MAG:CC - SilverCrest: A Great Silver Miner But Overvalued At The Moment

2023-05-31 13:48:37 ET

Summary

• Seeking Alpha analysts are bullish about SilverCrest Metals Inc. I am not (although I like the company).
• In my opinion, production figures reported by SilverCrest Metals in Q1 2023 were below expectations.
• What is more, using the figures published in the latest economic study for Las Chispas, it looks that Silvercrest shares are overvalued today.
• Hence, my recommendation: avoid SilverCrest Metals Inc. stock.

Introduction

A few days ago I published an article on Fresnillo plc ( FNLPF ), one of the world’s largest silver miners. In my opinion, Fresnillo plc shares present an interesting buying opportunity to play during an incoming silver bull (if there is one).

Today I would like to discuss SilverCrest Metals Inc. ( SILV ), a silver mining company that, according to many Seeking Alpha analysts, is one of the best buying opportunities in the sector:

As you can see, this year there were four articles on SilverCrest, each of them published by a different analyst. All the authors recommended buying the stock. However, in my opinion, although I like the company, the stock should be avoided.

Miners with exposure to silver prices

Before I provide you with my arguments, please, look at the updated chart listing a number of mining companies with relevant exposure to silver:

Chart 1

Note: Unfortunately, there is no definite standard illustrating in what way a company is exposed to silver prices. As a result, to calculate this measure I had to use a few methods, e.g. production figures, sales figures or revenue. Fortunately, no matter what method is applied, the final figure (i.e. exposure to silver prices) is quite precise.

As you see, the first position belongs to Impact Silver Corp. ( ISVLF ), a tiny miner operating in Mexico (exposure to silver of 93%).

The second miner with high exposure (73.4%) is MAG Silver Corp. ( MAG ). By the way, MAG, together with Fresnillo plc, owns the Juanicipio mine in Mexico – I discussed this property in my article on Fresnillo plc.

And SilverCrest, with exposure of 52.7%, is among the top five silver miners.

About SilverCrest

Basic facts

SilverCrest operates the Las Chispas underground mine located in Sonora, Mexico. According to the latest mineral reserve estimate, Las Chispas contains 3.35 million tons of ore grading 461 grams of silver per ton of ore and 4.81 g/t for gold. In total, it holds 49.7 million ounces of silver and 518.1 thousand ounces of gold:

Table 1

According to the company, mineralization is hosted in hydrothermal veins, stockwork, and breccia which means that there is a good chance for replenishing reserves above the current 8-year life of the mine (at least when hydrothermal veins are concerned).

Summarizing – Las Chispas is a long-life, high grade silver / gold deposit operated by the company run by a well-experienced mining executive, Eric Fier. By the way, Eric Fier holds approximately 1 million shares of SilverCrest (0.7% of all the shares outstanding).

Mining operations

The Las Chispas mine started its commercial operations in 2H 2022. And the first full income and cash flow statements were released for 1Q 2023.

For example, last quarter the company produced 1.29 million ounces of silver and 13.3 thousand ounces of gold (or 2.45 million ounces of silver equivalent):

Chart 2

Unfortunately, the company did not publish production guidance for 2023.

Fortunately, we have a good source of information to get some perspective – the latest economic study. For example, according to this study, over the first 6 years of full operations (2023 – 2028) SilverCrest should produce approximately 75 thousand ounces of gold and 5.9 – 7.4 million ounces of silver a year:

Table 2

Risk factors

And here we have the biggest risk factors because the results disclosed in 1Q 23 were, in my opinion, below expectations:

Table 3

My comment:

• Silver grade was 419 g/t while the reserve head grade is 461 g/t. What is more, during the first year of full operations the silver grade should stand at more than 500 g/t (look at Table 2, row “Mill feed grade”)
• The projected annual throughput (i.e. the amount of ore milled at the company’s processing facility) is appx 450 thousand tons. In 1Q 2023 the company milled 104.4 thousand (i.e. 418 thousand tons a year), more or less with expectations
• Silver recoveries were a bit below expectations (91.9% vs. the projected recovery of 92.8% - 94.3%)
• As a result, due to weaker silver grade and recoveries, in 1Q 23 SilverCrest produced 1.29 million ounces of silver or 5.2 million ounces extrapolated to a full year (below expectations).

In addition, according to the economic study, over the life of the mine the operating cost should stand at $118.49 per ton of ore milled:

Table 4

Last quarter the actual cost was $169.1 per ton, well above estimates.

However, as far as costs of production are concerned, I would not bother too much. Why? Because the company is still at its initial stage of operations so…it is learning its business.

Value

Using a price of $19 per ounce of silver and $1,500 per ounce of gold, an after-tax net present value of Las Chispas is $486.3M (look at the green cell in Table 5).

However, taking more accurate prices of gold and silver, i.e. today’s market prices ($1,950 for gold and $24.7 for silver), the project’s value is $740.1M (red cell below):

Table 5

How this value translates into the value of SilverCrest shares? Here are my calculations (I am using the balance sheet figures as at March 31, 2023):

Table 6

Notes:

• To calculate an after-tax net present value of Las Chispas, the company applies a discount factor of 5%. In my opinion, this factor should be higher, e.g. 7% - 8% (due to Mexico, which is a medium or even high-risk jurisdiction). As a result, the final value of Las Chispas of $740M is, most probably, overestimated
• Apart from mining operations, SilverCrest incurs general and administrative expenses. I assume the company will be spending approx. $10M a year; the present value of these costs is negative $65M

As you see, one share of SilverCrest is worth $4.73 . Today (May 30) these shares were trading at $6.35 a share which means that they are strongly overvalued .

Summary

I like SilverCrest Metals Inc. The company runs a high-grade silver / gold mine in Mexico called Las Chispas. According to the latest economic study, Las Chispas should operate for 8 years but I am pretty sure the life of the mine will be extended at some point.

However, despite my positive view on SilverCrest Metals Inc., the hard figures make me recommend avoiding the stock:

• In my opinion, last quarter the mine performed below expectations. For example, the average silver grade of 419 g/t was well below the projected one (500 g/t)
• Assuming that Las Chispas reaches its projected values (e.g. grades, recoveries etc.), the company’s shares are overvalued today

Interestingly, Mr. Market seems to share my opinion on SilverCrest:

As you see, since the beginning of 2020 SilverCrest shares have been trading in line with SIL, a silver miners ETF. In my opinion, it means that the upside potential, seen by SA analysts, is not that obvious for the market. Hence my SilverCrest Metals Inc. recommendation: AVOID .

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