South American Silver Corp. (TSX:SAC)(PINKSHEETS:SOHAF) reports the release of its audited consolidated financial statements for the year ended December 31, 2011 and the related management’s discussion and analysis of financial position and results of operations (“MD&A”). The Company is also pleased to provide an update on the Malku Khota silver-indium-gallium project in Bolivia and the Escalones copper-silver-gold project in Chile. In this press release, all amounts are expressed in U.S. dollars, unless otherwise indicated.
As at December 31, 2011, the Company had working capital of $26.3 million, including cash and cash equivalents of $26.6 million. With these funds in place, the Company is in a very strong financial position to accelerate the advancement of its Malku Khota project toward feasibility, and its Escalones project to the preliminary economic assessment stage. Further details including the full financial statements and information on each of the Company’s projects, including the resource estimate and Preliminary Economic Assessment study at Malku Khota and the resource estimate at Escalones, are available on the Company’s website at http://www.soamsilver.com and on SEDAR at http://www.sedar.com.
The year 2011 was a challenging one for equity markets in general, but particularly for companies in the precious metals sector. With a backdrop of both gold and silver bullion hitting or matching all time high price levels early in the year, precious metals equities experienced a prolonged consolidation period after a peak in the producer and explorer/developer indices in December of 2010. As a general barometer of the exploration/development stage resource market in 2011, the TSX Venture Composite Index saw one of its worst performances out of the past 10 years, second only to the market of 2008.
Though South American Silver also consolidated with the sector in 2011, performing along with the Junior Gold and Silver Miners Index, the Company saw a number of major fundamental achievements during the year including a major expansion of the resource and production projections on its Malku Khota silver-indium project and the discovery of a new 4 billion pound copper resource at the Company’s Escalones copper-gold project in Chile. On a two-year basis South American Silver substantially outperformed the sector indices, with its share price being up nearly 300% since January 2010.
At current valuations, South American Silver offers some of the best value and leverage to silver of any development stage silver company in the industry, with nearly 4 ounces of silver per share and nearly 8 ounces of silver equivalent value including the Company’s copper, indium and gallium resources. The year ahead should be an exciting one as well, with pre-feasibility level studies underway at the Malku Khota silver-indium project and a major Economic Assessment update due out Q2-2012; and with exploration activities underway at the Escalones copper-gold project to allow for an updated resource mid-2012 and a first Preliminary Economic Assessment Study by Q4-2012. With the two actively advancing projects the Company anticipates significant resource and engineering updates in each of the next 3 quarters of 2012 which should deliver meaningful milestones for increasing shareholder value.
Approach to business
South American Silver Corp.’s growth strategy has been to identify mineral properties that have significant scale potential to develop large resources in well established mining districts of Bolivia and Chile. Management looks to leverage its exploration and development expertise to bring additional resources and value to shareholders and to reduce development risk and expense through its focus on community relations and corporate social responsibility. The Company will continue to look for additional opportunities that can bring value to South American Silver’s shareholders through its approach to business. Responsible mining and community collaboration are a key part of South American Silver’s business strategy on its projects, where the Company is committed to upholding high environmental and social standards while focusing on delivering the financial growth its shareholders expect.
As part of the Company’s ongoing community relations approach to Malku Khota, community relations personnel are working closely with the surrounding local communities. The Company will look to facilitate local and regional economic development through the various stages of project development.
Current market and economic conditions
After fairly volatile market conditions throughout last year, 2012 has shown good relative strength with precious metals and precious metals equities prices generally higher as of March 2012. Thus far in 2012, prices for silver had steadily climbed to highs of nearly $36/oz by the end of February, after ending 2011 below $28/oz and gold had reached highs of nearly $1800/oz, up from early January prices of under $1600/oz. Though the precious metals markets are showing strength relative to the last couple of months of 2011, prices still remain below 2011 highs of nearly $1900/oz and $50/oz for gold and silver, respectively. While trending in a similar overall pattern to gold, silver has continued to show greater overall volatility and is up approximately 17% for the year to date compared with about 7% for gold.
Gold is up nearly 115% from its 1980 nominal high of $850/oz, whereas silver remains 35% below the 1980 nominal high of $50/oz. On an inflation-adjusted basis, silver still remains well below its highs of $140/oz in real terms as does gold with its high from 1980 estimated at $2350/oz in 2011 dollars.
Since early 2010, silver has nearly doubled in value, significantly outperforming gold, which has increased by about 60% over the same period. The current gold to silver price ratio of just under 50:1 remains well below its historic highs of 15-20:1 but is now well off of its 2010 lows in the 60-80:1 range.
The fundamentals for both silver and gold appear to remain strongly supportive for continued higher prices as governments continue to combat economic concerns with stimulus strategies to encourage economic growth and increase their sovereign debt. Increasingly, investors are returning to hard assets as a store of value and hedge against inflation and currency devaluation resulting in increased investment demand for both silver and gold in all forms, including Exchange Traded Funds (ETF’s), new physical metal investment trusts, bars and coins.
For silver specifically, its hybrid nature as both a precious and industrial metal shows in the significant increases last year in both investment and industrial demand growth. Industrial demand for silver is closely tied to global economic growth particularly in developing countries with applications ranging from biomedical to high technology. Silver appears to have resumed the multi-year trend prior to the recent global economic crisis of increasing overall industrial demand and has been accompanied by strong increases in investor demand. A recent industry report on silver by Byron Capital highlighted that the sustained growth in use of silver in technology usage alone may be enough to support silver at twice the current price levels.
With mining production of silver only increasing at approximately 2.5% annually and with by-product silver production from both gold and copper mining flat to falling since 2003, even with rising silver prices, anticipated continued growth in industrial use coupled with strong investment demand would appear to support higher silver prices going forward.
After correcting from highs of nearly $700/kg in November 2011, the indium and gallium market has begun to show more strength in February 2012, currently trading at prices of nearly $600/kg, well above trough pricing of around $500/kg during the global economic slowdown of 2008/2009. Recent developments in the indium and gallium markets continue to suggest a compelling supply/demand dynamic for these high technology metals.
The main usages for indium and gallium are in flat panel displays and touch screens, high efficiency solar panels and high-efficiency, long life LED lighting. Global indium and gallium consumption is anticipated to continue to grow significantly in these rapidly expanding market sectors. In total, global indium use has grown approximately ten times since 1990.
Base metals have also seen significant ranges in their prices over the past year with copper falling from its high of nearly $4.50/lb in July and August 2011 toward the $3.00/lb level in October 2011 with a recent rebound back to $3.50/lb in November 2011 and nearly $4.00/lb as of February 2012. Similarly zinc had fallen from $1.00/lb toward $0.80/lb, rebounding recently to $0.90/lb in November 2011 and recently reaching nearly $0.95/lb in March 2012. Recent price fluctuations in base metals appear to have been driven largely by short term economic concerns and general market volatility. Long term growth in demand for copper and zinc is likely to continue to be driven largely by growth in developing economies particularly in Asia where per capita consumption levels remain well below that of more developed nations.
With the volatility in the general markets and in commodities, equities in the sector have also seen significant swings in valuation over the past 6 months. Silver equities have been particularly so, with the move of the silver price toward its highs of $50/oz last spring, the correction toward $30/oz during the fall and recent rebound toward $35/oz today. Most silver equities saw consolidation from their spring highs and many small cap and growth stage companies are below their 200-day moving averages, a level that has often acted as a significant support level in the on-going bull market. The smaller cap explorer / developers have seen a larger rebound from their December lows than the larger cap producers significantly outperforming the larger companies in the sector and suggesting that broader investment capital is beginning to flow back into the sector. Traditionally late fall and winter are the strongest seasonalities for the precious metals sector and it appears that we may be moving into stronger markets since the end of the year.
With one of the largest development stage silver and indium resources, a significant new copper discovery in Chile, strong fundamentals and an attractive valuation level relative to peers, South American Silver has substantially outperformed both the metals and the silver and gold equity indexes over the past 2 years and has been one of the strongest performers on a year to date basis through March 2012.
South American Silver’s most advanced project is the Malku Khota silver-indium-gallium project located in the world-class silver mining district of central Bolivia, approximately 200 kilometers north of Potosi. Malku Khota is one of the world’s largest silver, indium and gallium resources with a NI 43-101-qualified Indicated Resource of 255 million tonnes of mineralized material containing 230.3 million ozs of silver, 1,481 tonnes of indium and 1,082 tonnes of gallium at a grade of 28.7 g/t silver, 5.8 g/t indium and 4.3 g/t gallium (43.8 g/t silver equivalent), and an additional Inferred Resource of 230 million tonnes containing 140 million ozs of silver, 935 tonnes of indium, and 1,001 tonnes of gallium at a grade of 18.9 g/t silver, 4.1 g/t indium and 4.3 g/t gallium (33.0 g/t silver equivalent). An updated Preliminary Economic Assessment study released in March 2011 showed robust economics for a bulk-mineable heap leach operation with the potential to be one of the largest new silver, indium and gallium producing mines in development with over 13.2 million ounces of silver production annually over the first 5 years. The project is road-accessible, with commercial scale natural gas and electricity nearby.
Pre-feasibility level engineering and metallurgical process work is underway to further optimize the project production levels and process flowsheet. These studies have looked at increasing overall scale and potentially including a milling scenario for higher grade material that leaches better when finely ground. An updated NI 43-101 qualified Economic Assessment study based on the work over the past year for Malku Khota is targeted for release in Q2-2012. In addition, exploration activities are underway to support a planned 20,000 meter drill program. With the typical conclusion of the rainy season in February, drill roads and drill pads are being developed to support the start of drilling on the project in March. This drill program will include infill drilling to convert inferred resources to measured and indicated resources and eventually into reserves and to test further resource expansion at depth and between the two known deposits. To date, only about 30% of the known prospective mineralized host stratigraphy at Malku Khota has been drill tested. The 2012 drill program will also include drilling to test several additional high-priority, near surface targets based on surface sampling and geophysics.
Due to the bulk mineable and heap leachable nature of the deposit, there remains excellent potential to continue to expand production levels beyond the 13.2 million ounces of silver per year level in the 2011 Economic Assessment study through further optimization of the resource and increases in overall mine throughput. Current optimization studies are targeting expansion of annual silver production toward 18 to 20 million ounces per year as part of the updated Economic Assessment and would make Malku Khota one of the largest producing silver mines in the world.
Over the past year South American Silver has significantly broadened its community relations activities and the Company has entered into Impact and Benefit-type agreements with local indigenous communities to facilitate local economic and business development through the various stages of project implementation. The project contributes significantly to the local economy and it is estimated that the construction phase would likely create as many as 1,000 new jobs in the region with over 400 full time workers directly employed during mine operations. Feasibility and baseline environmental work is planned to begin in the second half of 2012. The Company anticipates continuing to build on its community relations initiatives to support the feasibility and permitting stages in 2012 and 2013.
The Escalones copper-gold project is located in the world-class central Chilean mining district which includes the nearby El Teniente deposit – the world’s largest underground copper mine. The project is accessible by road and is approximately 100 kilometers south-east of Santiago. South American Silver filed a detailed NI 43-101 technical report for the Escalones resource estimate in February 2012.
The newly defined Inferred Resource of 420 million tonnes of mineralized material contains 3.8 billion lbs of copper, 56.9 million lbs of molybdenum, 610,000 ozs of gold and 16.8 million ozs of silver at a grade of 0.41% copper, 0.05 g/t gold, 1.24 g/t silver and 61 ppm molybdenum using a 0.2% Cu Equivalent cut-off grade (see December 19th, 2011 News Release). This is a copper-equivalent content of 4.5 billion lbs of copper grading 0.49% based on approximate 3-year average metal prices as of December 2011.
The Escalones deposit remains open to expansion laterally and down dip with 90% of the current resource hosted in copper, gold and silver replacement-style mineralization, and one drill hole testing porphyry-style mineralization. Initial interpretation of a ZTEM and aeromagnetic survey shows several large areas of untested conductivity anomalies which may represent areas of potential additional sulfide mineralization related to both replacement style and porphyry mineralization. 2D and 3D modeling and interpretation of these geophysical targets is in progress.
A Phase II exploration program is underway with two core drills currently working on the site. Work will focus on understanding the scale of the system by testing both porphyry and replacement-style mineralized zones. Step out drilling will focus on known mineralized areas and test new targets based on the recently completed aerial ZTEM and magnetic surveys. The planned program will include 7,000 meters of drilling to complete a resource update in mid-2012. Initial engineering work including metallurgical testwork is planned to determine recovery of copper, gold, silver and molybdenum and concentrate characteristics for a Preliminary Economic Assessment study targeted for Q4-2012.
Updates on Escalones will be provided as drill results and geophysical interpretations are completed.
The year ahead should be an exciting one for South American Silver Corp., with pre-feasibility level studies underway at the Malku Khota silver-indium project and a major economic assessment update due out in Q2-2012. A number of improvements in the process approach are being considered for the next economic assessment that look to further optimize more of the resource, increase annual production levels and cash flows and look for opportunities to lower overall operating costs on the project further.
In particular the technical team at South American Silver is focused on adding shareholder value through a process of refining engineering with the start of feasibility studies in the second half of 2012, understanding the resource expansion potential and moving forward with the permitting process while working closely with the local communities to facilitate local economic and business development.
The next phase of the program will include in-fill confirmatory drilling to move inferred resources into measured and indicated resources as well as test expansion along trend and down dip and potentially continue to expand the project resources which remain open in all directions.
We believe that the above will support the move toward a fairer market valuation for the Malku Khota project reflecting the world class scale of the resource, production potential and economics.
At the Escalones copper-gold project, the on-going exploration program is anticipated to begin to highlight the exceptional value of that newly discovered resource as well. The exploration activities underway are expected to allow for an updated resource by mid-2012 and a first Preliminary Economic Assessment Study by Q4-2012.
In the months ahead, we are committed to reporting on a number of important project milestones which we believe will broaden shareholder value as we advance each of our South American projects through the next stages of development.
Greg S. Johnson, President & CEO
About South American Silver Corp.
South American Silver Corp. is a growth focused mineral exploration company creating value through the exploration and development of the Malku Khota (100%) project in Bolivia, one of the world’s largest undeveloped silver-indium-gallium deposits, and the large-scale Escalones (100%) copper-gold project in Chile. The Company’s approach to business combines the team’s track record of discovery and advancement of large projects, key operational and process expertise, and effective community relations to increase shareholder value. Management has extensive experience in the global exploration and mining industry with much of that focused in Bolivia, Chile, Peru and Argentina. The Company’s shares are listed on the Toronto Stock Exchange under the symbol “SAC” and on the US OTC market as “SOHAF”.
Marketwire (March 20, 2012 – 8:48 PM EDT)
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