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Fortuna is Dundee Capital’s top silver mining pick

“…There is a divergence of relative strength among silver producers, and 2015 will be a critical year for balance sheet positioning,” says Dundee.

Low mining costs and clean balance sheets have prompted Dundee Capital Markets to choose Fortuna Silver as its top silver sector pick, along with Tahoe Resources, “which we believe are best positioned in the short, medium and long term”.

“On the other end of the spectrum are Endeavour Silver and Coeur Mining, both names with a critical 2015 (EDR’s resource update and El Cubo progress, CDE’s cash burn and balance sheet progress) and less clarity on the longer term outlook,” said Dundee Capital Markets analyst Matthew O’Keefe.

In a silver sector update published Wednesday, Dundee reported that third-quarter average fully loaded costs for silver miners were down 4% year-on-year to $19.30/oz.

“When we look at the company-specific costs in the silver sector, we continue to see a material spread between those companies who have cost structures designed for lower price environments, and those who are still structured for higher commodity prices,” said O’Keefe.

“Fortuna, Tahoe and SilverCrest continue to stand out as names that can generate cash in today’s price environment,” he advised. “Coeur remains the highest-cost producer in our coverage universe and should remain so.”

“Balance sheet strength within our coverage universe continues to show a large spread and we think is a key differentiator in terms of the downside risk associated with the silver producers,” said O’Keefe. “Those in the strongest position continue to be Fortuna Silver and Tahoe Resources.”

“We view Coeur Mining as having the balance sheet with the greatest risk, partially offset by a healthy cash balance,” he added.

“First Majestic and Endeavour Silver are companies which both have manageable  levels of debt,” said O’Keefe. “SilverCrest is expected to be in a free cash flow generation position in Q4, and should be able to use 2015’s free cash flow to build its net cash position.”

Dundee Capital Markets incorporates a silver reserve pricing range from $21.91-$28 per ounce with Fortuna and SilverCrest at either end. O’Keefe expects to see silver reserves prices drop to a range of $16-$20/oz “for many of the companies”.

“Over the past year and a half, we have seen producers mine higher grade to keep up with the falling silver price,” O’Keefe observed. “The amount of economic ore at today’s prices is not easily calculated and its impact on current mine plants remains a core ‘known unknown’ for silver producers.”

“Reserves and resources will certainly come down at lower silver prices but those mining high-grade vein deposits like Fortuna and Tahoe may see very little impact to their current mine plans,” he forecast. “Similarly, Endeavour and First Majestic have higher-grade operations. Coeur’s operations tend to be lower grade, particularly Rochester and San Bartolome but the former’s heap-leach extraction has been showing significant cost improvement.”

In their analysis, Dundee Capital Markets found current estimates of mine lives for silver mines in their coverage range between 5 to 25 years with a median of 11 years. Endeavor Silver Mines’ Bolantitos and Guanacevi are at the low end with five and six years, respectively, of mine life. Tahoe’s Escobal mine is at the high end with 25 years of mine life.

“Resource conversion continues to be important for many of our producers, given the short mine lives associated with underground mines,” said O’Keefe. He noted that First Majestic has not updated its resources with new drilling since its last technical reports in 2012.

O’Keefe told Mineweb that Dundee analysts have projected an average silver price of $22/oz in their calculations.

Dundee Capital Markets rated Fortuna Silver and Tahoe Resources as “Buys” with targets of C$6.50 and C$27.50, respectively.

“Fortuna has $72MM in cash and investment, no debt and FLCC [Fully Loaded Cash Cost] in the $14/oz range,” said Dundee, noting that the company “remains comfortably positioned to generate positive cash flow as well as fund its dry stack tailings project ($27MM) and the potential expansion at San Jose (conservatively modeled at $40MM, guided to $30MM).”

“The strong cash flow generation demonstrated in the first year of production from Escobal has established Tahoe’s position as a low cost producer with FLCC of ~$12/oz,” Dundee observed. “The recently released feasibility study and sizeable reserve statement supports our view that the company will continue to build on its net cash position of $29MM with steady cash flow for at least 19 years.”

Endeavour Silver and Coeur Mining were both ranked “Neutral” by Dundee Capital Markets.

“After a challenging Q3, Endeavour finished the quarter with $29MM in cash and $27MM in debt. The debt reduction targets of the company are being continuously pushed back, highlighting the challenges EDR is facing in today’s lower commodity price environment…”

“With FLCC expected to range from $18-20/oz through 2015, Endeavour remains a marginal producer and highly leveraged to commodity prices,” Dundee advised.

“The outlook for Coeur Mining is more challenged, given the cash burn we expect moving forward and FLCC in the $21-22/oz with little room to move lower in the short term,” said Dundee. “The company is targeting Q4 2016 before it generates free cash flow, given the operational turnaround plans currently being undertaken. Coeur’s heavy debt position of $469MM is not due until 2021 and it has significant cash position of $295MM but we think 2015 will be a critical year from a balance sheet perspective, and hence we will be watching 2015 guidance closely.”



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