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Bear Creek Mining
Introduction
Bear Creek Mining took the silver space by storm a few years ago when it came up with the Corani project - a massive 300 Million+ ounce silver deposit in Peru. Subscribers to the Morgan Report were introduced to this company in the early days and had a chance to benefit from the subsequent run of BCM shares to $11. Now that the story is even more mature and compelling, we feel it is a good time to put the company on our recommended list.
The company is led by a proven management team headed by Catherine McLeod-Seltzer, co-founder of Arequipa Resources and Peru Copper, both of which were based in Peru and in due course acquired by majors for a total of approximately $2 Billion. Elsewhere, Catherine was involved with Francisco Gold and Miramar Mining which were also gobbled up by majors. The Board of Directors includes Andrew Swarthout of Southern Peru Copper and Kennecott Copper fame, as well as Nolan Watson, the former CFO of Silver Wheaton.
If you are not familiar with at least some of these names, we urge you to do some research, as management is the most important factor when valuing junior mining companies. To our thinking this management team has a successful track record of making money for their shareholders - so we'll put a check mark for this section.
Projects
The company's flagship Corani project had a pre-feasibility study completed on it in September of 2009. According to the study, Corani has 258 Million ounces of silver in proven and probable category with an additional 100 Million+ ounces of silver in measured & indicated and inferred categories.
On top of that there is 3.4 Billion pounds of lead and zinc in reserves.
The study shows that the project can produce 10 Million oz of silver in the first 6 years and 6.4 m/oz over 27 year mine life with a potential cash cost of US$1.06 in the first 10 years and US$2.87/oz silver for the life-of-mine net of base metal credits. At current metal prices (US$16.0/oz silver) the economics of this project are very robust. The estimated capex of US$339 million makes this project very attractive to potential investors due to 2 year payback at current metal prices.
Admittedly, it would be ideal if the grade (2 oz/t) was higher but were that the case, this project would have been snapped up and taken off the market long ago or trading at much higher valuations. Therein lies the opportunity: as silver investors and analysts we maintain that the bull market in silver is yet to be unleashed and at some point during this cycle we should see new all-time highs in silver price. Projects such as Corani, while economic at current prices, should yield spectacular returns due to their size and extreme leverage to the silver price. Similarly, we expect substantially higher base metal prices in the second half of this decade that would further improve the bottom line (see graph below). The Bankable Feasibility Study for Corani is scheduled for completion in Q1, 2011 with a plan to take it to production in 2012.
Bear Creek's immediate focus is on the Santa Ana Project , also in Peru, which is a very interesting proposition in its own right. This project is currently undergoing in-fill drilling and a feasibility study which should be completed in Q2, 2010. The project has roughly 100 Million oz of silver in M&I resources, plus 40 Million oz in Inferred category. Based on our discussions with the company the plan for Santa Ana is to reach commercial production by the end of next year (2011).
Santa Ana is further ahead with metallurgical work completed indicating 70% recoveries from a conventional heap-leach operation producing silver doré bars on-site. The Preliminary Economic Assessment is based on US$51 Million capex to reach annual production of 5 Million ounces of silver during a 12 year mine life with a cash cost of US$7.50/oz.
In October, 2009 Bear Creek appointed Marc Leduc COO. Mr. Leduc was Chief Engineer in charge of building the Pierina gold mine for Barrick. In 2008 Pierina produced 400,000 ounces of gold which makes it a major operation. Another wrinkle worth mentioning is that the Pierina Mine is at 4,100 meters elevation above sea level. This type of experience makes him well-equipped for the job of building mines at both Santa Ana and Corani.
Having traveled in Peru and specifically in the vicinity of the Corani project this writer was initially concerned about the altitude which is perhaps in the 4,500 meter range. Since then we coferred with industry professionals and observed Barrick's decision to build a mine at Pascua-Lama that gets up to elevation of 5,200 meters and those concerns have been alleviated.
Blue Sky
While advancing both Corani and Santa Ana towards production, Bear Creek is still on the hunt for more projects which could potentially result in more discoveries. Two weeks ago the company acquired the Campanario gold project in Peru and is planning to drill two of its gold projects. We will discuss these and other developments in future updates. Although, we are not giving the blue sky potential much ink in this report, we have reasonable expectations for more positive news. This group has done it before and we support their efforts to continue with early-stage exploration.
Summary
Bear Creek has 70 Million shares outstanding of which 25% is owned collectively by insiders 6%, Rio Tinto 4% and Silver Wheaton 15%. As of close of day, January 27, 2010 it has a C$250 MM market cap of which $C43 MM is cash in the bank.
It has scheduled payments to Rio Tinto totaling $45 MM, with the final payment due in June, 2012. We are very comfortable with the management's ability to finance the projects are outstanding commitments going forward. We like this flow-chart extracted from the company's presentation. Aside from pointing to $50 MM of annual free cash flow based on $17.50 silver starting 2012, it tells us that management has a detailed plan with set milestones along the way for Santa Ana and Corani. We'll be the first to hold their feet to the fire should they deviate from this plan without a reasonable explanation.
In conclusion, we think Bear Creek is very well positioned to benefit from executing this plan by moving its two advanced projects to production as well as rising silver price. We happen to believe that the company or Santa Ana and Corani projects together or separately make an excellent acquisition target for a larger silver producer; or, as the price of silver increases, any other metal producer. Short of that, by 2013 the company plans to be producing 15 Million ounces of silver and we are optimistic they can achieve it with less than 100 Million shares issued. A 15 Million ounce silver producer today would be valued at about $2 Billion market cap. Assuming they have 100 Million shares out by 2013, you can arrive at a hypothetical price per share target. To keep our feet on the ground, we'd like to cut that target in half. There is a lot of work the company has to do between now and then, but if you can follow the math, there is plenty of upside to be had for Bear Creek shareholders in the next 3-4 years.
February 10 , 2010
Sean Rakhimov
Editor, http://SilverStrategies.com
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Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, entities in which he has an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author. © Copyright 2010 by Sean Rakhimov.
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