Bear Creek Mining Corp (BCEKF)

[Tommy]

$BCEKF - $BCM.V - Bullish On Bear Creek Mining

Nov 26 2013, 13:42 http://seekingalpha.com/article/1864311-bullish-on-bear-creek-mining?source=email_authors_alerts&ifp=0

Disclosure: I am long SLW. (More...)

The Nut Shell

Bear Creek Mining (OTCPK:BCEKF) is a junior exploration company controlling two primary silver deposits in Peru. Feasibility studies have been completed for both projects showing robust economics in both cases.

We strongly believe that important catalysts will occur for the Corani project in coming months and possibly also for the Santa Ana project which we believe will lead to a re-rating of the company's share price. We believe that the share price may well double within a year.

The company has outperformed the sector during the past year and we have every reason to believe that the company will continue to do so providing downside protection for an investment in Bear Creek Mining even in the event that our prediction regarding upcoming catalysts is incorrect.

The Company

Bear Creek Mining is listed on the Toronto and Lima Stock Exchanges where shares trade with ample liquidity. Shares of the company are also available via the pink sheets in the US, although with less liquidity. We therefore recommend using the Canadian exchange if possible when investing in Bear Creek Mining.

Market capitalization at the time of writing computes to $153M and the share price stands at $1.66, down from $11 in the heydays of early 2011. Having said this, the share price has held up well in comparison with peers (GDXJ) as shown in the chart below.

Being a junior explorer the company does not have cash flow to support its activities. It is therefore important to note that Bear Creek Mining has a balance sheet showing $52.4M in cash and no debt.

This large cash position puts the company in a very strong place to negotiate project financing in the near future.

BCM Chart

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The Assets

Bear Creek Mining controls two primary silver projects in Southern Peru: the Corani project and the Santa Ana project. Feasibility Studies, or FS, for both projects have been completed showing very favourable economics for both projects. Both deposits are mineable by open pit methods. The Santa Ana project is envisaged as a heap leach operation and ore from the Corani project would be processed through a flotation plant.

Detailed information on the two properties is available from the company website here and here.

Both projects will be very profitable mines even in the presently volatile silver price environment. Corani sports negative cash costs for the first five years and around $4/oz thereafter thanks to by-product credits. Operations at Santa Ana should produce at cash costs below $10/oz after taking into account inflation since publication of the FS which is still rather low compared to peers.

The FS for both projects are two and three years old respectively. Several assumptions concerning prices and costs need to be reworked in order to be brought up-to-date. The attached table gives an overview of estimates of the projects' up-to-date NPV (5%) and IRR. We are listing these values for various silver price assumptions and for two different scenarios: for the Corani project only, and for both projects combined. The highlighted $21/oz scenario sports an estimated NPV estimate of $709.5M for the Corani project on its own, and $945.9M for both projects together at an IRR of 26.4%.

We assume 10% annual cost inflation from FS levels with regards to capital costs. For the Corani project this leads to an estimated initial capex of $695M; for the Santa Ana we estimate initial capex requirements of $94M.

Valuation

Taking into account market capitalization and cash on hand we estimate an enterprise value of just over $100 million; or just 11% of the asset value. This is an extremely low valuation by anyone's measure, even in the presently depressed junior gold space.

Upside

Both projects have significant upside due to their exploration potential. The reserve for the Corani deposit has not been updated for almost four years. We expect this reserve to increase substantially once the deposit gets drilled out completely. Considering the reported 88.7M ounces in measured and indicated resources plus 48M ounces of inferred resources expectations of a 500M ounces reserve are not too far-fetched.

To be clear: the Corani deposit is one of the largest and most attractive known undeveloped silver deposits.

There are also ample resources documented at the Santa Ana deposit in addition to the current reserve of 63M ounces. An eventual reserve increase to well beyond 100M ounces is definitely quite conceivable just based on these resources. Additionally, the Santa Ana deposit remains open, mainly at depth and to the north where the northernmost holes contain up to 22 meters @ 124 g/t silver from surface.

Furthermore, we view the high zinc content of the Corani project as another important factor bolstering the project's economics. Zinc supply is poised to decline in coming years which should lead to higher prices and therefore higher by-product credits at the Corani mine. There is also a possibility of treating heap leach tailings at Santa Ana at a later point in time in order to monetize the zinc and lead and remaining silver should market conditions improve.

Permitting

Approval of the Environmental and Social Impact Assessment, or ESIA, was received for the Corani project in September. This ESIA approval represents a major milestone and practically paves the way to initiating financing negotiations and move on to detailed engineering of the future Corani mine.

Work on the Santa Ana project has been suspended for a couple of years now. The project is located in close proximity to the Bolivian border which has been cited as the official reason for the suspension. Government reluctance to decide on a mining licence while anti-mining protests were ongoing in the Puno province at a time of presidential elections may well have been the real reason for the suspension.

Catalysts

At present we see two catalysts that both have the potential to move the share price of Bear Creek Mining substantially. Both catalysts are difficult to predict in terms of timing but should eventuate within the next 12 months.

Permission to develop the Santa Ana project may be re-instated.
A streaming deal may be announced.

Let us discuss these two potential catalysts in more detail.

Santa Ana Permitting

A so-called Supreme Decree issued in 2007 originally granted the company title over the mineral concessions covering the Santa Ana Project. This decree was reversed in June 2011 by President Alan Garcia. Shortly after reversing the decree President Garcia was succeeded by President Ollanta Humala.

Under the new president Peru has turned increasingly pro-mining and Bear Creek Mining might be one of the companies benefiting from this change in attitude. In fact, we believe that there is a high chance that the issues concerning the Santa Ana project will be resolved in the near future. Talks between the company and Mines Minister Jorge Merino are under way and the company certainly seems much more optimistic with regard to finding a favourable solution than before. Comments made by the Peruvian minister also give rise to speculations on a positive solution from the company's point of view.

Reinstating the Supreme Decree that had originally allowed Bear Creek to develop the Santa Ana project would have an instant positive effect on the share price. The Santa Ana mine could be developed quite rapidly and comparatively inexpensively providing early cash flow for the company.

Precious Metal Stream

We have reason to believe that a streaming arrangement with Silver Wheaton (SLW) could be worked out and announced in coming months. Silver Wheaton currently holds 14.4% of the company. There are personal ties between the two management teams and we gather that discussions between the companies regarding a streaming deal are ongoing and advancing. We therefore believe it is worthwhile speculating on such a development and how it could be structured.

Silver Wheaton is under scrutiny by investors due to uncertainties regarding the Pascua Lama stream and the related silver production from 2017. The company has recently expanded its stream from Hudbay's (HBM) Constancia mine and it has also shown some deviation from its usual practice by funding an exploration stage project in Guyana by Sandspring Resources (OTCPK:SSPXF). Adding another stream of the caliber of the Corani deposit in a relatively safe jurisdiction would certainly be judged as accretive by most investors.

Contacts between management teams go back many years and Silver Wheaton's CEO Randy Smallwood still maintains friendly connections with Andrew Swarthout, CEO of Bear Creek Mining. Nolan Watson was Silver Wheaton's CFO when this connection was established. He has since moved on to found Sandstorm Gold (SAND); however, Nolan Watson still serves on Bear Creek Mining's board of directors (and Andrew Swarthout serves on Sandstorm Gold's board).

In speculating about the nature of this possible streaming arrangement we would envisage a staged deal similar to the deal struck for Hudbay's Constancia mine. An initial payment would be followed by one or two staged payments upon completion of certain project spending milestones. A $300M stream would account for just over 40% of capex for the Corani project. Financing the remaining portion could be achieved by a mixture of debt and equity. On the topic of equity we would envisage the 14.4% of Bear Creek Mining stock which Silver Wheaton holds to be returned and retired as part of a streaming deal. This holding has a value of around $17M at the current share price and such a move could alleviate shareholder dilution, especially if the share price appreciates after the announcement of the streaming deal.

According to some rough calculations assuming a silver price of $20 we would expect a $300M streaming deal to be worth about 3M ounces annually, which equates to 22% of average annual production over the 20 year mine life. Such a stream would certainly reduce Bear Creek's margin; however, considering the exceedingly low cash costs of the Corani project this would be quite sustainable for the company.

Running some numbers we find that such a stream would be around NPV-neutral. In our model the reduction cash flow due to the stream is roughly balanced out by the reduction in initial capex requirements. This is only true when using the currently stated life of mine estimate. Any expansion due to exploration success would be a windfall for both parties alike.

A streaming arrangement along the described lines would be especially beneficial for Bear Creek Mining if the Santa Ana project could be brought online quickly and cash flow from the Santa Ana mine could be used to either compliment funding for the Corani project, or for a partial buy-back of the stream in a few years' time.

We strongly believe that an announcement of a streaming arrangement would be seen as positive by the market since it puts the company in a very strong position to arrange additional debt funding and limit the portion of equity funding to advance the Corani project.

The Wrap

We believe that Bear Creek Mining is in a very strong position in comparison to most peers in the junior mining sector due to its solid cash position. The company would be able to weather an ongoing downturn in the junior mining sector well beyond 2014 at the current burn rate. We therefore believe that an investment in the company has limited downside if our speculation on upcoming catalysts proves incorrect.

If the company receives permission to continue work on the Santa Ana project this mine could be brought into production relatively quickly, and with very limited funding required. The market would certainly view such a move very positively.

Completion of a streaming agreement with Silver Wheaton as outlined above would also be highly accretive and we would expect the share price to react positively.

If both catalysts eventuate then we would not be surprised to see the share price double from current levels in short order. Our bullish call is apparently shared by analysts who provide price targets ranging from $2.55 to $3.39, or 154% to 204% of the current share price. In an ideal world, the company would use a run in share price and raise the remaining funds to complete financing of the Corani project at minimum dilution for shareholders.

Credit Where Credit is Due

Material input for this article was kindly supplied by fellow author Hyperinflation for which we are immensely grateful.