Kameleon007
SilverCrest Metals: A Compelling Buy At Current Valuations
This is new coverage on the silver miner SilverCrest Metals Inc. (NYSE:SILV), a silver mining company that has recently come under scrutiny due to the release of its updated 2023 technical report on the Las Chispas mine in Mexico. The report indicates a decrease in reserves, often a red flag in our industry. Additionally, the company reported increased operating costs, further unsettling investors.
Historically, I've long considered SilverCrest to be overvalued, particularly when comparing its enterprise value to the net present value of the Las Chispas mine, based on technical reports released by the company. That's largely why I've rated the stock as a HOLD over the past 5 years.
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However, following a 17.25% year-to-date drop in stock price, the valuation has become much more compelling.
The market cap has tumbled to around $700 million, a steep decline from its 2021 peak of $1.5 billion. The Las Chispas mine also remains a very strong asset, and it will arguably be one of the most profitable silver mines in the world going forward.
Given these changes, I'm revising SilverCrest's status to a BUY, and here's why.
SilverCrest's Feasibility Study: Still a Strong Asset
SilverCrest Metals
Despite the concerning aspects of the updated report, Las Chispas remains a highly attractive asset. The mine is projected to produce 10 million silver-equivalent ounces annually, split between 55% silver and 45% gold.
The extraordinarily high mill grades of 716 g/t silver equivalent contribute to its low cash costs. The company estimates life-of-mine all-in sustaining costs (AISC) to be just below $12 per ounce, making the operation highly profitable even at current silver prices.
Yes, the new AISC is a bit higher than previously projected, but let's not forget the inflationary pressures impacting the entire mining sector (and the entire world, for that matter).
For context, peer company Endeavour Silver (EXK) estimates its AISC to be between $19-$20 per ounce this year, citing inflation as a significant challenge. Gatos Silver (GATO), another Mexico-based silver miner, projects costs of $15.50 - $17.50 per ounce.
SilverCrest, despite its cost increases, remains competitively priced in comparison to its Mexican peers (sub-$1 billion silver miners), and that's even the case when comparing it to larger silver miners like Hecla (HL) and Coeur (CDE).
SilverCrest's Financial Strength, Future Prospects
SilverCrest Metals
One of the standout aspects of SilverCrest is its robust profitability prospects.
The company expects an average annual free cash flow of $84 million over the first seven years of the mine's life.
Even under a bearish scenario with gold at $1,700 per ounce and silver at $22 per ounce, the company would still generate close to $80 million in annual free cash flow ("FCF") during that period. That means it may generate free cash flow of over $800 million over the life of mine, more than its entire current market cap!
What's more, SilverCrest is in a very secure financial position, having recently paid off $90 million in debt. With no debt outstanding, the company can focus on generating strong free cash flow, which could be used for further exploration, dividends, share buybacks, or even strategic mergers and acquisitions.
The Bottom Line: Time to Buy SilverCrest
To sum up my analysis, despite some challenges reflected in its updated feasibility study, SilverCrest stands as a strong contender among smaller silver mining companies.
The worst is likely behind SilverCrest. While there may be other cheaper options in the gold and silver mining sector on an enterprise value to NPV basis, SilverCrest offers a relatively low-risk investment with the potential for market-beating returns.
Therefore, I've updated SilverCrest's status to BUY on my tracking spreadsheet. I'm optimistic that the company is well-positioned to regain its 2021 peak valuation ($1.5 billion), which implies potential upside of 75-100% from current levels. Of course, a new bull market in silver wouldn't hurt, either, and could lead to much better returns.
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