Why SantaCruz Silver Mining Looks Good

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Silver, precious metals

Markets are egregiously inefficient, which means that there are a plethora of opportunities for those investors who are able to spot irrational market behavior and exploit it. One such opportunity is in shares of the tiny silver mining company, SantaCruz Silver Mining (SZSMF.PK).

Over the past several months, shares of SantaCruz Silver Mining have underperformed both the price of silver and the price of silver miners more generally, as measured by the Global X Silver Miners ETF (NYSEARCA:SIL). However, the fundamentals do not support this underperformance — SantaCruz has recently made meaningful advances towards growing its resources and becoming a multi-million ounce producer. Not only has the company ramped up production at its flagship mine, Rosario, but we saw a huge boost recently in its total resources at the company’s (formerly) tertiary property — Gavilanes. With this in mind, SantaCruz shares should have outperformed the broader sector, and consequently, I think the shares have significant upside in the near future even if the price of silver remains at around $20/ounce.

An Overview of SantaCruz Silver Mining

SantaCruz Silver Mining has an interesting strategy: it plans to develop small and inexpensive mines on its Mexican properties in order to generate a small amount of cash flow in order to further explore its these properties. The company paid just $10 million in order to bring its flagship property, Rosario, into production. By the end of the year, this production should reach an annualized rate of 800,000 ounces of silver equivalents (i.e. silver plus lead, zinc, and gold priced in silver terms). By employing this strategy, management hopes to fund its own exploration and incremental expansions of its producing mines without seeking large amounts of outside capital. This is a very appealing approach because it limits the amount of dilution that existing shareholders have to endure.

The company has three primary properties — Rosario, San Feliz, and Gavilanes. Rosario is a small producing mine that contains about 12.5 million ounces of silver. Production has been increasing from virtually nothing over the summer to hopefully 800,000 ounces on an annualized basis by the end of the year. Furthermore, the silver here is high grade — 300 grams (about 10 ounces) per tonne, which means that the operation will likely be profitable and it will generate significant cash-flow that the company can use to expand its resource.

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