TORONTO -- Scorpio Mining Corp [TSX:SPM], which closed Friday at C$1.84, is a near-term Mexican silver and base metal producer that could generate monstrous cash flow as it begins production from its Nuestra Senora project in about 9 months time.
Despite this, and the fact that the company is fully cashed up to production, SPM's valuation suggests that it continues to be an under followed situation. This is ironic because RI looks at this story as something of a layup - it is a fairly low risk, high-reward play with a sound project, in a safe country, with a seasoned management team.
Indeed, all of the numbers necessary to calculate how Scorpio should perform are more or less available, permits have been received, government and community support has been expressed and reiterated, the resource is there (and growing), mining infrastructure is being brought back online, and it could be just a matter of time before the company starts to monetize rock.
Management
Resource Investor had the pleasure of speaking with Scorpio founder, Chairman and CEO Peter Hawley at this year's in Toronto, and we can report very favourably on the calibre and track record of the team that Peter has assembled.
This senior group knows how to build out a resource and how to operate a mine as well as anybody.
Growing Resource & Great Rock Values
The concessions collectively known as Nuestra Senora encompass over 14,000 hectares. The company's development work has been conducted on just a tiny fraction of this, and the resource in across all categories now stands at over 7.5 million tonnes with an in-situ value upwards of US$1 billion, at current metal prices.
Indeed, Scorpion has drilled over 50,000 metres at the property in the last couple of years and has hit grades in every hole - not too many other companies can say that.
It is anticipated that current rounds of drilling will take the resource through 10 million tonnes.
In addition to this resource growth and resultant life of mine expansion, investors need to remember that all of this drilling will, in all probability, result in some high-grade holes that alone could take the stock much higher, as that is what this market is paying for.
That, of course, is in addition to the solid upcoming cash flow, which not only underpins this story but should take it much higher.
Cash Flow & Valuation
Scorpio will start mining in late 2007 at a rate of 1,000 tonnes per day (tpd) and will gradually augment daily production to the 2,500 tpd level over the course of 2008.
Nuestra Senora is a past-producing mine, formerly operated by ASARCO, with a not only straight-forward but favourable and well-understood metallurgy with which the company expects no difficulties.
Given reserve grades and current metal prices, and based on our discussions with the company, we expect that at current metal prices, cash flows could run around $100 million per annum at 2,500 tpd. This equates to C$1 per share.
This number does not factor in the company's ability to optimize cash flows by focusing on areas that are particularly precious metal rich or base metal rich, depending on which commodities are performing best.
Readers should watch for a pre-feasibility study, due out in early Q2, though in rough terms the numbers can already be adumbrated.
Conclusion
At current metal prices, and based on our cash flow projection of about C$1 per fully diluted share in annualized cash flow at 2,500 tpd, we see Scorpio as a C$6-C$8 stock in Q4 2008, assuming silver prices go sideways, and given a cash flow multiple of 6X-8X, which is on the lower end relative to comparables.
In reality, Scorpio could be one of the largest silver producers in Mexico relative to other Canadian-listed companies operating in that country and should be generating nine-figure cash flows, which should, combined with the company's large and growing resource, and elephantine precious and base metal anomalous land-package, result in a superior cash flow multiple, possibly as high as 8X-10X.
Scorpio as a critical mass play has more certainty than many other near-term producers, and we see it as a very attractive low-quartile relative risk, high-reward play, with the added bonus of being levered to silver prices.
To us, when one can find a story with a solid measure of safety that will at the same time, and in all probability, deliver multi-bagger returns, it makes sense to pull the trigger.
And if silver prices head over $20 an ounce, SPM could well have a double-digit handle on it - that much is algebraically demonstrable.