2,500 tpd mine and processing plant. Considering the recent resource update to 24 million tonnes (in the Indicated and Inferred resource categories), this may be a bit too low for an optimized mining and processing scenario. As such, a 4,000-tpd mining and milling scenario may be justified (of course this will depend on the mine plan as there are no guarantees the mine could yield 4,000 tonnes of pay dirt per day), and we will assume the initial capex to be US$375M.

Next up: determining a discount rate. Although the company's name is Southern "Silver", the silver is just a byproduct, as 67% of the recoverable and payable rock value in the Indicated categories is generated by base metals. So we will use a weighted average between a discount rate of 5%, which seems to be the standard for precious metals projects these days (but too low, if you ask us), and the 8% that appears to be common for base metals projects. So, let's use 7%.

Let's now assume the higher-value Indicated resources gets mined first for the first seven years, where after Southern Silver switches to the lower-grade Inferred resources for the subsequent eight years (this clearly is not a real-life scenario, as the mine plan will be based on what's the most opportune mining scenario rather than categorizing things as Indicated and Inferred. But, as mentioned before, there's no mine plan yet, so we will just have to work with assumptions here to at least get an idea of what we are looking at).

Another assumption is to use a 10-year depreciation schedule for the initial capex, and to use a total tax pressure of 40% (corporate tax + the specific mining taxes). This means that the total average tax per processed tonne of rock in the first seven years will be 0.40 X [(1.44Mt X 78/t) – $37.5M] = $30M, or $21 per processed tonne.

For years 8–10, the numbers are: 0.40 X [(1.44Mt X $63/t) – $37.5M] = $22M, or $15/t.

For years 11–15 there will be no depreciation allowance and the tax pressure will be 0.4 X $63/t = $25/t.

This results in the following after-tax cash margins per tonne of processed rock:

Years 1–7: $57/t
Years 8–10: $48/t
Years 11–15: $38/t

Using these numbers in a back-of-the-envelope calculation based on an annual throughput of 1.44 million tonnes results in this:

So according to our "thinking exercise," the after-tax NPV7%, based on the assumptions and inputs we mentioned before, would be US$294M. Southern Silver owns 40% of the project so its attributable NPV7% would be US$118M or CA$154M.

Raising CA$3M to further advance Cerro Las Minitas

Last week, Southern Silver announced its plans to issue 10 million units priced at CA$0.20 per unit to raise CA$2M to be spent on advancing Cerro Las Minitas to the next stage. The financing is "priced to sell,"as it contained a full warrant exercisable for a five-year period at CA$0.25, making it a very appealing "sweetener"for people with a long-term vision who are bullish on either the zinc price and/or the silver price.

The financing appeared to be a huge success as the financing was oversubscribed on the very same day and subsequently increased to CA$3M.Additionally, Electrum and another warrant holder have indicated their desire to exercise just over 10 million warrants with an exercise price of CA$0.08 to add an additional CA$835,000 in proceeds to the treasury. The warrant exercises will also help to remove the warrant overhang as there were approximately 25 million warrants with an exercise price of CA$0.08. This will now decrease to approximately 15 million, and as they have expiration dates in 2020 and 2021, we would expect these to be gradually exercised throughout their remaining term.


Southern Silver's exploration programs continue to add value to the Cerro Las Minitas project, and the increased resources should make it easier to put a longer-term mine plan together. In our calculations, we ended up with an after-tax NPV7% of US$295M for the entire project, and the after-tax NPV7% attributable to Southern Silver came in at just over CA$150M.

Of course, there still are a lot of other variables that could change (mine life, capex, throughput, etc.), so our calculations are and should be seen as one "thinking exercise" in anticipation of the publication of the "official" PEA, which is slated for late 2020.

Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.


1) Thibaut Lepouttre: The author has a long position in Southern Silver and is participating in the current financing. The author's company has a financial relationship with Southern Silver. The author determined which companies would be included in this article based on his research and understanding of the sector. Additional disclosures are available here.
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