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COMPANY OVERVIE W
South American Silver Corp. (“SAC” or the “Company”) is an exploration stage mineral company engaged in the exploration and development of the 100% owned Malku Khota silver-indium project in Bolivia and the Escalones copper-gold project in Chile. The Malku Khota project is a world-class silver-indium deposit expected to commence production in 2014. Exploration activity at the Escalones project, a relatively early-stage property, has been restarted after being temporarily suspended. SAC’s senior management is vastly experienced in the global exploration and mining industry, primarily in South America (Bolivia, Chile, Peru and Argentina).
INVESTMENT R ATIONALE
SAC is an attractive asset play. SAC has a large existing silver resource base with good exploration upside. The Company has indicated silver resources of 144.6 million oz and inferred silver resources of 177.8 million oz, making it one of the largest undeveloped silver resources in the world. The Company also has indicated and inferred indium resource of 845 tonnes and 968 tonnes respectively. In addition to low operating costs of $3.75 per oz (net of byproduct credits) and low initial capital costs ($103.37 million), the ongoing exploration at Malku Khota covers only 25% of the project’s 15 km strike length, providing significant opportunity to expand the resource base.
Stock re-rating on transition from exploration to production. SAC’s current valuation (EV/oz of C$0.09) reflects its low market visibility and relatively recent development of its resource. Though the recent appointment of CEO Greg Johnson and increased investor outreach are positives for the stock, we believe the real value drivers will come from the following two chronologically successive events: 1) the successful transition from a resource definition and Preliminary Economic Assessment (PEA) stage to a feasibility study stage 2) the successful transition to a production decision (expected in 2014) or partners with/sells out to an industry major.
Based on comparable companies and past instances, the transition from resource definition to the feasibility stage can potentially increase valuation anywhere between 5x and 10x, depending on the success and speed of development. The subsequent transition to production or a partnership/sellout agreement with a major mining producer has a similar upside potential. Moreover, the potential
AnALySt Soumik Gosh
MARkET dATA
june 28, 2010 | TARGeT PRICe: C$3.20 | RATInG: SPeCuLATIVe BuY
South American Silver Corp. (TSX: SAC)
I n I t I a l R e p o R t
TICKER SaC.ToFISCaL YEaR dECEmbER
SECToRmETaLS mInInG &
ExpLoRaTIonRECEnT pRICE C$0.62TaRGET pRICE C$3.20maRKET Cap C$37.8m52-WEEK HIGH - LoW C$0.81 - C$0.29 pRICE/EaRnInGS (TTm) n/apRICE/booK (mRQ) 2.5xpRICE/SaLES (TTm) n/aSHaRES oUTSTandInG 61.0mFLoaT 53.3mavG daILY voLUmE (3 moS) 226,952InSIdER oWnERSHIp 12.6%
As of June 25, 2010
REvEnUE (TTm) n/aREv (TTm)pER SHaRE n/aQRTLY REv GRWTH YoY n/aGRoSS pRoFIT (TTm) n/aopERaTInG maRGIn (TTm) n/aEbITda -$1.8mnET InComE (TTm) -$1.8mdILUTEd EpS (TTm) -$0.03QRTLY EpS GRWTH (YoY) n/aCaSH & EQUIv (mRQ) $5.8mCaSH (mRQ) pER SHaRE $0.10ToTaL dEbT/EQUITY 3.4%booK vaLUE pER SHaRE $0.25RoE (TTm) n/aRoa (TTm) n/a
FINANCIAL dATA
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
for this multiplier is particularly great in the case of SAC, since the potential for resource expansion through further drilling is significant. We therefore expect a valuation re-rating as the Company moves closer to the production stage (as per our analysis, EV/oz valuation of a silver producer is approx 2.2x EV/oz of a silver exploration company).
$4 million financing accelerates resource expansion. On June 18, 2010 the Company announced a $4 million “bought deal” private placement that will help accelerate resource expansion for the Malku Khota project. The financing will also enable SAC to resume drilling at Escalones and progress towards resource definition there. Under the terms of the deal, the underwriters take the entire risk of placement on their book. SAC will issue 6.35 million units at $0.63 each. Each unit comprises a common share and a warrant to purchase half of a common share at a strike price of $0.95. The underwriters also have the option to increase the offering by another $2 million at the same price per unit.
Substantially improved investment scenario in Bolivia. The Malku Khota silver-indium deposit is located in Potosi State, a silver mining district in central Bolivia. Three new silver mines—PanAmerican Silver’s San Vicente Mine, Coeur d’Alene’s San Bartolome Mine, and Sumitomo’s San Cristobal mine have came on stream in the last three years from this same region. Under the Evo Morales administration, Bolivia has become one of the fastest growing economies in the Americas, with tightly controlled inflation and a strong trade surplus. Owing to the substantial improvement from the previous administration, Moody’s has upgraded Bolivia’s sovereign rating from B3 to B2 while Fitch and S&P upgraded its ratings from B- to B which is also in line with the EIU’s country’s risk rating of B and positive outlook for the country.
Investment in silver is an effective inflation hedge. We believe the current macroeconomic environment makes the economics of precious metal exploration and mining extremely attractive. Investment in silver is viewed as an effective inflation hedge and a counter trade against the US dollar, which is expected to remain under pressure over the medium to long term due to unprecedented monetary easing and a weak economic recovery. Over the long term, this is expected to lead to higher budget deficits and inflationary pressures, supporting silver’s price.
Valuation. Our discounted cash flow valuation using a 15% discount rate suggests a net present value (NPV) of C$3.95 per share. Applying a price to net asset value (P/NAV) multiple of 0.8x to the discounted cash flows of SAC’s Malku Khota project derives our price target of C$3.20. Our price target does not assign a value to any resource expansion which may come when the Company issues a resource update possibly in 2011. Similarly, we haven’t valued the Escalones project since there not yet a resource definition and PEA. However, we do want to stress the further upside potential of SAC’s valuation once the Company advances its project through the development curve.
At an enterprise value of C$0.09 per oz, SAC trades at a steep discount to peers with similar silver reserve/resource profiles, such as Bear Creek (EV/oz of C$0.73), Minco Silver Corp (EV/oz of C$0.78) and MAG Silver Corp (EV/oz of C$1.45). We believe SAC’s current depressed valuation is due to a combination of low market visibility, a relatively new resource (released in the turbulent 2008 market) and a risk premium associated with SAC’s presence in Bolivia. Additionally, high project execution risk at the Malku Khota project given its early stage of exploration and production likely to start in 2014 at the earliest, are further tempering the stock. With improvement in Bolivia’s investment environment and ongoing resource expansion by the Company, we view investment in SAC at current valuations as an opportunity to build exposure to lucrative, early stage silver assets.
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
INVESTMENT HIGHLIGHTS
SAC is an attractive takeover candidate. Given the attractiveness of the precious metals space, exploration companies with good precious metals resource profiles are attractive takeover targets. The recently announced acquisition from Goldcorp of a similar size project by Tahoe Resources at an EV/oz of US$1.51 underscores this trend. The deposit is at an earlier stage compared to SAC’s Malku Khota and has no economic assessment to its credit yet. Being located in the emerging market country of Guatemala, it has a similar risk profile compared to Bolivia. This transaction gives a sense of the upside potential to shareholder value for early-stage precious metals companies, such as SAC. Assessing this transaction, we estimate a takeover valuation of C$3.30 per share, which is 5.3x the recent stock price (C$0.62).
Potential for resource expansion is significant. SAC’s current focus is on increasing drilling activity at the site and significantly expanding its resource base. The Company expects to provide an expanded resource estimate by late summer or early fall, following which it will undertake a preliminary economic assessment (PEA) by the end of 2010. SAC wants to continue resource expansion well into 2011 and file a pre-feasibility study by the end of that year, following which it will take the subsequent steps toward production. Given that current resource estimates are based on only 25% of Malku Khota’s 15 Km strike length, we see substantial upside to resource potential from here.
Malku Khota’s mining economics are very attractive. The Malku Khota project has indicated resources of 144.6 million oz and inferred resources of 177.8 million oz. The leachable resources can be extracted in a very cost efficient manner. Operating costs (net of credits) are estimated at US$3.75 per equivalent silver oz and initial capital costs at $103.37 million, resulting in a payback period of 1.4 years. Infrastructure along the site also plays a major role. The site is accessible by road, has a power source nearby and moderately warm climate.
Resumption of drilling at Escalones to be another positive for the stock. SAC is looking at its Escalones copper-gold project in Chile with renewed interest since Greg Johnson joined the Company. The Escalones deposit is located in a world-class copper district, and has a similar geological setting compared to El Tiente, world’s largest underground copper mine, which is located just 35 km east of the deposit. The property has access to road and water, and has a gas pipeline running across it. With the Company’s recent equity raise, SAC is set to resume drilling activities on the project and is targeting a resource definition by early 2011. This positive development will allow the Company to increase and diversify its asset base.
Strong management team. SAC has a strong management team lead by Greg Johnson, Company’s President and CEO. Greg Johnson is a geologist with over twenty years of experience in the mining industry. His prior experience at Nova Gold and Placer Dome gives SAC necessary expertise to drive the transition from resource definition through to the feasibility study stage. As one of the co-founders of NovaGold, Mr. Johnson was part of the team that took NovaGold’s market capitalization from $10 million to nearly $2 billion over a period of 12 years, through resource expansion and advancing its projects up the development curve through feasibility and toward production. He also played a key role in the multi-million–ounce Donlin Creek discovery, one of the largest gold deposits in the world. The SAC management team has extensive exploration experience in South America and is well supported by Ralph Fitch (Executive Chairman & Director). Ralph Fitch has over forty years of geologist experience in international exploration management and field work.
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Silver is an effective inflation hedge. Investment in SAC provides exposure to silver with an embedded indium option. A weak global economic outlook coupled with long term inflationary concerns has made precious metals like silver and gold an extremely attractive asset class. Investment in silver is viewed as an effective inflation hedge and a contra trade against the U.S. dollar. The general expectation is that aggressive monetary easing by major central banks and heavy deficit spending by the U.S. and other major economies will lead to higher inflation and a weakened U.S. dollar over the long term.
INVESTMENT RISkS
Despite improved outlook, Bolivia’s geopolitical risk remains considerable. Presence in Bolivia increases SAC’s geopolitical risk due to the possibility of anti-industry policy decisions, including the imposition of higher taxes on mining companies. These concerns are hightened due to recent decisions by the government to repurchase formerly state-owned businesses such as utilities. However, we do note the improvement in the country’s investment outlook over the last few years under the Morales administration. On many measures, from dramatically reduced inflation rates to double digit trade surpluses and robust internal growth, Bolivia’s recent economic performance is the best it has been in over 30 years. Along with easing political tensions and healthy accumulation of foreign exchange reserves, the three main ratings agencies have all upgraded its sovereign ratings in the last year. Bolivia is also preparing to tap the international markets to finance a $32 billion infrastructure build-out plan in the next seven years.
Execution risk due to Company’s early stage of exploration. As per the timeline provided by management, SAC currently expects to release an expanded resource estimate and updated PEA by the end of 2010. We would then anticipate a pre-feasibility study by the end of 2011, followed by a feasibility study and permitting in 2012, which could lead to a production decision by the 2013-14 time frame. This 4-year lead time to production adds to the Company’s execution risk profile. Delays in advancing development projects are quite common, and it often leads to timelines being pushed out. Moreover, increasing environmental regulations have significantly increased production timelines for mining companies. Delays and execution risks can also arise from problems or failures in engaging the local communities. If such execution risks materialize, it can adversely impact investor sentiments and valuation.
Our target price is sensitive to silver prices. Silver prices have been highly volatile in the past. Recent silver prices have traded in the $17-19/oz range, well below their long term highs of $50/oz in 1980. From the onset of the financial crisis, prices have been supported by safe haven demand from investors (mainly through ETFs) though industrial demand has been soft. Historically silver’s volatility has been due to its dual correlation with gold (as a store of value) and base metals (for its industrial use). Though we are bullish about silver price in the long-run, we do note that if silver prices soften over a prolonged time frame, it will dampen SAC’s outlook. Our sensitivity analysis shows that with a $1 decline in silver price from our base case of $15 per oz, SAC’s NPV would decline by 9% to C$3.60 per share.
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As per the timeline provided by the management, SAC currently expects to release an expandedresource estimate and updated PEA by the end of 2010. We would then anticipate a pre feasibility studyby end 2011, followed by a feasibility study and permitting in end 2012, which could lead to aproduction decision by the 2013 14 time frame. This 4 year lead time to production adds to theCompany’s execution risk profile. Delays in advancing development projects are quite common, and itoften leads to timelines being pushed out. Moreover, increasing environmental regulations hassignificantly increased production timelines for mining companies. Delays and execution risks can alsoarise from problems or failures in engaging the local communities. If such execution risks materialize, itcan adversely impact investor sentiments and valuation.
Our target price is sensitive to silver prices
Silver prices have been highly volatile in the past. Recent silver prices have traded in the $17 19/ozrange, well below their long term highs of $50/oz in 1980. From the onset of the financial crisis, priceshave been supported by safe haven demand from investors (mainly through ETFs) though industrialdemand has been soft. Historically silver’s volatility has been due to its dual correlation with gold (as astore of value) and base metals (for its industrial use). Though we are bullish about silver price in thelong run, we do note that if silver prices soften over a prolonged time frame, it will dampen SAC’soutlook.
Our sensitivity analysis shows that with a $1 decline in silver price from our base case of $15 per oz,SAC’s NPV would decline by 9% to C$3.60 per share. However, it is still well above the current price.
Sensitivity of NPV to Silver Prices
Silver Price NPV per share % decline
$15 per ounce C$3.95
$14 per ounce C$3.60 9%
$13 per ounce C$3.25 18%
$12 per ounce C$2.90 27%
Source: Redchip estimates
Foreign Currency risk
Majority of SAC’s working capital is held in US dollars, with only modest exposure to the Boliviancurrency and Canadian Dollar. Once production commences, fluctuations in the exchange rate betweenthe US Dollar and Bolivian Boliviano could have a more material effect on SAC’s results of operations,though the Company will hedge its currency risks in all likelihood.
Financial Snapshot
Company financials FY08 actual FY09 actual FY10 Company FY10 RedChip
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Foreign Currency risk. A majority of SAC’s working capital is held in US dollars, with only modest exposure to the Bolivian currency and Canadian Dollar. Once production commences, fluctuations in the exchange rate between the US Dollar and Bolivian Boliviano could have a more material effect on SAC’s results of operations, though the Company will in all likelihood hedge its currency risks.
FINANCIAL SNAPSHOT
• The initial capital cost of $124.2 million will be incurred over a period of six years starting from 2011 to 2016.
• The initial spending will be financed by approximately 80% bank funding and the balance from fresh equity and the existing cash balance.
• SAC intends to buy the net smelter royalty (NSR) for $500,000 just prior to production.
VALuATION ASSuMPTIONS
Discount Rate. At 15%, our discount rate is higher than the 7% rate we normally use for comparable companies with assets in North America. The higher discount rate is primarily to account for Bolivia’s high geopolitical risk profile.
Capital expenditure and other outflows in the coming years. Under our base case of 35,000 tons per day heap leach operation, the initial capital cost of $124.2 million will be incurred over a period of six years starting at construction. The initial capital cost under our base case is higher than the $103.4 million estimated in the 2009 Preliminary Economic Assessment dut to an estimated higher throughput (35,000 vs. 20,000). Additionally the Company expects to incur $5-15 million annually over the next couple of years for drilling, and another $15-20 million to complete the feasibility study. Silver Price. We have used a long-term average silver price of $15 per oz in our base case scenario. Though the price assumption is lower compared to the 2010 YTD average silver of approx $17 per oz and current price of approx $18 per oz, we note that average price has ranged between $7 per oz and $15 per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of the macroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver Market Overview’ section.
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long run, we do note that if silver prices soften over a prolonged time frame, it will dampen SAC’soutlook.
Our sensitivity analysis shows that with a $1 decline in silver price from our base case of $15 per oz,SAC’s NPV would decline by 10% to C$3.7 per share. However, it is still well above the current price.
Sensitivity of NPV to Silver Prices
Silver Price NPV per share % decline
$15 per ounce C$2.59
$14 per ounce C$2.32 10%
$13 per ounce C$2.06 11%
$12 per ounce C$1.79 13%
Source: Redchip estimates
Foreign Currency risk
Majority of SAC’s working capital is held in US dollars, with only modest exposure to the Boliviancurrency and Canadian Dollar. Once production commences, fluctuations in the exchange rate betweenthe US Dollar and Bolivian Boliviano could have a more material effect on SAC’s results of operations,though the Company will in all likelihood hedge its currency risks.
Financial Snapshot
Company financials FY08 actual FY09 actual FY10 CompanyGuidance*
FY10 RedChipEstimate*
Revenue ($ million) N.A. N.A. N.A. N.A.
Operating Income ($million)
(3.1) (1.9) N.A. N.A.
Operating Profitmargin
N.A. N.A. N.A. N.A.
Net Profit ($ million) (3.1) (1.8) N.A. N.A.
Net margin N.A. N.A. N.A. N.A.
*SAC is expected to start production in 2012 2014.
The initial capital cost of $103.37 million will be incurred over a period of six years starting from2011 to 2016.
After the completion of feasibility, the capital spending will be in the range of $100 200 million.The initial spending will be financed by approximately 80% bank funding and the balance fromfresh equity and the existing cash balance.
SAC intends to buy the net smelter royalty (NSR) for $500,000 just prior to production.
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Capacity utilization. Our NPV calculation is based on the process capacity of 35,000 tpd. In order to optimize the value of the project, SAC will most likely increase the throughput to close to 50,000tpd during the pre-feasibility/feasibility stage. This can potentially increase average annual silver production to 12.5 - 13 million oz from the current estimate of 9.5 million oz. Our sensitivity analysis below assesses the impact on NPV at varying levels of mining throughput, however in our base case we have used 179.7 million oz as the silver mined over a period of 20 years.
SENSITIVIT Y ANALY SIS - IMPAC T OF SILVER PRICES/dISCOuNT R ATE ON FAIR VALuE
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NPV and price estimate
Tax rate 30.0%
Discount rate 15.0%
After-tax Cash Flows
NPV as on 1 Jan 2011 ($ ‘000) 317,861
NPV – current ($ ‘000) 296,407
Net debt as on 31st March 2010 ($ ‘000)* (7,014)
Expected cash proceeds from warrants/options* 8,945
Equity value 312,366
Diluted SAC shares (in 000)* 81,923
NPV per share in $ 3.81
Exchange rate as on 23 June 2010 1.04
NPV per share in C$ 3.95
P/NPV 0.8x
Price 3.20
CMP (C$) as on 23 June 2010 0.62
Upside / (Downside) 416.0% Source: Redchip estimates.*Proforma for the recently announced $4 million equity financing.
Silver Price: We have used a long term average silver price of $15 per oz in our base case scenario.Though the price assumption is lower compared to the 2010 YTD average silver of approx $17 per oz andcurrent price of approx $18 per oz, we note that average price has ranged between $7 per oz and $15per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of themacroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver MarketOverview’ section.
Capacity utilization: Our NPV calculation is based on the process capacity of 35,000 tpd. In order tooptimize the value of the project, SAC will likely increase the throughput to close to 50,000tpd duringthe pre feasibility/feasibility stage, with a life span of around 20 years. This can potentially increaseaverage annual silver production to 12.5 – 13 million oz from the current estimate of 9.5 million oz. Wehave run sensitivity analysis to assess the impact on NPV at varying levels of mining throughput. In ourbase case, however, we have used 179.7 million oz as the silver mined over a period of 20 years.
Scenarios Production t/d NPV (C$ per share)
MOz silver produced
Additional Capex*
Base Case 35,000
3.95 179.7
25%-
Best Case 50,000
6.08 201.2
30%
Worst Case 25,000
2.75 241.4
10%
Source: Redchip estimates.*From initial PEA estimates,
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Silver Price: We have used a long term average silver price of $15 per oz in our base case scenario.Though the price assumption is lower compared to the 2010 YTD average silver of approx $17 per oz andcurrent price of approx $18 per oz, we note that average price has ranged between $7 per oz and $15per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of themacroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver MarketOverview’ section.
Capacity utilization: Our NPV calculation is based on the process capacity of 20,000 tpd used in the PEA.In order to optimize the value of the project, SAC will most likely consider increasing the throughputduring the pre feasibility/feasibility stage. This can potentially double average annual silver productionfrom the current estimate of 6.4 million oz and shorten the life span to around 20 years. As such, capitalspending at the time of construction may be in the range of $100 200 million. We have run sensitivityanalysis to assess the impact on NPV, in case the Company is able to operate at higher capacity levels(factoring in the requirements of higher capital expenditure). In our base case, however, we have used160.9 million oz as the silver mined over a period of 36 years.
Scenarios Production tpd NPV
(C$ per share)
M oz silver produced
Additional Capex*
Base Case 35,000 3.95 179.7 25% -
Best Case 50,000 6.08 201.2 30%
Worst Case 25,000 2.75 241.4 10%Source: RedChip estimates*From initial PEA estimates
Sensitivity Analysis
Impact of silver prices/Discount rate on fair value (NPV per share)
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Sensitivity Analysis
Impact of silver prices/Discount rate on fair value (NPV per share)
3.9 12.00 12.50 13.00 13.50 14.00 14.50 15.00 15.50 16.00 16.50 17.00 17.50 18.00 9.0% 5.08 5.38 5.67 5.96 6.25 6.55 6.84 7.13 7.42 7.72 8.01 8.30 8.59 9.5% 4.84 5.12 5.40 5.68 5.96 6.24 6.51 6.79 7.07 7.35 7.63 7.91 8.19
10.0% 4.61 4.88 5.14 5.41 5.68 5.94 6.21 6.48 6.74 7.01 7.28 7.54 7.81 10.5% 4.39 4.65 4.90 5.16 5.41 5.67 5.92 6.18 6.43 6.69 6.94 7.20 7.45 11.0% 4.18 4.43 4.67 4.92 5.16 5.41 5.65 5.90 6.14 6.38 6.63 6.87 7.12 11.5% 3.99 4.22 4.46 4.69 4.93 5.16 5.39 5.63 5.86 6.10 6.33 6.56 6.80 12.0% 3.81 4.03 4.26 4.48 4.70 4.93 5.15 5.38 5.60 5.82 6.05 6.27 6.50 12.5% 3.63 3.85 4.06 4.28 4.49 4.71 4.92 5.14 5.35 5.57 5.78 6.00 6.21 13.0% 3.47 3.68 3.88 4.09 4.29 4.50 4.71 4.91 5.12 5.33 5.53 5.74 5.94 13.5% 3.31 3.51 3.71 3.91 4.11 4.30 4.50 4.70 4.90 5.10 5.29 5.49 5.69 14.0% 3.17 3.36 3.55 3.74 3.93 4.12 4.31 4.50 4.69 4.88 5.07 5.26 5.45 14.5% 3.03 3.21 3.39 3.58 3.76 3.94 4.12 4.31 4.49 4.67 4.85 5.04 5.22 15.0% 2.90 3.07 3.25 3.42 3.60 3.77 3.95 4.12 4.30 4.48 4.65 4.83 5.00 15.5% 2.77 2.94 3.11 3.28 3.45 3.62 3.78 3.95 4.12 4.29 4.46 4.63 4.80 16.0% 2.65 2.82 2.98 3.14 3.30 3.47 3.63 3.79 3.95 4.11 4.28 4.44 4.60 16.5% 2.54 2.70 2.85 3.01 3.17 3.32 3.48 3.63 3.79 3.95 4.10 4.26 4.42 17.0% 2.43 2.58 2.74 2.89 3.04 3.19 3.34 3.49 3.64 3.79 3.94 4.09 4.24 17.5% 2.33 2.48 2.62 2.77 2.91 3.06 3.20 3.35 3.49 3.64 3.78 3.93 4.07 18.0% 2.24 2.38 2.52 2.66 2.80 2.94 3.07 3.21 3.35 3.49 3.63 3.77 3.91 18.5% 2.15 2.28 2.41 2.55 2.68 2.82 2.95 3.09 3.22 3.36 3.49 3.63 3.76 19.0% 2.06 2.19 2.32 2.45 2.58 2.71 2.84 2.97 3.10 3.23 3.36 3.49 3.62 19.5% 1.98 2.10 2.23 2.35 2.48 2.60 2.73 2.85 2.98 3.10 3.23 3.35 3.48 20.0% 1.90 2.02 2.14 2.26 2.38 2.50 2.62 2.74 2.86 2.99 3.11 3.23 3.35 20.5% 1.82 1.94 2.06 2.17 2.29 2.41 2.52 2.64 2.76 2.87 2.99 3.11 3.22 21.0% 1.75 1.86 1.98 2.09 2.20 2.31 2.43 2.54 2.65 2.77 2.88 2.99 3.10
Source: Redchip estimates
SAC’s fair value (NAV per share) is sensitive to silver price per oz and the discount rate assigned to thefuture cash flows from the project. A $1 increase or decrease in silver price estimate keeping thediscount rate constant at 15% increases or decreases the NPV per share by 8.8%.
Relative Valuations
Company Name EV C$ (million) Market Cap C$ (million) P/B Silver M Oz* EV/OzMinco Silver Corp 122.76 129.17 4.7x 156.79 0.78Silvercrest Mines Inc 61.13 63.38 7.8x 62.45 0.98Orko Silver Corp 169.99 171.79 31.0x 140.70 1.21Alexco Resource Corp 145.31 175.52 2.0x 217.10 0.67ECU SilverMining Inc 211.20 193.59 3.1x 431.20 0.49Bear CreekMining Corp 267.06 321.48 4.1x 365.40 0.73Tahoe Resources Inc. 409.77 729.87 NA 334.45 1.23MAGSilver Corp 348.71 372.97 4.2x 240.04 1.45Median 4.2x 0.88
South American Silver 28.02 37.83 2.71 322.38 0.09Source: Bloomberg and respective company filings, press releases.Note: Values as on 23rdh June 2010.*Reported silver resources.
The list of peers comprises companies with early stage silver assets in Central and South Americannations. The resource profile and geopolitical risk profile are similar to that of SAC. Similar to SAC, thepeers all have debt free balance sheets.
DiscountRate
%
Silver Price $/oz
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
SAC’s fair value (NAV per share) is sensitive to silver price per oz and the discount rate assigned to the future cash flows from the project. A $1 increase or decrease in silver price estimate keeping the discount rate constant at 15% increases or decreases the NPV per share by about 9%.
REL ATIVE VALuATIONS
The list of peers comprises companies with early stage silver assets in Central and South American nations. The resource profile and geopolitical risk profile are similar to that of SAC. Similar to SAC, the peers all have debt-free balance sheets.
• SAC enterprise value per ounce of silver is less than a fourth of the cheapest comparable in the list, ECU Silver Mining. SAC has a large resource base which is large enough to support a higher market valuation similar to other peers like Minco Silver Corp, MAG Silver Corp, Bear Creek and Tahoe.
• The peers are in different stages of exploration. However, due to the leachable resource base of SAC, it enjoys low initial capital and operating costs. We therefore believe the market is ascribing a value to SAC’s resource that is nowhere near what can be justified as a fair value based on the ratio of operating costs to the value of metal underground.
• The recent transaction between Tahoe Resources and Goldcorp underscores SAC’s undervaluation. Tahoe recently raised C$348 million in an IPO (the second largest IPO in Canada this year) to buy a Guatemalan silver deposit from Goldcorp, valuing the property at an EV/oz of C$1.51. The property is similar to SAC’s Malku Khota in terms of geological profile, but is in an earlier stage of development, and is located in a similar jurisdiction compared to Bolivia.
• Another good comparable is Bear Creek with 365 million ounces of silver in Peru at a similar stage of advancement and a similar geopolitical risk profile. Bear Creek is trading at an EV/oz of C$0.73. Though Bear Creek has comparatively better leverage to costs as lead and zinc credits will likely result in negative cash costs per ounce on a byproduct basis, we see no reason why SAC should not trade within 25% of that valuation.
8
Sensitivity Analysis
Impact of silver prices/Discount rate on fair value (NPV per share)
3.9 12.00 12.50 13.00 13.50 14.00 14.50 15.00 15.50 16.00 16.50 17.00 17.50 18.00 9.0% 5.08 5.38 5.67 5.96 6.25 6.55 6.84 7.13 7.42 7.72 8.01 8.30 8.59 9.5% 4.84 5.12 5.40 5.68 5.96 6.24 6.51 6.79 7.07 7.35 7.63 7.91 8.19
10.0% 4.61 4.88 5.14 5.41 5.68 5.94 6.21 6.48 6.74 7.01 7.28 7.54 7.81 10.5% 4.39 4.65 4.90 5.16 5.41 5.67 5.92 6.18 6.43 6.69 6.94 7.20 7.45 11.0% 4.18 4.43 4.67 4.92 5.16 5.41 5.65 5.90 6.14 6.38 6.63 6.87 7.12 11.5% 3.99 4.22 4.46 4.69 4.93 5.16 5.39 5.63 5.86 6.10 6.33 6.56 6.80 12.0% 3.81 4.03 4.26 4.48 4.70 4.93 5.15 5.38 5.60 5.82 6.05 6.27 6.50 12.5% 3.63 3.85 4.06 4.28 4.49 4.71 4.92 5.14 5.35 5.57 5.78 6.00 6.21 13.0% 3.47 3.68 3.88 4.09 4.29 4.50 4.71 4.91 5.12 5.33 5.53 5.74 5.94 13.5% 3.31 3.51 3.71 3.91 4.11 4.30 4.50 4.70 4.90 5.10 5.29 5.49 5.69 14.0% 3.17 3.36 3.55 3.74 3.93 4.12 4.31 4.50 4.69 4.88 5.07 5.26 5.45 14.5% 3.03 3.21 3.39 3.58 3.76 3.94 4.12 4.31 4.49 4.67 4.85 5.04 5.22 15.0% 2.90 3.07 3.25 3.42 3.60 3.77 3.95 4.12 4.30 4.48 4.65 4.83 5.00 15.5% 2.77 2.94 3.11 3.28 3.45 3.62 3.78 3.95 4.12 4.29 4.46 4.63 4.80 16.0% 2.65 2.82 2.98 3.14 3.30 3.47 3.63 3.79 3.95 4.11 4.28 4.44 4.60 16.5% 2.54 2.70 2.85 3.01 3.17 3.32 3.48 3.63 3.79 3.95 4.10 4.26 4.42 17.0% 2.43 2.58 2.74 2.89 3.04 3.19 3.34 3.49 3.64 3.79 3.94 4.09 4.24 17.5% 2.33 2.48 2.62 2.77 2.91 3.06 3.20 3.35 3.49 3.64 3.78 3.93 4.07 18.0% 2.24 2.38 2.52 2.66 2.80 2.94 3.07 3.21 3.35 3.49 3.63 3.77 3.91 18.5% 2.15 2.28 2.41 2.55 2.68 2.82 2.95 3.09 3.22 3.36 3.49 3.63 3.76 19.0% 2.06 2.19 2.32 2.45 2.58 2.71 2.84 2.97 3.10 3.23 3.36 3.49 3.62 19.5% 1.98 2.10 2.23 2.35 2.48 2.60 2.73 2.85 2.98 3.10 3.23 3.35 3.48 20.0% 1.90 2.02 2.14 2.26 2.38 2.50 2.62 2.74 2.86 2.99 3.11 3.23 3.35 20.5% 1.82 1.94 2.06 2.17 2.29 2.41 2.52 2.64 2.76 2.87 2.99 3.11 3.22 21.0% 1.75 1.86 1.98 2.09 2.20 2.31 2.43 2.54 2.65 2.77 2.88 2.99 3.10
Source: Redchip estimates
SAC’s fair value (NAV per share) is sensitive to silver price per oz and the discount rate assigned to thefuture cash flows from the project. A $1 increase or decrease in silver price estimate keeping thediscount rate constant at 15% increases or decreases the NPV per share by 8.8%.
Relative Valuations
Company Name EV C$ (million) Market Cap C$ (million) P/B Silver M Oz* EV/OzMinco Silver Corp 122.76 129.17 4.7x 156.79 0.78Silvercrest Mines Inc 61.13 63.38 7.8x 62.45 0.98Orko Silver Corp 169.99 171.79 31.0x 140.70 1.21Alexco Resource Corp 145.31 175.52 2.0x 217.10 0.67ECU SilverMining Inc 211.20 193.59 3.1x 431.20 0.49Bear CreekMining Corp 267.06 321.48 4.1x 365.40 0.73Tahoe Resources Inc. 409.77 729.87 NA 334.45 1.23MAGSilver Corp 348.71 372.97 4.2x 240.04 1.45Median 4.2x 0.88
South American Silver 28.02 37.83 2.71 322.38 0.09Source: Bloomberg and respective company filings, press releases.Note: Values as on 23rdh June 2010.*Reported silver resources.
The list of peers comprises companies with early stage silver assets in Central and South Americannations. The resource profile and geopolitical risk profile are similar to that of SAC. Similar to SAC, thepeers all have debt free balance sheets.
DiscountRate
%
Silver Price $/oz
RedChip Visibility | � | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
• As mentioned earlier, limited market visibility and a high risk premium to its relatively new resource base (released in the turbulent 2008 market) in Bolivia has kept valuations depressed. We expect the stock to trade near its peer group median in the near future once SAC successfully expands its resource base and moves closer to the pre-feasibility stage.
TAkEOVER ANALY SIS
Basis of Valuation. Given its attractive resource base and potential for significant resource expansion, we view SAC as a likely takeover candidate in the next cycle of consolidation in the industry once the financing environment improves. Tahoe’s acquisition of Goldcorp’s Guatemalan silver deposit through an IPO in May 2010, and Fresnillo’s unsuccessful hostile bid for MAG Silver in late 2008 and early 2009 gives us a sense of the latent appetite for development-stage silver assets in risky jurisdictions.
The most recent transaction and a good comparable for estimating a takeover price for SAC is Tahoe Resources Inc. due to the similarity in geological profile and resource size. Tahoe paid an all-in acquisition price of $505 million, or $1.51 per oz of silver resource. We use a higher value of $2.25 per oz to estimate SAC’s takeover price since its resource is at a more advanced stage compared to Tahoe with a PEA already done and pre-feasibility expected in 2011.
The all-in acquisition price, however, does not reflect the operating and capital cost structure of a mineable deposit. Since the cost structure plays a key role for valuation of such assets, we take our analysis one step further, and deduct the present value of operating and capital costs from the all-in acquisition price, as well as the net debt.
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SAC enterprise value per ounce of silver is less than a fourth of the cheapest comparable in thelist, ECU Silver Mining. SAC has a resource base large enough to support a higher marketvaluation similar to other peers like Minco Silver Corp, MAG Silver Corp, Bear Creek and Tahoe.
The peers are in the different stages of exploration. However, due to leachable resource base ofSAC, it enjoys low initial capital and operating costs. We therefore believe the market isascribing a value to SAC’s resource that is nowhere near to what can be justified as a fair valuebased on the ratio of operating costs to value of metal underground.
The recent transaction between Tahoe Resources and Goldcorp underscores SAC’sundervaluation. Tahoe recently raised a C$348 million in an IPO (the second largest IPO inCanada this year) to buy a Guatemalan silver deposit from Goldcorp, valuing the property at anEV/oz of C$1.51. The property is similar to SAC’s Malku Khota in terms of geological profile, butis in an earlier stage of development, and is located in a similar jurisdiction compared to Bolivia.
Another good comparable is Bear Creek with 365 million ounces of silver in Peru at a similarstage of advancement and a similar geopolitical risk profile. Bear Creek is trading at an EV/oz ofC$0.73. Though Bear Creek has comparatively better leverage to costs as lead and zinc creditswill likely result in negative cash costs per ounce on a by product basis, we see no reason whySAC should not trade within 25% of that valuation.
As mentioned earlier, limited market visibility and a high risk premium to its relatively newresource base (released in the turbulent 2008 market) in Bolivia has kept valuations depressed.We expect the stock to trade near its peer group median in the near future once SACsuccessfully expands its resource base and moves closer to the pre feasibility stage.
Relative Valuation Bubble Chart
0.0
0.5
1.0
1.5
2.0
2.5
0 50 100 150 200 250 300 350 400 450 500
EV/oz
Silver M oz
MAGSilver
Tahoe Resources
BearCreek
ECU SilverSAC
OrkoSilver
AlexcoMincoSilver
Silvercrest
SAC is undervalued as compared to itspeers despite having a comparativelylarge resource base.
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South American Silver Corp. (TSX: SAC)InItIal RepoRt
The resulting estimated takeover price of C$3.20 per share equal to our discounted cash flow valuation of $3.20 per share. Enterprise value of C$0.78 per ounce using this takeover price estimate is also within the range of its peer group. The takeover valuation, therefore, is another way of justifying SAC’s deeply discounted valuation. With resource expansion and advancements through the development curve, we expect the Company to command a premium over our takeover price estimate.
COMPANY PROFILE
SAC is a mineral exploration Company that acquires, explores and develops mineral properties. The Company holds interests in two material properties: the Malku Khota silver-indium-gold property in Bolivia and the Escalones copper-gold-molybdenum property in Chile. The Malku Khota silver-indium deposit has indicated resources of 144.6 million oz of silver and 845 tonnes of indium and inferred resources of 177.8 million oz of silver and 968 tonnes of indium. SAC is approximately 3-4 years away from actual metals production at Malku Khota, but the deposit has good exploration upside, as the resource covers only 3.5 km of the project’s 15 km strike length.
SAC has guided that it plans to explore the Chile-located Escalones property further in the future, but the estimates of the resources are not yet available. Also, the property is accessible by road resulting in easy access, and its location in the district of El Teniente (which houses the world’s largest open pit copper mine) favors mining activity.
Malku Khota Silver-Indium Project
The Malku Khota project is located in the Cordilera Oriental, about 98 km east-southeast of Oruro in central Bolivia, and 260 km southeast of La Paz, the capital of Bolivia. The project in Malku Khota had silver mineralization within a surface area of 448,000 square meters and to a drilled depth of up to 400 meters below the surface. The stages of the progress of the project are as depicted below:
Significant control. SAC controls a significant block of land in the area around the Malku Khota Project with 100% interest in the property. The total surface covered by the Malku Khota group of properties is 5,475 hectares. It is currently in the exploration phase and requirements for the surface rights for mining operations are yet to be determined.
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Source: Company websites and Bloomberg
Takeover Analysis
Basis of Valuation: Given its attractive resource base and potential for significant resource expansion,we view SAC is a likely takeover candidate in the next cycle of consolidation in the industry oncefinancing environment improves. Tahoe’s acquisition of Goldcorp’s Guatemalan silver deposit throughan IPO in May 2010, and Fresnillo’s unsuccessful hostile bid for MAG Silver in late 2008 and early 2009gives us a sense of the latent appetite for development stage silver assets in risky jurisdictions.
The most recent transaction and a good comparable for estimating a takeover price for SAC is TahoeResources Inc. due to the similarity in geological profile and resource size. Tahoe paid an all inacquisition price of $505 million, or $1.51 per oz of silver resource. We use a higher value of $2.25 peroz to estimate SAC’s takeover price since its resource is at a more advanced stage compared to Tahoewith a PEA already done and pre feasibility expected in 2011.
The all in acquisition price, however, does not reflect the operating and capital cost structure of amineable deposit. Since the cost structure plays a key role for valuation of such assets, we take ouranalysis one step further, and deduct the present value of operating and capital costs from the all inacquisition price, as well as the net debt.
Takeover Valuation Unit Amount
All-in Acquisition Price $/oz 2.25
Less: Forecasted Operating Costs $/oz 0.8
1.5
Less: Forecasted Capital Costs $/oz 0.3
Forecasted Taxes 0.5
Less: Net Debt (Net Cash) $/oz (0.05)
Net Purchase Price $/oz 0.8
Recoverable Resources M oz 322.4
Potential Acquisition Value $ million 251.1
Fully Diluted Shares* million 81.9
Potential Takeover Price Per Share C$ 3.20
Current $-C$ Exchange Rate 1.04Source: RedChip Estimates.*Proforma for the recently announced $4mn equity raise.
The resulting estimated takeover price of C$3.20 per share equal to our discounted cash flow valuationof $3.20 per share. Enterprise value of C$0.78 per ounce using this takeover price estimate is also within
RedChip Visibility | 10 | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Rapid Payback. Due to its low initial capital costs and low operating costs, the payback period is estimated to be 1.4 years (from start of production). IRR for the project based on post tax cash flows is 46.1%. On the contrary, the payback period for Bear Creek Mining Corp.’s Corani project (27-year mine life) is estimated at 3 years. In addition, the tax benefit carried forward from past year’s losses provides an additional upside to SAC’s cash flows.
Low cash costs. Due to the leachable silver-indium resource at Malku Khota, operating cash costs of $3.75 per oz (net of credits) and initial capital costs of $103.37 million are lower as compared to its peers. Sabina Gold & Silver Corp. comes closest to SAC in terms of cash costs ($4.4/oz). The Company has the lowest cash costs as shown in the chart below. Although initial capital costs to prepare the mine for production are the lowest for Bear Creek ($51 million), it involves high operating cash costs ($7.47/oz) at the time of actual production.
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Source: Company websites
Low levels of waste: Significant portions of the resource are in the exposed ridgeline, which shouldallow for an exceptionally low waste to ore (“strip”) ratio in the early years of mining. The metalrecoveries in the PEA, 80% silver and 70% indium are considered good. Also, the Company estimatesthat heap leaching recoveries may be lower depending on size of rock material and mill recoveries maybe higher.
By product revenue adds to cash flows: A portion of the resources include higher grades that include anindium component which is expected to contribute to higher cash flow in the early years of production.
Support from community and government: The Malku Khota Project is of economic importance to theregion, and with the potentially long mine life, the project has received encouragement from thegovernment to accelerate its development. Moreover, the BSR Group (Business for Social Responsibility)has been entrusted to develop a pro active community relations program that represents all stakeholders facilitate a smooth transition from exploration to production.
SWOT Analysis
Strengths Weaknesses
Malku Khota is one of the largest silver depositmines in Bolivia with combined indicated andinferred resources of approx 323 million oz.
Low operating cost per oz of $3.75 (net ofcredits) and low initial capital cost of $103.37million
Low payback period of 1.4 years (since the startof production).
Long lead time to production (expected start ofproduction would be in 2013).
SAC has no Proven and Probable (P&P)reserves. Resources estimates are only atindicated and inferred level.
Opportunities Threats
Upside from further exploration of Malku Khotamine area as the on going exploration covers
Environmental regulations and terrain risk.
Downside risk to silver prices.
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square meters and to a drilled depth of up to 400 meters below the surface. The stages of the progressof the project are as depicted below:
DISCOVERYRESOURCEDEFINITION
PEA
PREFEASIBILITY
PERMIT&CONSTRUCTFEASIBILITY PRODUCTION
INCREASINGRESOURCE INCREASING CERTAINTY
EXPLORATIONVALUATION
RESOURCE DEFINITIONPRELIMINARY ECONOMIC
ASSESSMENT (PEA)
PREFEASIBILITY /FEASIBILITY
PRODUCERSJUNIOR & MID TIER
DECREASING TECHNICAL RISK / INCREASING MARKET VALUATION
Source: Company filings
Project: Malku Khota: Key Highlights
Significant control: SAC controls a significant block of land in the area around the Malku Khota Projectwith 100% interest in the property. The total surface covered by the Malku Khota group of properties is5,475 hectares. It is currently in the exploration phase and requirements for the surface rights for miningoperations are yet to be determined.
Rapid Payback: Due to its low initial capital costs and low operating costs, the payback period isestimated to be 1.4 years (from start of production). IRR for the project based on post tax cash flows is46.1%. On the contrary, the payback period for Bear Creek Mining Corp.’s Corani project (27 year minelife) is estimated at 3 years. In addition, the tax benefit from carried forward past year’s losses providesan additional upside to the SAC’s cash flows.
Low cash costs. Due to the leachable silver indium resource at Malku Khota, operating cash costs of$3.75 per oz (net of credits) and initial capital costs of $103.37 million are lower as compared to itspeers. Sabina Gold & Silver Corp. comes closest to SAC in terms of cash costs ($4.4/oz). The Companyhas lowest cash costs as shown in the chart below. Although, initial capital costs to prepare the mine forproduction are the lowest for Bear Creek ($51 million) but it involves high operating cash costs($7.47/oz) at the time of actual production.
2009 2010 2011 2012-2014
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South American Silver Corp. (TSX: SAC)InItIal RepoRt
Low levels of waste. Significant portions of the resource are in the exposed ridgeline, which should allow for an exceptionally low waste-to-ore (“strip”) ratio in the early years of mining. The metal recoveries in the PEA, 80% silver and 70% indium are considered good. Also, the Company estimates that heap leaching recoveries may be lower depending on the size of rock material and mill recoveries may be higher.
By-product revenue adds to cash flows. A portion of the resources include higher grades that include an indium component which is expected to contribute to higher cash flow in the early years of production.
Support from community and government. The Malku Khota Project is of economic importance to the region, and with the potentially long mine life, the project has received encouragement from the government to accelerate its development. Moreover, the BSR Group (Business for Social Responsibility) has been entrusted to develop a pro-active community relations program that represents all stake-holders to facilitate a smooth transition from exploration to production.
SWOT ANALY SIS
LIquIdIT Y ANd C APITAL RESOuRCES
12
has been entrusted to develop a pro active community relations program that represents all stakeholders facilitate a smooth transition from exploration to production.
SWOT Analysis
Strengths Weaknesses
Malku Khota is one of the largest silver depositmines in Bolivia with combined indicated andinferred resources of approx 323 million oz.
Low operating cost per oz of $3.75 (net ofcredits) and low initial capital cost of $103.37million
Low payback period of 1.4 years (since the startof production).
Long lead time to production (expected start ofproduction would be in 2013).
SAC has no Proven and Probable (P&P)reserves. Resources estimates are only atindicated and inferred level.
Opportunities Threats
Upside from further exploration of Malku Khotamine area as the on going exploration coversonly 25% of the project’s 15 km strike length.
Environmental regulations and terrain risk.
Downside risk to silver prices.
Geo political risk associated with Bolivia.
Summary financials
SAC had cash and cash equivalents of US$7 million as of the end of 2009. As per the company, the bulkof the initial capex of $103.4 million will be incurred in 2011 and 2012.
In USD ‘000 (as of December) 2007 2008 2009
Cash and Cash Equivalents 12,870.40 7,422.87 7,013.97
Shareholder’s Equity 15,767.92 13,710.12 15,396.45
Mining claims and deferred explorationcosts
3,180.50 6,454.79 8,675.05
Source: Company filings
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only 25% of the project’s 15 km strike length. Geo political risks associated with Bolivia.
Liquidity And Capital Resources
SAC had cash and cash equivalents of US$5.8 million as of the March 2010. Starting the year with a cashbalance of $7 million, SAC spent approx $1.2 million in the first quarter. Management estimatesspending requirements for the rest of 2010 at $4million, primarily for drilling activities, which keeps SACin a comfortable liquidity position. Management expects 2011 spending requirements at the same levelas 2010, and is looking to raise additional equity at reasonable costs.
In USD ‘000 (as of December) 2007 2008 2009 1Q2010
Cash and Cash Equivalents 12,870.40 7,422.87 7,013.97 5,814.50
Shareholder’s Equity 15,767.92 13,710.12 15,396.45 14,961.08
Mining claims and deferredexploration costs
3,180.50 6,454.79 8,675.05 9,425.72
Source: Company filings
Revenue distribution estimate: Based on the preliminary economic estimation, SAC is expecting a largepart of its revenue from Silver, Indium and Gold. Copper and Lead will be derived as by products addingto the overall cash inflows.
Source: Company filings
Revenue Model of Malku Khota Project for period 2014E 2018E
Malku Khota project is expected to commence production in 2013 and we estimate the total revenuesof $102.38mn in FY2013, of which 87.6% would be contributed by silver.
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South American Silver Corp. (TSX: SAC)InItIal RepoRt
SAC had cash and cash equivalents of US$5.8 million as of March 31, 2010. Starting the year with a cash balance of $7 million, SAC spent approximately $1.2 million in the first quarter. Management estimates spending requirements for the rest of 2010 at $4 million, primarily for drilling activities, which keeps SAC in a comfortable liquidity position. Management expects 2011 spending requirements at the same level as 2010, and is looking to raise additional equity at reasonable costs.
Revenue distribution estimate. Based on the preliminary economic estimation, SAC is expecting a large part of its revenue from Silver, Indium and Gold. Copper and Lead will be derived as by-products adding to the overall cash inflows.
Revenue Model of Malku Khota Project for period 2014E-2018E. Malku Khota project is expected to commence production in 2014 and we estimate total revenues to be $102.38mn in FY2013, of which 87.6% would be contributed by silver.
OWNERSHIP
Source: Company filings
Revenue distribution estimate (March 2009)
Silver70%
Indium18%
Gold, Copper,Lead12%
Source: Company filings
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All figures in $’000 2014E 2015E 2016E 2017E 2018E
Silver revenue 156,922 195,669 157,954 149,962 170,167
Indium revenue 15,955 23,901 30,206 36,120 35,876
By product credit 12,950 18,130 18,130 18,130 18,130
Total revenues 185,827 237,700 206,291 204,213 224,173
Total cash operating costs 47,310 67,074 73,674 76,531 72,151
Depreciation 5,192 6,241 6,241 6,241 6,241
EBIT 133,325 164,385 126,376 121,440 145,781
EBIT (%) 71.75% 69.16% 61.26% 59.47% 65.03%Source: Redchip estimates
Ownership
Shareholding Pattern Stake
Ralph Fitch 4.7%Gregory Johnson 2.5%
Felipe Malbren 2.2%
Richard Doran 1.3%
Public and others 89.3%
Total 100.0%Source: Company.
Technical Report: Key Highlights
Favorable economic assessment: SAC completed a preliminary economic assessment on its MalkuKhota project in Bolivia. The study estimated a base case, pre tax net cash flow of $1,233 million (NPV of$326 million at a 10% discount rate) and an internal rate of return of 50.7%. The study suggested a20,000 tonnes per day acid heap leach operation with a mine life of 36 years.
Summary of Key Economic Indicators Details
Initial Capital Cost ($million) 103.37
Life of Mine 36 years
Net Cash Flow, pre tax ($million) 1,233.30
Internal Rate of Return (IRR) 50.7%
Payback period from start of production 1.4 yearsSource: Company filing
Environmental liability and permitting: SAC faces no environmental liabilities associated with theproject. As per the technical report, some alpine natural lakes near the site contains fish and may needadditional monitoring to ensure that exploration activities do not jeopardize the water quality in theselakes. The project has a current environmental permit for its continued exploration work. Surface rights
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All figures in $’000 2014E 2015E 2016E 2017E 2018E
Silver revenue 156,922 195,669 157,954 149,962 170,167
Indium revenue 15,955 23,901 30,206 36,120 35,876
By product credit 12,950 18,130 18,130 18,130 18,130
Total revenues 185,827 237,700 206,291 204,213 224,173
Total cash operating costs 47,310 67,074 73,674 76,531 72,151
Depreciation 5,192 6,241 6,241 6,241 6,241
EBIT 133,325 164,385 126,376 121,440 145,781
EBIT (%) 71.75% 69.16% 61.26% 59.47% 65.03%Source: Redchip estimates
Ownership
Shareholding Pattern Stake
Ralph Fitch 4.7%Gregory Johnson 2.5%
Felipe Malbren 2.2%
Richard Doran 1.3%
Public and others 89.3%
Total 100.0%Source: Company.
Technical Report: Key Highlights
Favorable economic assessment: SAC completed a preliminary economic assessment on its MalkuKhota project in Bolivia. The study estimated a base case, pre tax net cash flow of $1,233 million (NPV of$326 million at a 10% discount rate) and an internal rate of return of 50.7%. The study suggested a20,000 tonnes per day acid heap leach operation with a mine life of 36 years.
Summary of Key Economic Indicators Details
Initial Capital Cost ($million) 103.37
Life of Mine 36 years
Net Cash Flow, pre tax ($million) 1,233.30
Internal Rate of Return (IRR) 50.7%
Payback period from start of production 1.4 yearsSource: Company filing
Environmental liability and permitting: SAC faces no environmental liabilities associated with theproject. As per the technical report, some alpine natural lakes near the site contains fish and may needadditional monitoring to ensure that exploration activities do not jeopardize the water quality in theselakes. The project has a current environmental permit for its continued exploration work. Surface rights
RedChip Visibility | 1� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
kE Y HIGHLIGHTS FROM TECHNIC AL REPORT
Favorable economic assessment. SAC completed a preliminary economic assessment on its Malku Khota project in Bolivia. The study estimated a base case, pre-tax net cash flow of $1,233 million (NPV of $325 million at a 10% discount rate) and an internal rate of return of 50.7%. The study suggested a 20,000 tonnes per day acid heap leach operation with a mine life of 36 years.
Environmental liability and permitting. SAC faces no environmental liabilities associated with the project. As per the technical report, some alpine natural lakes near the site contain fish and may need additional monitoring to ensure that exploration activities do not jeopardize the water quality in these lakes. The project has a current environmental permit for its continued exploration work. Surface rights are owned by local individuals. It is customary to make agreements with the local users of the land before proceeding with any construction work such as road building for drill site access.
Large resource base. All of the resources estimated are in the indicated and inferred category. It is based on 25% exploration of the total length of 15km.
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Source: Company filing
Large resource base: All the resources estimated are in the indicated and inferred category. It is basedon 25% exploration of the total length of 15Km.
Pit 1 Pit 2 Pit 3 Pit 4 Pit 5 Pit 6 TOTALTOTALMATERIAL(Waste+ Indicated+Inferred) t 65,727,111 34,845,709 13,932,233 21,802,827 68,669,759 290,549,100 495,526,738Mineral Resources(indicated + Inferred) t 39,161,547 27,004,076 11,912,973 16,763,707 46,448,429 106,035,758 247,326,490Silver grade g/t 40.26 36.27 33.34 27.49 17.55 19.12 25.30Indium grade ppm 7.46 9.70 3.44 6.98 3.22 5.69 5.92
Mineral Resources t 37,683,346 21,757,221 11,602,157 11,401,720 21,378,156 41,867,712 145,690,313Silver grade g/t 40.96 35.35 33.65 30.03 18.89 17.49 28.70Indium grade ppm 7.37 9.49 3.46 7.43 2.77 5.38 6.13
Mineral Resources t 1,478,202 5,246,855 310,816 5,361,987 25,070,272 64,168,046 101,636,177Silver grade g/t 22.48 40.10 21.47 22.10 16.40 20.19 20.42Indium grade ppm 9.55 10.57 2.79 6.02 3.61 5.90 5.62
Indicated
Inferred
Source: Company data
Global Metals and Minerals market overviewThe value of global precious metals and minerals market shrank (year over year) by 1.5% in 2008 toreach $38.5 billion. The market is forecasted at $47.4 billion by 2013, growing at a 5 year CAGR of 4.2%.
14
All figures in $’000 2014E 2015E 2016E 2017E 2018E
Silver revenue 156,922 195,669 157,954 149,962 170,167
Indium revenue 15,955 23,901 30,206 36,120 35,876
By product credit 12,950 18,130 18,130 18,130 18,130
Total revenues 185,827 237,700 206,291 204,213 224,173
Total cash operating costs 47,310 67,074 73,674 76,531 72,151
Depreciation 5,192 6,241 6,241 6,241 6,241
EBIT 133,325 164,385 126,376 121,440 145,781
EBIT (%) 71.75% 69.16% 61.26% 59.47% 65.03%Source: Redchip estimates
Ownership
Shareholding Pattern Stake
Ralph Fitch 4.7%Gregory Johnson 2.5%
Felipe Malbren 2.2%
Richard Doran 1.3%
Public and others 89.3%
Total 100.0%Source: Company.
Technical Report: Key Highlights
Favorable economic assessment: SAC completed a preliminary economic assessment on its MalkuKhota project in Bolivia. The study estimated a base case, pre tax net cash flow of $1,233 million (NPV of$326 million at a 10% discount rate) and an internal rate of return of 50.7%. The study suggested a20,000 tonnes per day acid heap leach operation with a mine life of 36 years.
Summary of Key Economic Indicators Details
Initial Capital Cost ($million) 103.37
Life of Mine 36 years
Net Cash Flow, pre tax ($million) 1,233.30
Internal Rate of Return (IRR) 50.7%
Payback period from start of production 1.4 yearsSource: Company filing
Environmental liability and permitting: SAC faces no environmental liabilities associated with theproject. As per the technical report, some alpine natural lakes near the site contains fish and may needadditional monitoring to ensure that exploration activities do not jeopardize the water quality in theselakes. The project has a current environmental permit for its continued exploration work. Surface rights
16
are owned by local individuals. It is customary to make agreements with the local users of the landbefore proceeding with any construction work such as road building for drill site access.
Source: Company filing
Large resource base: All the resources estimated are in the indicated and inferred category. It is basedon 25% exploration of the total length of 15Km.
Pit 1 Pit 2 Pit 3 Pit 4 Pit 5 Pit 6 TOTALTOTALMATERIAL(Waste+ Indicated+Inferred) t 65,727,111 34,845,709 13,932,233 21,802,827 68,669,759 290,549,100 495,526,738Mineral Resources(indicated + Inferred) t 39,161,547 27,004,076 11,912,973 16,763,707 46,448,429 106,035,758 247,326,490Silver grade g/t 40.26 36.27 33.34 27.49 17.55 19.12 25.30Indium grade ppm 7.46 9.70 3.44 6.98 3.22 5.69 5.92
Mineral Resources t 37,683,346 21,757,221 11,602,157 11,401,720 21,378,156 41,867,712 145,690,313Silver grade g/t 40.96 35.35 33.65 30.03 18.89 17.49 28.70Indium grade ppm 7.37 9.49 3.46 7.43 2.77 5.38 6.13
Mineral Resources t 1,478,202 5,246,855 310,816 5,361,987 25,070,272 64,168,046 101,636,177Silver grade g/t 22.48 40.10 21.47 22.10 16.40 20.19 20.42Indium grade ppm 9.55 10.57 2.79 6.02 3.61 5.90 5.62
Indicated
Inferred
Source: Company data.
GLOBAL METALS AND MINERALS MARKET OVERVIEW
The value of global precious metals and minerals market shrank (year over year) by 1.5% in 2008 toreach $38.5 billion. The market is forecasted at $47.4 billion by 2013, growing at a 5 year CAGR of 4.2%.
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GLObAL METALS ANd MINER ALS MARkET OVERVIE W
The value of global precious metals and minerals market shrank (year-over-year) by 1.5% in 2008 to reach $38.5 billion. The market is forecasted at $47.4 billion by 2013, growing at a 5-year CAGR of 4.2%.
Silver comprised 17% ($11.0 billion) of the total precious metals market in 2008. Precious metals in turn occupied 3.9% of the $1.7 trillion metals and minerals market globally.
Market Segmentation: Metals and Mining by Value (2008)
Source: Datamonitor, Oct. 2009
Precious Metals Market Size Excluding Gold ($ billion)
38.547.4
05101520253035404550
2008 2013E
$billion
4.2% 5yr CAGR
63.4%
18.4%
8.6%
5.6% 3.9%
Iron and Steel
Coal
Base Metals
Aluminium
Precious Metals andMinerals
Source: Datamonitor, October 2009
$1,661.4billion
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Market Segmentation: Precious Metals by Value (2008)
SILVER MARkET OVERVIE W
Silver Supply. Despite continuing growth in mine production, the supply side for silver remains under pressure from falling scrap supply and net government sales. Mine production registered its seventh consecutive year of growth in 2009, rising by 4% year on year to 709.6 million ounces. Supply of scrap silver fell to a 13-year low with a 6% year on year decline while net government sales fell by over 50%.
World Silver Supply (million ounces)
• According to the Silver Institute’s World Silver Survey 2009, compiled by GFMS, silver mine production in 2009 rose by 4% or 25 million oz to a new high of 709.6 million oz. Unlike in 2008, last year’s growth was driven by increases in primary mine supply. Silver produced as a by-product of gold mining was once again strong, registering a growth of 21% year over year, although supply from base metal sources were minimal.
18
Source: Datamonitor, October 2009
Silver Market Overview
Demand – Supply Fundamentals
Silver Supply
Despite continuing growth in mine production, the supply side for silver remains under pressure fromfalling scrap supply and net government sales. Mine production registered its seventh consecutive yearof growth in 2009 rising by 4% year on year to 709.6 million ounces. Supply of scrap silver fell to a 13year low with a 6% year on year decline while net government sales fell by over 50%.
World Silver Supply (million ounces)
2002 2003 2004 2005 2006 2007 2008 2009
Supply
Mine Production 593.9 596.6 613.0 636.8 640.9 664.4 684.7 709.6
Net Government sales 59.2 88.7 61.9 65.9 78.2 42.5 27.6 13.7
Old Silver Scrap 187.5 184.0 183.7 186 188 181.8 176 165.7
Producer Hedging 9.6 27.6
Implied Net Disinvestment 11.6
Total Supply 852.2 869.3 868.2 916.7 907.5 888.4 888.4 889.0Source: World Silver Survey 2009 compiled by GFMS Ltd.
According to the Silver Institute’s World Silver Survey 2009, compiled by GFMS, silver mineproduction in 2009 rose by 4% or 25 million oz to a new high of 709.6 million oz. Unlike in 2008,
18
Source: Datamonitor, October 2009
Silver Market Overview
Demand – Supply Fundamentals
Silver Supply
Despite continuing growth in mine production, the supply side for silver remains under pressure fromfalling scrap supply and net government sales. Mine production registered its seventh consecutive yearof growth in 2009 rising by 4% year on year to 709.6 million ounces. Supply of scrap silver fell to a 13year low with a 6% year on year decline while net government sales fell by over 50%.
World Silver Supply (million ounces)
2002 2003 2004 2005 2006 2007 2008 2009
Supply
Mine Production 593.9 596.6 613.0 636.8 640.9 664.4 684.7 709.6
Net Government sales 59.2 88.7 61.9 65.9 78.2 42.5 27.6 13.7
Old Silver Scrap 187.5 184.0 183.7 186 188 181.8 176 165.7
Producer Hedging 9.6 27.6
Implied Net Disinvestment 11.6
Total Supply 852.2 869.3 868.2 916.7 907.5 888.4 888.4 889.0Source: World Silver Survey 2009 compiled by GFMS Ltd.
According to the Silver Institute’s World Silver Survey 2009, compiled by GFMS, silver mineproduction in 2009 rose by 4% or 25 million oz to a new high of 709.6 million oz. Unlike in 2008,
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• At just 13.7 million oz, net government sales reached their lowest level in more than a decade. Sales were down more than half year on year due to a large drop in Russian sales along with continued absence of Chinese and Indian sales.
• Old silver scrap, the second-largest source of silver supply after mine production, continued its decline in 2009. Scrap supplies totaled about 165.7 million oz in 2009, versus 176 million oz in 2008. The largest single contributor to silver scrap recycling is the photographic sector. The ongoing shift toward digital cameras from traditional photographic film cameras is sharply reducing the demand for silver nitrates, and hence the supply of silver scrap from the photographic sector. Recovery from medical equipment also remained soft during the year. Consequently, we expect a continued decline in scrap sales in the next few years, though scrap sales will still remain a big source of supply due to recycling of jewelry and silverware.
Source: GFMS.
Mine production (million Oz)
640.9664.4
684.7
709.6
600
620
640
660
680
700
720
2006 2007 2008 2009
millionOz
Source: GFMS.
Net Government sales (Million oz)
13.7
78.2
42.527.6
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009
millionOz
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• Jewelry and silverware was estimated to have increased marginally in 2009, primarily due to strong recycling activity in India, as silver prices in rupee terms recorded a 10% year on year gain in the country.
2010 Silver Supply. ForecastMine production remains by far the largest component of silver supply accounting for around 78% of the total supply in 2009. For 2009, according to the estimates, the mine output is expected to increase by an additional 15 million oz. The charts below illustrate the global supply of silver for 2008 and 2009 (based on forecasts done in Nov 2009).
Case of derived supply. Almost 65% of silver supply is either a co- or by-product of production as a natural consequence of the mining of copper, lead, zinc and gold. Thus, silver gets mined irrespective of the silver price. The following charts indicate the silver output by source metal for 2008 and 2009.
Source: GFMS.
Old Silver scrap (million Oz)
188181.8
176
165.7
150
155
160
165
170
175
180
185
190
2006 2007 2008 2009
(millionOz)
21
29.1%
10.4%
36.5%
23.5%
0.5%
Silver Output By SourceMetal: 2008
Primary Gold Lead/Zinc Copper Other
30.1%
12.2%33.9%
23.4%
0.4%
Silver Output By SourceMetal: 2009
Primary Gold Lead/Zinc Copper Other
Source: GFMS
As per the chart, silver price has consistently moved in line with the price of other metals. Higher pricesof other metals lead to higher production of such metals resulting in higher supply of silver as a byproduct. Hence by product silver production depends on production of other metals, which is afunction of prevailing market prices.
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10
Silver AndOtherMetals: IndexedPriceMovement
Lead Copper Zinc Silver Gold
Source: Bloomberg
Geographic coverage for Silver mining
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As per the below chart, the silver price has consistently moved in line with the price of other metals. Higher prices of other metals lead to higher production of such metals resulting in higher supply of silver as a by-product. Hence by-product silver production depends on production of other metals which is a function of prevailing market prices.
Geographic coverage for Silver mining
• Peru was the largest producer of silver in 2008 with production of 118 million oz. The Americas, which include 6 of the 10 largest silver producing countries, contribute to nearly half of global silver production.
Source: Bloomberg
Silver And Other Metals: Indexed Price Movement
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10
Lead Copper Zinc Silver Gold
Source: GFMS
Top 25 Silver producing countries in 2008 (Millions of ounces)
123.9
104.789.1
52.642.6 42.2 41.8
21.7 19.6 17.1 14.0 8.7 8.3 7.7 7.3 4.2 3.5 2.6
39.839.2
0
20
40
60
80
100
120
140
Peru
Mexico
China
Australia
Bolivia
Russia
Chile
United States
Poland
Kazakhstan
Canada
Argentina
Turkey
Sweden
Morocco
Indonesia
India
Guatermala
Iran
South Africa
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• A handful of mines account for the bulk of global primary silver output. Silver Standard’s Pirquitas mine is one of the largest primary silver mines in the world (produced approximately 6 million oz of silver in 2009 and expected to produce approximately 10 million oz in 2010).
• Bolivia has reasonably high silver resources, although the silver extracting companies are few. It might be due to high geo-political risk perceived by the investors.
Silver Demand
Demand for silver comes from both industrial applications as well as from investment in the form of ETFs, coins and jewelry. It has a wide variety of special applications in the areas of power transmission, germicide and anti-bacterial agents, solar cells, water purification, catalytic agents, soldering products, bearings, batteries, and photography.
• The global demand for silver in 2009 stood at 889 million oz. Fabrication demand fell by 11.9% year on year to 730 million oz mainly due to the impact of the global recession. Accelerated decline in photographic demand also contributed to the fall in fabrication. This was the second consecutive year of decline in fabrication demand, after a 1.6% drop in 2008.
23
World Silver Demand (million ounces)
2001 2002 2003 2004 2005 2006 2007 2008 2009
Demand
Fabrication
Industrial Applications 335.2 339.1 349.7 367.1 405.1 424.5 453.5 447.2 352.2
Photography 213.1 204.3 192.9 178.8 160.3 142.4 124.8 104.8 82.9
Jewelry 174.3 168.9 179.2 174.9 173.8 166.3 163.5 158.3 156.6
Silverware 106.1 83.5 83.9 67.3 67.8 61.2 58.8 57.3 59.5
Coins & Medals 30.5 31.6 35.7 42.4 40.0 39.8 39.7 64.9 78.7
Total Fabrication Demand 859.2 827.4 841.4 830.5 847.0 834.2 840.3 832.5 729.8
Producer De Hedging 24.8 20.9 6.8 23.5 5.6 22.3
Implied Net Investment 11.7 7.0 37.7 69.6 66.6 24.7 50.2 136.9
Total Demand 870.9 852.2 869.3 868.2 916.7 907.5 888.4 888.4 889.0Source: World Silver Survey 2009 compiled by GFMS Ltd.
The global demand for silver in 2009 stood at 889 million oz. Fabrication demand fell by 11.9%year on year to 730 million oz mainly due to the impact of the global recession. Accelerateddecline in photographic demand also contributed to the fall in fabrication. This was the secondconsecutive year of decline in fabrication demand, after a 1.6% drop in 2008.
836.4 842.5828.6
729.8
660
680
700
720
740
760
780
800
820
840
860
2006 2007 2008 2009
Millions
Oz
FabricationDemand (millionOz)
Industrial fabrication accounted for the bulk of decline in fabrication demand, falling by 20.6% toa six year low of 352.2 Moz (10,955 tones), in the process eclipsing 2001’s technology relateddecline. The drop in industrial demand was largely a first half event, brought about by a slump inorders and an extended period of pipeline destocking.
Source: Bloomberg
Fabrication Demand (million Oz)
836.4 842.5828.6
729.8
660680700720740760780800820840860
2006 2007 2008 2009
Millions
Oz
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• Industrial fabrication accounted for the bulk of decline in fabrication demand, falling by 20.6% to a six-year low of 352.2 Moz (10,955 tons), in the process eclipsing 2001’s technology-related decline. The drop in industrial demand was largely a first half event, brought about by a slump in orders and an extended period of pipeline destocking.
• Like gold producers, silver producers have tended to close out or buy back hedges in recent years. According to the Silver Survey, de-hedging contributed 22.3 million oz of demand in 2009, up from 11.6 million oz in 2008. The global silver hedge book as a percentage of total mine production is estimated to be low; consequently, we expect de-hedging to decline in the coming years.
World Silver Demand 2010 Forecast. Silver demand is dominated by the industrial applications category, which accounts for approx 39% of total demand in 2009 as against 51% in 2008.
Source: Bloomberg
Industrial applications (million oz)
427456.1 443.4
352.2
0
100
200
300
400
500
2006 2007 2008 2009
Millions
Oz
Source: GFMS
5.00%
24.00%
12.00%7.00%
1.00%
51.00%
Coins De Hedging Industrial
Investment Jewelry and Silverware Photography
World Silver Demand 20092%
15%
25%
10% 9%
39%
Coins De Hedging Industrial
Investment Jewelry and Silverware Photography
World Silver Demand 2010E
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Silver Demand
Fabrication demand covers silver’s use in industry, photography, jewelry manufacturing and in the making of coins.
Industrial demand has fallen sharply in 2009, due to the severity of the economic downturn. In 2010, however, a rebound is expected, given an improvement in global GDP, industrial production and stock replenishment.
Jewelry & Silverware fabrication, on a combined basis, was largely flat in 2009, declining by a modest 0.4% year on year. Softness in major western and far-eastern/southeast Asian jewelry markets were largely offset by strong demand in India and China. Silver has benefited in several important jewelry markets from substitution at gold’s expense. However, the weak economy and high silver prices have also restrained growth in demand. Moreover, some of the rise in fabrication reflects an increase in trade stocks in India, where surging local prices have constrained incremental consumer demand at higher prices.
Photographic use of silver dropped by approximately 21% in 2009 as demand continues to be affected by the switch to digital technology. Silver usage in the cinematic industry has also been hit hard, as a lack of financing has led to a drop in the number of films produced.
Investment Demand in silver continued to surge in 2009, rising by a whopping 90% following an 84% rise in 2008, as investors flocked to the metal in search of a safe haven amid global financial turmoil. Much of the surge took place in the early part of 2009, and was dominated by demand for physical metal and ETFs, as investors sought refuge in silver when fears over counterparty risk and the overall financial system remained rampant. Overall, the January-October 2009 timeframe saw a 3,110-tonne rise in ETF holdings coupled with an increase of 5,306 tonnes in the ‘investor’ net long positions in Comex futures. Investors’ bullion stocks have increased substantially in FY09 on a net basis. We expect investment demand to rise further in the near future owing to the Euro zone sovereign debt problems. However, over the long term, conditions should eventually become less supportive of investment demand as some level of GDP growth returns for the global economies.
Physical Demand/Supply Balance – Moving from a Deficit to Surplus. The chart below shows the physical demand/supply balance, excluding investment demand. As seen from the chart, industry dynamics have undergone a structural shift, with demand lagging supply for the first time in the last 10 years in 2008. Lower industrial production worldwide has reduced the demand for silver in electronic, electrical, and other manufacturing processes, while shrinking consumer income has eroded the demand for silver jewelry.
26
Source: World Silver Survey 2009 (prepared by GFMS)
Meanwhile, mine supply growth is increasing, with greater primary mine production more thancompensating for lower mine byproduct output.Luke stopped reading and graphing here on 6 10 2010 at 5:58pmNew uses of silver in industrial applications to drive demand in the long termWhile the price of silver is currently benefiting from its precious metal status, it will undoubtedly be itsindustrial properties in future years that will ensure physical demand endures (well after the currentinvestment cycle subsides), with the metal expected to play a pivotal role in new industrial applications.While main growth areas in the past has been electronics and photographic equipment, novel areas ofsilver demand are likely to emerge from renewable energy and health sectors. Over the last decade, thephotovoltaic (PV) industry has emerged as a significant user of silver. The PV industry’s silver use isestimated to have reached 28 million oz in 2009. Industry projections put silver off take at 186 million ozby 2020. Silver’s use as an anti bacterial substance in medical equipment and applications, as well as inhousehold applications is expected to be boosted in the future once new technologies using silver gainacceptance.
SILVER PRICE OUTLOOKSilver is currently trading around the $18 /oz level, below 17 March 2008 high of $20.92/oz, but wellabove the 4 year low of $8.97/oz on 10 October 2008.
Silver prices have been buoyed by investor demandThe silver demand is likely to get most of its growth from investment demand (Investments accountedfor 15% of demand in 2009 as against 5% in 2008), especially with the economic uncertainty surroundingthe Euro zone and the macroeconomic imbalances in the US. Hence despite reduced fabricationdemand, silver prices rallied (along with other assets including gold and oil) between April October2009, before undergoing a correction in November December, following which the EU crisisorchestrated the ongoing rally. The general expectation among investors is that aggressive monetary
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Meanwhile, mine supply growth is increasing, with greater primary mine production more than compensating for lower mine byproduct output.
New uses of silver in industrial applications to drive demand in the long-termWhile the price of silver is currently benefiting from its precious metal status, it will undoubtedly be its industrial properties in future years that will ensure physical demand endures (well after the current investment cycle subsides), with the metal expected to play a pivotal role in new industrial applications. While main growth areas in the past have been electronics and photographic equipment, novel areas of silver demand are likely to emerge from the renewable energy and health sectors. Over the last decade, the photovoltaic (PV) industry has emerged as a significant user of silver. The PV industry’s silver use is estimated to have reached 28 million oz in 2009. Industry projections put silver offtake at 186 million oz by 2020. Silver’s use as an anti-bacterial substance in medical equipment and applications, as well as in household applications, is expected to be boosted in the future once new technologies using silver gain acceptance.
SILVER PRICE OuTLOOk
Silver is currently trading around the $18 /oz level, below the March 2008 high of $20.92/oz, but well above the 4-year low of $8.97/oz in October 2008.
Silver prices have been buoyed by investor demand. The silver demand is likely to get most of its growth from investment demand (Investments accounted for 15% of demand in 2009 as against 5% in 2008), especially with the economic uncertainty surrounding the Euro zone and the macroeconomic imbalances in the U.S.. Hence despite reduced fabrication demand, silver prices rallied (along with other assets including gold and oil) between April-October 2009, before undergoing a correction in November-December, following which the EU crisis orchestrated the ongoing rally. The general expectation among investors is that aggressive monetary easing and heavy deficit spending by the U.S. and other major economies would lead to higher inflation and weakened fiat currencies over the longer term.
Silver is also highly correlated to base metals. Owing to its large industrial demand (far more than other precious metals, such as gold and platinum), silver prices tend to move in tandem with other base metals, such as copper, lead and zinc. This correlation is also influenced by the fact that bulk of the silver production is in the form of a by-product from producing other base metals.
Source: Bloomberg
Silver And Other Metals: Indexed Price Movement
0%
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200%
300%
400%
500%
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700%
800%
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May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10
Lead Copper Zinc Silver Gold
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As the chart shows, silver tanked along with other base metals since the onset of the recession in the U.S., even as gold, due to its safe haven demand, was on the rise.
ETFs are a favored investment option for investors. Along with physical demand for coins and bars, silver ETFs have been a favored investment vehicle to seek exposure to silver. Like the gold ETFs, the silver ETFs have been popular, absorbing substantial amounts of bullion and effectively replacing speculators and hedge funds as the principal source of investor demand. The data from the Commodity Futures Trading Commission (CFTC) shows that silver’s net long speculative positions amounted to 166 million oz at end-July 2009, above the 125.8 million oz low of the year set in April 2009, but still well below the peak of 378.9 million oz in February 2008.
While Comex positions (speculative long positions) are responsive to prices (with long positions increasing on rally in silver prices and vice versa), ETF funds have been increasing positions regardless of price direction. Though liquidation of ETFs would have a negative impact on silver prices, we view ETFs as long-term investors having a stabilizing effect on the price, and thus should be favorable for our long-term bullish outlook for silver.
MARkET FOR INdIuM
Production: With an abundance in the Earth’s continental crust of 0.05 parts per million (ppm) and its oceanic crust of 0.072 ppm, indium is somewhat more abundant than its lookalike, silver. However, since it does not occur in the same concentrations as silver, indium is never mined in its own right. Instead, like many other strategic and minor metals, indium is mined as a by-product of the production of other ore. Traditionally, the largest source of indium has come as a by-product of zinc production. As a result, indium production and prices tends to be fairly correlated to zinc production.
Extraction rates remain small, while processing and recycling is largely wasteful: Historically, less than 20 percent of the indium content in concentrates is extracted. Even with modern technological improvements, producers can only extract 30 percent of the 1,500 mt of indium mined every year worldwide, according to the Indium Corporation of Utica, NY. Moreover, considerable quantities of the metal remain to be recovered both through extractions from unprocessed base metal concentrates and through recycling. 30% of the indium in base metal concentrates never reaches the smelter. Of the remaining 70%, the final average rate of extraction of the metal is only around 50%. Therefore, there is currently a great deal of indium-bearing concentrate that could be processed but goes wasted currently. Additionally, the sputtering process is extremely wasteful, with less than 30% of the ITO actually ending up on the panel. The remaining 70% ends up on the walls of the sputtering chamber, the substrate and in the grinding sludge. While 60-65% of that indium can now be recovered, the remainder still goes wasted. An increase in recovery rates will only come from improvements in recycling methods.
Indium Demand: Eighty percent of indium demand is for electronics applications, primarily for fabrication of thin uniform film indium-tin oxides (ITO) on glass, which create unique optically transparent electrical conductors for LCDs. The growing usage in CIGS (copper-indium-gallium-selenides) in the manufacture of thin film photovoltaic (PV) applications in solar panels has potentially a greater demand than its use in LCDs with growing interest in developing alternative energy resources. Presently CIGS applications account for only 6% of demand.
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Indium Prices: The U.S. producer price for indium remained at $500 per kilogram from the start of 2009 through mid-October. The New York dealer price range for indium began the year at $350 to $400 per kilogram, decreased steadily until mid-July reaching a low of $290 to $340 per kilogram, and then rose until at least mid-October to $495 to $510 per kilogram.
Refinery Production and Reserves: China is the world’s largest refiner of the metal, using feedstock either produced domestically or imported from abroad. China has held on to its leadership position in indium refining for the last five years at least, with Japan coming a distant second.
Outlook. The total market for indium has experienced annual growth averaging over 10% for the past 5- 6 years and is expected to grow at a similar rate for the foreseeable future. The forecast growth in indium demand will be largely met by an increase in recycling, initially in Japan and later in the rest of the world. Increased production of secondary indium will meet much of the projected increase in demand over the years.
COMPETITIVE L ANdSC APE
We have classified silver companies into three categories as small, medium and large silver players based on the Company’s market capitalization (which, in our opinion, reflects the Company’s total reserves and resources). Details of some of SAC’s competitors are presented below:
Alexco Resource Corp. (Alexco): Alexco operates two principal businesses: mineral exploration and development in Canada, primarily in the Yukon Territory, and provision of consulting and project management services in respect of environmental permitting and compliance and site remediation and reclamation, both in Canada and the United States. Alexco’s principal mineral exploration activities in the Yukon are being carried out within the Keno Hill district. Alexco’s material property within the Keno Hill district is the Bellekeno property. Alexco holds several other property interests within the district, including but not limited to Onek, Lucky Queen and Silver King.
Bear Creek Mining Corporation (Bear Creek): Bear Creek is a Canada-based company. Bear Creek is engaged in acquiring and exploring mineral properties, principally located in Peru. Bear Creek controls
Refinery production 2008 2009 2008 2009
China 310 300
Korea Republic 75 85
Japan 65 60
Canada 45 50
Belgium 30 30
Other countries 25 30
Peru 6 20
Russia 12 12
Brazil 5 10
United StatesSource: Bloomberg
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
a 100% interest in the Santa Ana silver project. The property is comprised of 6,300 hectares located in the Puno region in southern Peru. Bear Creek has completed 55,574 meters of drilling in 306 drill holes. Bear Creek owns 100% interest in the 1,000 hectares Antash concession. On 17 July 2008, Bear Creek completed its 100% acquisition of the Corani Project from Rio Tinto Mining and Exploration Limited (Rio Tinto).
ECU Silver Mining Inc. (ECU): ECU is engaged in gold, silver and base metals exploration and development, and has its mining operations in the Velardena mining district of Mexico. ECU owns three properties located in the Velardena mining district. These properties, collectively known as the Velardena District Properties are comprised of the Velardena Property, the Chicago Property and the San Diego Property. The Velardena Property contains the Santa Juana mine. The property consists of 20 contiguous mineral concessions totaling 233.2 hectares. The Chicago Property is located approximately two kilometers south of the Velardena Property. This property contains the historical Los Muertos-Chicago mine and consists of eight contiguous mineral concessions, totaling 315.88 hectares.
Kimber Resources Inc. (Kimber): Kimber is a Canada-based exploration-stage company, engaged in the acquisition and exploration of mineral right interests in Mexico. Kimber focuses on gold-silver exploration in Mexico. Kimber’s mineral rights are located in the states of Chihuahua and Estado de Mexico, Mexico. Kimber owns three exploration projects located in Mexico. The principal project is Monterde, which is 29,266 hectares in size and is located in the prolific Sierra Madre Gold-Silver belt of Northern Mexico. The Monterde project hosts substantial gold-silver mineralization and has three deposits located within two kilometers of each other. Kimber owns a 100% interest in the El Coronel mineral concessions.
MAG Silver Corp. (MAG): MAG is engaged in the mineral acquisition, exploration and development business. MAG’s property interests are located in Mexico. MAG’s two properties include its 44% joint venture interest in the Juanicipio property and the 100% owned Cinco de Mayo property. MAG’s subsidiary, Minera Los Lagartos, S.A. DE C. V. (Lagartos) is the owner of a 44% interest in Minera Juanicipio, S.A. DE C.V. (Minera Juanicipio) and Fresnillo plc (Fresnillo).
Minco Silver Corporation (Minco Silver): Minco Silver is engaged in the acquisition, exploration and development of silver mineral properties in the People’s Republic of China. Minco Silver has a 100% interest in Foshan Minco with the 10% carried interest in Foshan Minco in the Fuwan Silver Deposit, situated along the northeast margin of the Fuwan Silver Belt in Guangdong Province, People’s Republic of China. Minco Silver has a 51% interest in the Changkeng Silver Interest. Minco Silver has interests in three additional silver exploration permits in China, referred to as the Guanhuatang Property, the Luoke-Jilinggang Property and the Guyegang-Sanyatang Property.
Orko Silver Corp. (Orko Silver): Orko Silver is an exploration-stage company. The Company is engaged in the acquisition and exploration of mineral resources in Mexico either directly or through its investment in Proyectos Mineros La Preciosa S.A.
Silvermex Resources Ltd. (Silvermex): Silvermex is an exploration-stage company. Silvermex is engaged in the acquisition, exploration and evaluation of mineral resource properties in Mexico, through its wholly owned subsidiary, Minera Terra Plata, S.A. de C.V. Its property portfolio includes Penasco Quemado Project; Lobos Project; Cerro de Plata Project; Lety Project; El Rayo Project; San Marcial Project and La Frazada Project.
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Sabina Gold & Silver Corp. (Sabina): Sabina is a mineral exploration company. Sabina focuses on the acquisition, exploration, and development of mineral resource properties. Sabina is primarily focused on its Hackett River silver-zinc project in Nunavut in the Canadian Arctic. Sabina also has exploration properties in the Red Lake gold camp in Ontario and the Del Norte silver-gold project in the Stewart-Eskay Creek mining district, in British Columbia. Sabina’s Hackett River project consists of approximately 10,637 hectares and is located approximately 480 kilometer (km) north east of Yellowknife, and approximately 75 km from Bathurst Inlet.
Silver Crest Mines Inc. (Silver Crest): Silver Crest is a Canada-based exploration and development company with a portfolio of silver-gold deposits. Silver Crest’s properties include the Santa Elena project and the Cruz de Mayo project in Sonora, Mexico. As of December 31, 2008, Silver Crest has completed a total of 98 core holes, four geotechnical core holes, and 21 reverse circulation drill holes in Santa Elena project. Silver Crest completed a Phase II drill program on Cruz de Mayo project, which included a 27 reverse circulation (RC) drill hole program totaling 2,907 meters. RC drilling was completed and a total of 10 holes measuring approximately 2,000 meters were drilled to test the Cruz de Mayo mineralization trending to the north-northwest.
30
Name MajorAssets
EV (C$million)
Reserves/Resources(million oz)
Stake Key highlights
OremexResources Inc
TejamenProperty(Mexico)
8.97 47.5 100% To date, Oremex has completed 240drill holes for a total of 37,500 metresof drilling on the property. TheCompany expects to increase theresource base through additionaldrilling programs. The Tejamenmineral resource remains open atdepth and along trend.
SilvermexResources Ltd
PenascoQuemadoproject , SanMarcialproject(Mexico)
32.63 42.3 100% Well financed with over US$6 million inworking capital and Resources situatedin near surface, potentially bulkmineable deposits
SilvercrestMines Inc
High gradepreciousmetalsproperties inMexico(Santa Elenaand Cruz demayo) andEl Salvador
39.76 62.4 100% Expected to start commercialproduction in 2010
KimberResources Inc
Monterde(Mexico)
68.28 54.1 100% NA
Minco SilverCorp
Fuwan Silverdepositlocated insoutheastern China
68.13 156.8 90% The Fuwan property is one of the fewmineral projects in the world thatalready has a significant infrastructurein place, which is expected to save thecompany in development costs.
AlexcoResource Corp
Bellekeno,Onek, LuckyQueen,Silver King(Canada)
195. 14 217.1 NA Undertaking construction activity atBellekeno mine after explorationprogram in 2009.
Orko SilverCorp
La Preciosasilverproject(Mexico)
187.04 135.3 45% On April 14th, 2009 Pan AmericanSilver Corp. and Orko Silver agreed fora joint venture to develop the LaPreciosa project. Pan American willcontribute 100% of the funds inconsideration for a 55% interest in thejoint venture. Orko Silver retains a
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
30
Name MajorAssets
EV (C$million)
Reserves/Resources(million oz)
Stake Key highlights
OremexResources Inc
TejamenProperty(Mexico)
8.97 47.5 100% To date, Oremex has completed 240drill holes for a total of 37,500 metresof drilling on the property. TheCompany expects to increase theresource base through additionaldrilling programs. The Tejamenmineral resource remains open atdepth and along trend.
SilvermexResources Ltd
PenascoQuemadoproject , SanMarcialproject(Mexico)
32.63 42.3 100% Well financed with over US$6 million inworking capital and Resources situatedin near surface, potentially bulkmineable deposits
SilvercrestMines Inc
High gradepreciousmetalsproperties inMexico(Santa Elenaand Cruz demayo) andEl Salvador
39.76 62.4 100% Expected to start commercialproduction in 2010
KimberResources Inc
Monterde(Mexico)
68.28 54.1 100% NA
Minco SilverCorp
Fuwan Silverdepositlocated insoutheastern China
68.13 156.8 90% The Fuwan property is one of the fewmineral projects in the world thatalready has a significant infrastructurein place, which is expected to save thecompany in development costs.
AlexcoResource Corp
Bellekeno,Onek, LuckyQueen,Silver King(Canada)
195. 14 217.1 NA Undertaking construction activity atBellekeno mine after explorationprogram in 2009.
Orko SilverCorp
La Preciosasilverproject(Mexico)
187.04 135.3 45% On April 14th, 2009 Pan AmericanSilver Corp. and Orko Silver agreed fora joint venture to develop the LaPreciosa project. Pan American willcontribute 100% of the funds inconsideration for a 55% interest in thejoint venture. Orko Silver retains a
31
45% interest fully carried toproduction.
ECU SilverMining Inc
VelardenadistrictProperties,Mexico
228.54 431.2 100% Company achieved an average dailythroughput of 650 tpd in last twomonths of 2009 much above its targetof 500tpd.Undergoing pre feasibility study atone of the larger mills in Velardena.
Bear CreekMining Corp
Peru (Coraniand SantaAnaProjects)
319.12 500.2 100% The company's 100% held Tassasilver gold prospect is undergoingexplorationFurther drilling is in progress at its twoadvanced development projects;Santa Ana and Corani.
TahoeResources, Inc.
Escobalsilverproject,Guatemala
505.00 334.45 100% Acquired the property from Goldcorpfor $505 million, financed through anIPO, which was the second largest inCanada this year.
MAG SilverCorp
Juanicipio,Cinco deMayo,Mexico
356.69 189.4 44% Recently conducted independentscoping study at Juanicipio mines.Undertaking drilling activities at Cimcode mayo.
Source: Various company websites and search engines
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
MANAGEMENT TEAM ANd bOARd OF dIREC TORS
Greg Johnson, President and CEO. Mr. Johnson was appointed as President and Chief Executive Officer of South American Silver Corp. in April 2010. As an exploration geologist with more than 20 years of experience in the mining industry, Mr. Johnson brings considerable corporate finance, project development and exploration experience to the Company. He most recently served at NovaGold Resources as Vice-President, Strategic Development, where during his 12 years there he was part of the team that grew NovaGold from a $10-million market capitalization to nearly a $2-billion company. While at NovaGold, Mr. Johnson was prominently involved with the acquisition and advancement of three world-class deposits, including the completion of three feasibility studies. He was a co-winner of the respected Thayler Lindsay International Discovery Award for his role in the discovery and advancement of the 40-million-ounce Donlin Creek gold deposit in Alaska. Mr. Johnson began his career with Placer Dome Inc., where he worked in the U.S. and International Exploration Groups with responsibilities for several projects from early discovery stage to development and operations. He graduated with honors from Western Washington University, where he earned a B Sc. in Geology. Mr. Johnson has served as a director of the Company since May 2009.
Ralph Fitch, Executive Chairman & Director. Mr. Fitch, one of the founders of South American Silver Corp., High Desert Gold Corporation and previously, General Minerals Corporation, is an exploration geologist with over forty years of international exploration management and field experience. His prior positions included Chief Geologist (Worldwide) and Manager of U.S. Exploration for the Chevron Minerals Group. His extensive exploration experience includes work in South America, Australia, West Africa, South Africa and the United States. Mr. Fitch is credited with a number of major international discoveries and was awarded the Chevron Chairman’s Award for his part in the discovery of the Ujina deposit at the Collahuasi copper porphyry project in Chile. As Chief Geologist for Chevron, he also directed the ore reserve estimations for the Lisheen zinc project in Ireland, another Chevron discovery, and the Stillwater platinum group metals project in Montana. Earlier in his career he was involved in the discovery at the Bend and Horseshoe massive sulphide deposits in Wisconsin, the Henkries uranium deposit in South Africa, the Coppins Gap Archaen porphyry copper molybdenum deposit in West Australia, and the Pah-My-Yah diamond field in Liberia. Mr. Fitch received his B.Sc. (Special) Honours Degree in Geology from the Imperial College of Science and Technology, London.
Felipe B Malbran, Vice President, Exploration South America. Prior to the formation of SASC, Mr. Malbran served as vice president of Exploration South America (1995-2006) for General Minerals Corporation; in addition, his career includes work as a consultant for base and precious metals exploration in Chile, project geologist for base metals exploration in Chile with Min. Cominco Resources Chile (1991-1994), and as project geologist for base and precious metals exploration with Geoestudios Consultants (1983-1990). Mr. Malbran has a wealth of experience in both economic geology and geotechnical and regional geology; he received his degree in geology from the University of Chile in 1983.
Richard Doran, Vice President. Mr. Doran has been associated with South American Silver since its beginning and currently serves as the Executive Vice President of investor relations and corporate secretary. Prior to joining General Minerals, Mr. Doran served as the North American marketing manager for the European-based metals company Union Miniere. He was the commercial manager for Chevron
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRt
Corporation’s mining division from 1985 through 1994. Prior to this, he was marketing research manager for Getty Mining Company. Mr. Doran holds a professional engineering degree in metallurgical engineering from the Colorado School of Mines and an M.S. degree in mineral economics from Pennsylvania State University. He completed additional graduate studies in international economics at the University of Denver.
Peter Harris, Director. Mr. Harris is a consulting engineer with over 40 years of mining industry experience including experience as Senior VP and Chief Operating Officer at Nova Gold Resources Inc., and Senior VP of Project Development at Placer Dome Inc. Mr. Harris has been involved in the construction and operation of over 20 different mines in North and South America, Africa, Australia and Papua New Guinea.
William Murray, Director. Mr. Murray is an engineer in the mining industry with over 33 years of experience in construction management and project evaluation in North America and Africa. He currently serves as the executive chairman and director of Polymet Mining Corp. Mr. Murray has been involved in numerous successful projects while working at Fluor Daniel, Denison Mines, Optimum Project Services and Anglo American Corp. in South Africa.
Paul Haber, Director. Mr. Paul Haber is a Chartered Accountant and a Certified Public Accountant with a strong background in US/Canadian accounting and finance. He is presently managing the private company Haber & Co. Ltd. Prior to March 2007, he was Vice-President, Chief Financial Officer and Corporate Secretary of a TSX Venture Exchange listed company.
John W. Paul, Director. Mr. John W. Paul held various legal positions with Chevron Corporation over the period of 1988 to 2005. He holds B.B.A., M.B.A. and J.D.
John Watson, Director. Mr. John E. Watson has been the President of a TSX Venture Exchange listed company since 2002. He is also the manager/member of a limited liability corporation that owns and manages commercial real-estate.
Tina Woodside, Director. Ms. Woodside is currently the head of the corporate finance department in Gowlings’ Toronto office and a member of the firm’s National Executive Committee. Ms. Woodside practices corporate and securities law with particular emphasis on corporate finance, mergers and acquisitions and corporate governance matters. Ms Woodside was seconded to the Ontario Securities Commission in 1993 and became a partner in 1996. Ms. Woodside was listed in Lexpert Magazine as one of Canada’s 15 Women Lawyers to Watch and was awarded the BV rating in Martindale-Hubbell.
RedChip Visibility | �0 | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Quarterly Income StatementAll Figures in US$FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10
Total Revenue - - - - -Cost of Sales - - - - -Gross Profit - - - - -
Expenses and Other ItemsGeneral and Administrative expensesConsulting 24,188 36,485 19,422 75,790 39,792Depreciation and Amortization 6,685 5,989 6,834 8,845 9,737Director's Fees 19,500 19,550 15,750 15,750 29,250Filing and transfer agent fees 30,447 2,984 (2,632) 3,628 33,946Office and Administration 56,518 63,193 51,894 54,542 58,218Professional Fees 66,204 34,017 27,914 68,416 103,463Reconnaissance and Sundry Exploration 35,171 15,704 7,043 15,101 11,829Shareholder information 39,284 96,587 43,962 83,250 132,736Stock-based compensation 183,359 120,609 121,953 122,522 90,482Wages and benefits 66,726 50,924 53,285 106,403 78,946Provision for value added tax credits - - - - -Operating Income (Loss) (528,082) (446,042) (345,425) (554,247) (588,399)
Other Income (expense)Interest and other income 3,170 1,248 1,046 1,200 1,133Foreign currency gain (loss) (22,119) 48,424 29,723 26,900 14,336Loss on disposal of assets (631) - - - -Write-down of mining claims - - - - -Net loss and comperhensive loss for the period (547,662) (396,370) (314,656) (526,147) (572,930)
EPSBasic (0.01) (0.01) (0.01) (0.01) (0.01)Diluted (0.01) (0.01) (0.01) (0.01) (0.01)Shares OutstandingBasic 50,676,295 51,456,665 51,456,665 54,455,000 60,235,879Diluted 50,676,295 51,456,665 51,456,665 54,455,000 60,235,879
RedChip Visibility | �1 | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Annual Income StatementAll Figures in US$FY Ending December 31, FY07 FY08 FY09
Total Revenue - - - Cost of Sales - - - Gross Profit - - -
Expenses and Other ItemsGeneral and Administrative expensesConsulting 132,874 117,855 155,885 Depreciation and Amortization 36,619 45,501 28,353 Director's Fees 58,000 62,500 70,550 Filing and transfer agent fees 42,303 50,603 34,427 Office and Administration 143,727 208,530 226,147 Professional Fees 219,589 212,712 196,551 Reconnaissance and Sundry Exploration 16,160 10,600 73,019 Shareholder information 96,137 178,404 263,083 Stock-based compensation 1,507,714 1,031,578 548,443 Wages and benefits 291,807 200,326 277,338 Provision for value added tax credits 160,846 - - Operating Income (Loss) (2,705,776) (2,118,609) (1,873,796)
Other Income (expense)Interest and other income 576,463 231,992 6,664 Foreign currency gain (loss) 119,048 (211,679) 82,932 Loss on disposal of assets - - (631) Write-down of mining claims - (1,023,677) - Net loss and comperhensive loss for the period (2,010,265) (3,121,973) (1,784,831)
EPSBasic (0.05) (0.06) (0.03) Diluted (0.05) (0.06) (0.03) Shares OutstandingBasic 42,710,466 49,831,438 52,011,146Diluted 42,710,466 49,831,438 52,011,146
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Quarterly Balance SheetAll Figures in US$FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10
AssetsCurrent assetsCash and cash equivalents 6,564,682 5,718,880 5,051,663 7,013,973 5,814,496Receivables and prepaids 76,993 71,441 52,862 75,138 140,840Total current assets 6,641,675 5,790,321 5,104,525 7,089,111 5,955,336
Mining claims and deferred exploration costs 6,872,859 7,465,736 7,918,994 8,675,051 9,425,714Equipment 30,807 66,598 69,973 94,305 87,877Total non-current assets 6,903,666 7,532,334 7,988,967 8,769,356 9,513,591Total assets 13,545,341 13,322,655 13,093,492 15,858,467 15,468,927
Liabilities and shareholders' equityCurrent liabilitiesAccounts payable and accrued liabilities 194,097 240,445 194,092 462,017 507,851Total current liabilities 194,097 240,445 194,092 462,017 507,851Total liabilities 194,097 240,445 194,092 462,017 507,851
Shareholders' equityShare capital 44,891,866 44,891,866 44,891,866 47,251,095 47,866,568Contributed surplus 1,894,969 2,022,305 2,154,151 2,818,115 2,340,198Deficit (33,435,591) (33,831,961) (34,146,617) (34,672,760) (35,245,690)Total shareholders' equity 13,351,244 13,082,210 12,899,400 15,396,450 14,961,076Total liabilities and shareholders' equity 13,545,341 13,322,655 13,093,492 15,858,467 15,468,927
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Annual Balance SheetAll Figures in US$FY Ending December 31, FY07 FY08 FY09
AssetsCurrent assetsCash and cash equivalents 12,870,407 7,422,870 7,013,973Receivables and prepaids 76,950 50,396 75,138 Total current assets 12,947,357 7,473,266 7,089,111
Mining claims and deferred exploration costs 3,180,496 6,454,790 8,675,051Equipment 59,575 37,209 94,305 Total non-current assets 3,240,071 6,491,999 8,769,356Total assets 16,187,428 13,965,265 15,858,467
Liabilities and shareholders' equityCurrent liabilitiesAccounts payable and accrued liabilities 419,509 255,144 462,017 Total current liabilities 419,509 255,144 462,017 Total liabilities 419,509 255,144 462,017
Shareholders' equityShare capital 43,660,920 44,276,393 47,251,095Contributed surplus 1,872,955 2,321,657 2,818,115Deficit (29,765,956) (32,887,929) (34,672,760)Total shareholders' equity 15,767,919 13,710,121 15,396,450Total liabilities and shareholders' equity 16,187,428 13,965,265 15,858,467
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Quarterly Cash Flow StatementAll Figures in US$FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10
Cash flow from operating activitiesNet Income (547,662) (396,370) (314,656) (526,143) (572,930)Depreciation and amortization 6,685 5,989 6,834 8,845 9,737Gain on disposal of investments / assets (631) - - - -Investor relation fees settled by warrants - - - - 36,282Write-down of mining claims - - - - -Stock based compensation 183,359 120,609 121,953 122,522 90,482Change in receivables and prepaids (26,597) 5,552 18,579 (22,276) (65,702)Change in accounts payable 12,380 (42,679) (44,441) 226,926 (89,222)Cash flow from operating activities (371,204) (306,899) (211,731) (190,126) (591,353)
Cash flows from investing activitiesDeferred exploration costs (486,070) (497,123) (445,277) (704,984) (604,815)Purchase of equipment (914) (41,780) (10,209) (33,177) (3,309)Proceeds on disposal of investments - - - - -Cash flows from investing activities (486,984) (538,903) (455,486) (738,161) (608,124)
Cash flows from financing activitiesProceeds from issuance of capital stock, net of issue costs - - - 2,890,597 -Proceeds from exercise of compensation warrants - - - - -Net capital contribution from (reimbursement to) parent - - - - -Cash flows from financing activities - - - 2,890,597 -
Net Change in Cash (858,188) (845,802) (667,217) 1,962,310 (1,199,477)Net Cash - Beginning Balance 7,422,870 6,564,682 5,718,880 5,051,663 7,013,973Net Cash - Ending Balance 6,564,682 5,718,880 5,051,663 7,013,973 5,814,496
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtFInancIal StatementS
Annual Cash Flow StatementAll Figures in US$FY Ending December 31, FY07 FY08 FY09
Cash flow from operating activitiesNet Income (2,010,265) (3,121,973) (1,784,831)Depreciation and amortization 36,619 45,501 28,353Gain on disposal of investments / assets - - (631)Investor relation fees settled by warrants - - -Write-down of mining claims - 1,023,677 -Stock based compensation 1,507,714 1,031,578 548,443 Change in receivables and prepaids (47,076) 26,554 (24,742) Change in accounts payable 197,614 (164,365) 152,186 Cash flow from operating activities (315,394) (1,159,028) (1,079,960)
Cash flows from investing activitiesDeferred exploration costs (2,212,015) (4,265,374) (2,133,454)Purchase of equipment (77,118) (23,135) (86,080) Proceeds on disposal of investments 103,611 - -Cash flows from investing activities (2,185,522) (4,288,509) (2,219,534)
Cash flows from financing activitiesProceeds from issuance of capital stock, net of issue costs 14,891,170 - 2,890,597Proceeds from exercise of compensation warrants 419,101 - -Net capital contribution from (reimbursement to) parent 8,366 - -Cash flows from financing activities 15,318,637 - 2,890,597
Net Change in Cash 12,817,721 (5,447,537) (408,897) Net Cash - Beginning Balance 52,686 12,870,407 7,422,870Net Cash - Ending Balance 12,870,407 7,422,870 7,013,973
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtvaluatIon
South Am
erican Silver Corp.
Acid H
eap Leach Process (tonne/day)
35,000
1 Troy ounce = Gram
s:32.15
Total2013E
2014E2015E
2016E2017E
2018E2019E
2020E2021E
2022E2023E
2024E2025E
2026E2027E
2028E2029E
2030E2031E
2032E2033E
Material extracted [Tonnes]
192,683,823
6,846,223
10,033,913
13,342,068
14,774,464
12,578,624
9,583,013
9,741,665
9,578,896
8,565,664
7,588,885
8,562,086
7,712,625
10,651,329
13,564,448
13,046,890
9,133,655
8,277,763
9,087,302
10,014,310
9,187,110
Pre-P
roduction [Tonnes]494,543
494,543
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
1.75
Leach Tonnes
229,250,000
8,750,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
12,250,000
7,000,000
Grade (g/t)
30.5
48.93
43.58
35.18
33.40
37.90
45.38
32.97
35.02
38.88
34.89
32.98
30.05
26.17
28.27
13.69
14.23
15.00
17.06
20.84
22.53
In [g/t]6.4
4.57
4.89
6.18
7.39
7.34
13.63
6.40
8.26
13.34
9.22
3.36
5.71
8.43
4.71
3.30
3.37
3.44
3.54
3.58
2.70
Waste
(36,566,177)
(1,903,777)
(2,216,087)
1,092,068
2,524,464
328,624
(2,666,987)
(2,508,335)
(2,671,104)
(3,684,336)
(4,661,115)
(3,687,914)
(4,537,375)
(1,598,671)
1,314,448
796,890
(3,116,345)
(3,972,237)
(3,162,698)
(2,235,690)
2,187,110
Contained S
ilver [kg]6,987,890
428,138
533,855
430,955
409,150
464,275
555,905
403,883
428,995
476,280
427,403
404,005
368,113
320,583
346,308
167,703
174,318
183,750
208,985
255,290
157,710
C
ontained Indium [kg]
1,462,090
39,988
59,903
75,705
90,528
89,915
166,968
78,400
101,185
163,415
112,945
41,160
69,948
103,268
57,698
40,425
41,283
42,140
43,365
43,855
18,900
Silver R
ecovery [%]
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%80.0%
80.0%Indium
Recover [%
]70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
70.0%70.0%
Silver [oz]
179,734,121
11,012,039
13,731,178
11,084,507
10,523,665
11,941,524
14,298,321
10,388,181
11,034,095
12,250,303
10,993,134
10,391,332
9,468,148
8,245,638
8,907,306
4,313,442
4,483,586
4,726,197
5,375,261
6,566,263
4,056,427
Indium [kg]
1,023,463
27,991
41,932
52,994
63,369
62,941
116,877
54,880
70,830
114,391
79,062
28,812
48,963
72,287
40,388
28,298
28,898
29,498
30,356
30,699
13,230
Payable S
ilver [tr oz]170,747,415
10,461,437
13,044,619
10,530,282
9,997,482
11,344,448
13,583,405
9,868,772
10,482,390
11,637,787
10,443,478
9,871,765
8,994,741
7,833,356
8,461,941
4,097,770
4,259,406
4,489,887
5,106,498
6,237,950
3,853,606
P
ayable Indium [kg]
972,290
26,592
39,835
50,344
60,201
59,793
111,033
52,136
67,288
108,671
75,108
27,371
46,515
68,673
38,369
26,883
27,453
28,023
28,838
29,164
12,569
Silver P
rice [$/t oz]15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
Indium
Price [$/kg]
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
600.0
Cash flow
($ x 000)
Silver revenue
2,561,211
156,922
195,669
157,954
149,962
170,167
203,751
148,032
157,236
174,567
156,652
148,076
134,921
117,500
126,929
61,467
63,891
67,348
76,597
93,569
57,804
Indium revenue
583,374
15,955
23,901
30,206
36,120
35,876
66,620
31,282
40,373
65,203
45,065
16,423
27,909
41,204
23,021
16,130
16,472
16,814
17,303
17,498
7,541
By-P
roduct Credit
339,290
12,950
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
18,130
10,360
Total revenue [$ x 000]3,483,875
185,827
237,700
206,291
204,213
224,173
288,501
197,443
215,739
257,899
219,847
182,629
180,960
176,834
168,080
95,726
98,493
102,292
112,030
129,197
75,705
Mining costs
384,404
13,658
20,018
26,617
29,475
25,094
19,118
19,435
19,110
17,088
15,140
17,081
15,387
21,249
27,061
26,029
18,222
16,514
18,129
19,979
18,328
Plant costs
596,050
22,750
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
31,850
18,200
General and adm
inistrative229,250
8,750
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
12,250
7,000
S
ustaining capital for plant52,728
2,013
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
2,818
1,610
Final R
eclamation
2,639
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
139
Total Cash O
perating Cost [$ x 000]
1,265,071
47,310
67,074
73,674
76,531
72,151
66,174
66,491
66,166
64,145
62,196
64,138
62,443
68,306
74,117
73,085
65,278
63,571
65,186
67,035
45,277
Depreciation
121,662
5,192
6,241
6,241
6,241
6,241
6,241
7,066
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
6,517
EBIT [$ x 000]
2,097,143
133,325
164,385
126,376
121,440
145,781
216,086
123,886
143,056
187,238
151,134
111,975
112,000
102,012
87,446
16,125
26,698
32,205
40,328
55,646
23,911
Taxes627,456
38,817
49,274
37,879
36,401
43,699
64,783
37,135
42,884
56,135
45,307
33,561
33,572
30,579
26,207
4,824
7,996
9,647
12,082
16,674
7,161
EB
IT*(1-T) [$ x 000]1,469,687
94,508
115,111
88,496
85,040
102,083
151,303
86,752
100,172
131,103
105,827
78,414
78,429
71,433
61,239
11,300
18,702
22,558
28,246
38,972
16,750
O
perating Cash Flow
s [$ x 000]1,591,348
99,700
121,352
94,737
91,281
108,324
157,544
93,817
106,689
137,620
112,344
84,930
84,945
77,950
67,756
17,817
25,219
29,074
34,762
45,488
23,267
Capital cost [$ x 000]
25%A
ssumed additional capex for higher output than technical report
Initial Cap. P
lant62,500
25,000
12,500
P
re-Production
1,236
1,236
Initial Cap. M
ine16,475
6,590
3,295
Initial C
ap. Infrastructure25,000
10,000
5,000
C
ontingencies, Working C
apital18,955
4,222
6,451
2,708
943
409
Initial C
apital [$ x 000]124,167
47,049
27,246
2,708
943
409
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sustaining capital - M
ine [$ x 000]45,325
15,108
15,108
15,108
R
oyalty / NS
R [$ x 000]
875
875
Total capital costs [$ x 000]170,366
47,049
28,121
2,708
943
409
-
15,108
-
-
-
-
15,108
-
-
-
-
15,108
-
-
-
-
Return of W
orking Capital [$ x 000]
-
Salvage [$ x 000]
-
Net C
ash Flow, pre-tax [$ x 000]
2,048,438
(47,049)
110,396
167,918
131,674
127,272
152,022
207,218
130,952
149,572
193,755
157,651
103,383
118,517
108,528
93,963
22,641
18,107
38,722
46,845
62,162
30,428
Net C
ash Flow, post-tax [$ x 000]
1,420,982
(47,049)
71,579
118,644
93,794
90,872
108,324
142,436
93,817
106,689
137,620
112,344
69,822
84,945
77,950
67,756
17,817
10,111
29,074
34,762
45,488
23,267
Source Docum
ent for the data inputed in this tab (unless stated otherwise) is the Technical report dated M
arch 19th 2009
Valuation - Case B
- Assum
es the throughput of 30,000 tonnes per day and measures the im
pact on NPV
Tax rate30.0%
Discount rate
15.0%Silver Price
15.0A
fter-tax Cash Flow
s ("000 $)N
PV
as on 1 Jan 2011318,795
N
PV
- Current
297,278
Net debt as on 31st M
arch 2010(7,014)
E
xpected cash proceeds from w
arrants/options8,945
Equity valu e
313,237
Diluted S
AC
shares (in 000)81,923
NP
V per share in $
3.82E
xchange rate as on 24 June 20101.04
N
PV per share in C$
3.96
P/N
PV
0.8xPrice
3.20
Market P
rice (C$) as on June 23, 2010
0.62
Upside / (D
ownside)
415.5%
RedChip Visibility | �� | South American Silver Corp.
South American Silver Corp. (TSX: SAC)InItIal RepoRtDIScloSuReS
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BUYThe current price reflects a discount from the market and from its peers, and the company does not possess significant financial risk within its risk category. The analyst believes the stock at current levels will provide an opportunity for capital gains over the period of its target price. Several factors can indicate an undervaluation of the company’s shares. SPECULATIVE BUYThe current price appears to offer potential gains though risk is considerably higher given its risk category. There may be insufficient historical data or clear-cut prospects to warrant a “Buy,” but the analyst believes that the long run prospects of the Company are positive. The analyst believes its risk reward ratio advocates purchase of the stock. In the short term, the stock may be subject to high volatility and continue to trade at a discount to its market.
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Company Contact Info:880-580 Hornby StreetVancouver, BC V6C 3B6Phone: (604) 684-0693
Rating Number of Covered CompaniesPercentage of
Universe
Strong Buy 5 22.7%
Buy 14 63.6%
Speculative Buy 3 13.6%
Hold 0 0.0%
Sell 0 0.0%
RedChip Visibility Coverage Universe