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Silver Bear (CN: SBR) updated its Mangazeisky silver project NI43-101 feasibility study earlier this month, with the highlights a 97% rise in pre-tax IRR to 86.1% and increase in pre-tax NPV (5% discount) from US$79.7 million to $132.6 million. Payback on the sub-$50 million capex is set at 1.3 years.
Gold/Silver Investor Hub: Silver has obviously dipped but still in the US$17-24/oz range that seems to be a consensus near-term expectation. You’ve used $19.76/oz average over seven years, but there is a $17.5-30 million per annum margin in there at $11/oz total cash costs. Is that AISC? How cash generative is Mangazeisky versus peers at current prices?
Graham Hill: Mangazeisky has cash costs significantly below the average producer predominantly because the grade is so high and the tonnage is so low; the costs of mining and handling only 110,000 tonnes per annum – circa 300 tonnes per day – and the low cost of the project itself – circa US$50 million. We are struggling to see if there are any cheaper producers of silver as our [cash] costs are now $7.49 per ounce following the update on the feasibility announced earlier this month. We do not have an AISC number as yet, but it won’t be much above the cash costs in view of the very low non-mining costs for SBR. Fresnillo, regarded as the lowest cost producer in the world, claim AISC for silver production at US$11.10 per once Ag to give some context.
Gold/Silver Investor Hub: How much scope is there to reduce the TCC/AISC – what is it dependent on?
Graham Hill: The main cost drivers are diesel, for power generation and mining fleet, cyanide –metallurgy requires quite high consumption and we have used a current, high price – and of course labour. We have continuously stressed needs to reduce consumptions and have some plans including using wind turbines. We will be extremely careful about negotiating all of our supply contracts and buying in bulk, once a year, does give us some advantages in this regard. Labour will be kept to a minimum. Increasing the LOM through the addition of high grade, low strip deposits, dependent on proximity to the plant, and grade [could deliver lower-cost ounces into the future].
"Even if you were to discount all of the other deposits in our portfolio to zero ... we are trading at least at 75% discount on Vertikalny alone.
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Gold/Silver Investor Hub: Given the free-float situation with SBR shares, jurisdiction risk, and other factors, how much upside are you seeing in the equity price, and I suppose how much needs to be realised to get a satisfactory financing structure in place?
Graham Hill: SBR has an NPV of US$132 million on the Vertikalny deposit within the Mangazeisky licence. We are currently valued at US$33 million, and most Russian precious metal producers trade at 0.5-to-0.7-times NPV. Even if you were to discount all of the other deposits in our portfolio to zero, some of which have NI 43-101 resources already attributed to them, we are trading at least at 75% discount on Vertikalny alone. In addition, the project is fully funded through shareholder loans and we will be continuously looking at possibilities for re-financing those when and where better terms are available, which we expect to come to us in the near future, especially as we move to production. We believe that investors will not only be interested in SBR because of the undemanding value, but also the potential upside beyond just the Vertikalny deposit.
Gold/Silver Investor Hub: How much capital spent to date on long-lead/other items, and does that offset the stated project capex?
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Graham Hill: We have committed $33.4 million to date and all major equipment was delivered earlier this year with the balance being delivered now. The project is well advanced with ball mill installation now taking place inside the completed plant building. We certainly have a very good handle on the capex and we feel very comfortable of completing within our budget.
Gold/Silver Investor Hub: What order of exploration upside are you seeing in this project/district, in the near/medium term, and where are the priority targets before/post development, and why?
Graham Hill: We are continuing to carry out exploration around our first project development with a view to being able to transport ore from other deposits to the plant we are currently building. The first of these, Mangazeisky North, we are currently undertaking a PEA (preliminary economic assessment) with a view to that deposit being available to switch the openpit mining equipment onto after we exhaust the openpit at Vertikalny. We are simultaneously developing additional deposits and intend to announce a further two maiden Resource estimates in the very near future. In addition there are numerous known deposits outside our current exploration area which may be available. We have opportunities to increase our resources by a factor of three-to-four times in the next few years, just in our area of Russia. Of course we will not neglect good opportunities elsewhere too.
Gold/Silver Investor Hub: Where is the company’s corporate development focus – geographically, and commodity-wise – and why? Or, put another way, where else are you seeing potential value in exploration/development, comparable to what you’re seeing in Russia?
Graham Hill: We see the growth of the business being fundamentally within the licence areas we already have, with the potential to produce over 5 million ounces Ag per annum in the medium term. With the cash flow from this production we would obviously be interested in some of the other known deposits in the Sakha region – we definitely see our core strengths being Russia and precious metals. Regarding other commodities, silver will remain our focus, though if there are some synergies with developing gold assets [we will look at them. The region has some very decent deposits. Some of these we are already looking at and decide on a case by case basis as to whether any of them will add value to our shareholders.
Gold/Silver Investor Hub: Given the Russia/silver focus, what do you see as the real keys to building the type of premium-value producer/developer we’ve seen re-emerge of late, with a Mexico/LatAm focus?
Graham Hill: The absolute driver of this business is to deliver returns to our shareholders – we are not interested in building the world’s largest silver producer – we are more focused on building one of the best returns on investment in the industry. We are blessed with a combination of ultra-high grade, very low capex, and a number of exciting targets and we see that growing the business beyond the assets we already have will only happen if there is a very strong case for delivering further value.
