SilverCrest Metals: A Low-Cost Silver Producer

Introduction

SilverCrest Metals (NYSE:SILV) is a low-cost silver producer in Mexico. It's a very simple story. They recently ramped up production at their high-grade Las Chispas mine in Q1 2023. It's a single-mine company. Q1 results were solid, with an AISC of $11.50 and a net profit of $27 million. They have $45 million in cash and $25 million in debt and will soon be debt free.

There are no significant red flags with this company other than location risk in Mexico. This is likely a long-life, low-cost mine that will be a cash flow machine.

My main worry is that they don't have a lot of insiders. For this reason, they might get acquired by a larger company. I don't want that outcome. Instead, I want them to be a shark and begin growing via acquisitions.

My other worry is that Mexico could either raise taxes/royalties or demand partial equity ownership of silver mines.

Of course, many things can go wrong, and usually do with PM miners. These investments are never slam dunks and go according to plan.

One thing I always like to point out is that investing in PM miners is speculating. We are gambling, since so many things can go wrong. Keep your allocations low and expect to lose money on some of your PM mining stocks. What we are really betting on is PM prices going higher. If silver prices rise, then SilverCrest will be in a strong position. If silver prices languish, then bad things can happen.

Company Overview

SilverCrest Metals is ramping up production for their large silver/gold mine in Mexico. Las Chispas is a monster project. It has 6 miles of underground workings and 14 known veins. The resource size is 200 million oz (800 gpt silver equivalent including gold) and growing in size.

Their share price has blasted off from an initial spinout price of $0.15 to $5.89 today (38-bagger). They now have an FD market cap of $905 million. Amazingly, it's still cheap. They don't have a second mine to build, but Las Chispas is growing in size.

The economics of the project is excellent. The after-tax IRR was projected to be around 75%. The reason for the high IRR is low all-in costs (free cash flow) around $14 to $15 per oz. Plus, the capex was only $140 million to produce about 10 million oz. (silver equivalent, including gold). The head grade should be around 800 gpt (25 opt).

It is quite unusual for a company to build a mine and pay it off in less than one year. But that is the case with SilverCrest. Plus, they only have 153 million fully diluted shares, which is a tight share structure for a mid-tier producer. This is a strong company with very good management. Their strategy is to find and develop mines. Investors who got in early were very lucky. Some of them will get 100-bagger returns (15 cents x 100 = $15).

As silver prices rise, SilverCrest's balance sheet is going to get very juicy, with a large amount of cash. They will likely pay out dividends and buy back shares. Plus, they will likely acquire another company. To say that they look strong is an understatement.

Company Info

Cash: $45 million

Debt: $25 million

Current Silver Resources: 200 million oz. (AGEQ)

Current Silver Production: 10 million oz. (AGEQ)

Current All-in Costs (breakeven): $15 per oz

Current FCF multiple: 9.5

Estimated Future Silver Reserves: 200 million oz. (AGEQ)

Estimated Future Silver Production: 10 million oz. (AGEQ)

Estimated Future Silver All-in Costs (breakeven): $20 per oz

Estimated Future FCF Multiple: 15

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 8

People/Management: 8

Cash/Debt: 8

Location Risk: 6.5

Risk-Reward: 8

Upside Potential: 8

Production Growth Potential/Exploration: 8

Overall Rating: 8

Strengths/Positives

Low costs.

Good balance sheet.

Significant upside potential.

Strong management.

Pure silver play.

Strong brand name.

Risks/Red Flags

Dependence on higher PM prices (for large returns).

Location risk.

Could be acquired.

Speculation stock (high risk).

Estimated Future Valuation ($75 Silver)

Silver production estimate for the long term: 10 million oz.

Silver All-In Costs (break-even): $20 per oz.

10M oz. x ($75 - $20) = $550 million annual FCF (free cash flow).

$550 million x 15 (FCF multiplier) = $8.2 billion.

Current FD market cap: $905 million.

Upside potential: 800%.

Future Valuation Explained

This is an estimated return and will only occur if all assumptions are correct. A more likely outcome will be something less than this amount, although it is not crazy talk to expect silver to exceed $75 or the FCF multiple to reach 15.

My All-In Costs are the expected costs that will generate FCF.

I used a future FCF multiplier of 15, which I think is conservative for my expectations. I expect them to receive at least a 15 multiple.

I used a future PM price of $75 silver because I am a long-term investor who plans to wait for higher silver prices. I expect to see this level reached within 3-5 years. In fact, I use $100 silver for valuations on my website since that is my expected future price. I tone it down a bit to $75 on Seeking Alpha, which I think is more reasonable.

It is my opinion that gold drives the silver price and that macroeconomics drives the gold price. The only reason I expect to see $100 in silver is that I expect to see at least $3,000 in gold.

A $75 or $100 silver price may seem like a pie-in-the-sky fantasy, but silver traded at $49 in 2011 when gold was at $1,935. If gold rises 50% from its current level, there is a good chance that silver will rise 150%. This is usually what happens as the GSR gets squeezed. Of course, this is an assumption.

Balance Sheet/Share Dilution

They currently have a strong balance sheet with $45 million in cash and only $25 million in long-term debt. They will have no debt by the end of the year. It's likely they will begin accumulating a lot of cash. In Q1, they generated $27M in net profit. Their FCF is currently over $100M a year at $25 silver prices.

Risk/Reward

As I mentioned at the beginning, investing in PM miners is speculating. Why? Because one of your assumptions is bound to get flipped. The biggest risk is that PM prices won't rise, or inflation will cause costs to rise significantly, reducing expected margins. Many things can go wrong.

One thing that could go wrong is our expectation of margins. I'm expecting large margins as silver prices rise, which will drive up their FCF. Several things could hinder large margins, one of which is Mexican politics. They could raise taxes or even do some type of nationalization, such as requiring partial government ownership of all silver mines.

While the risk is high, the reward for SilverCrest is enticing if silver prices rise substantially. Plus, if SilverCrest finds a way to grow production, the reward could be even higher than I anticipate with my estimated future valuation.

Investment Thesis

SilverCrest appears to be well-positioned and well-leveraged for higher silver prices. They are somewhat unique in holding very strong factors, such as high-grade, low costs, a good balance sheet, and a tight share structure. These factors make it very attractive, and why it is on my favorites list.

The risk is high because the location of their mine is in Mexico. This is a country that has turned away from its mining-friendly reputation. The question is, does this trend continue? If it does, then investors will turn away from Mexico, and FCF multiples will shrink.

If Mexican politics does not derail SilverCrest, it should do very well if silver prices rise. This could become a very big company with a couple of acquisitions.

Strategy to Manage Risk

I use a pyramid approach (as discussed in my book) to manage risk, along with low allocations (normally less than 1% per individual stock), whereby I use less risky assets at the base of the pyramid and riskier stocks as I move up the pyramid.

As the shape of a pyramid implies, the bulk of my portfolio is on the lower half. This means that I hold fewer riskier stocks as a portion of my cost basis. Also, the base of the pyramid should be strong enough to withstand major corrections when the riskier stocks (exploration and development) higher up on the pyramid get obliterated (sometimes down 70% or more).

SilverCrest fits in the lower half of the pyramid, where I accumulate quality mid-tier producers. Ironically, it is also a high-upside stock because of its low costs and large resources. In many respects, I think it is the ideal stock to own. Many are fortunate it is this cheap. I don't think it will be once silver reaches $30 to $32, when it will likely double in value.

I don't trade. Instead, I use a buy-and-hold strategy of accumulating stocks (expanding my portfolio). Sometimes I think I am more of a stock collector than an investor.

While I am constantly accumulating stocks (I currently hold over 150 stocks), I also have an exit strategy. In fact, I have an exit strategy for each stock. I often add to stocks that crash more than 50% if I still like the story, thereby reducing my cost basis.

I rarely add to stocks that fall less than 50%, unless I think I am underweight on an exceptional stock. Moreover, I always buy big stock market corrections to improve my portfolio (this is usually the best time to buy).

I currently have a list of about 10 stocks that I want to buy in the coming correction. Of these 10 stocks, about half I already own. This will improve my portfolio.