Sac initial report

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Sac initial report

  1. 1. South American Silver Corp. (TSX: SAC) TM TM june 28, 2010 | TARGeT PRICe: C$3.20 | RATInG: SPeCuLATIVe BuY Discovering ToMorrow’s Blue chips ToDay TM Visibility COMPANY OVERVIEW InItIal RepoRt South American Silver Corp. (“SAC” or the “Company”) is an exploration stage mineral company engaged in the exploration and development of the 100% owned Malku Khota silver-indium project in Bolivia and the Escalones copper- AnALySt gold project in Chile. The Malku Khota project is a world-class silver-indium Soumik Gosh deposit expected to commence production in 2014. Exploration activity at the Escalones project, a relatively early-stage property, has been restarted after MARkET dATA TICKER SaC.To being temporarily suspended. SAC’s senior management is vastly experienced FISCaL YEaR dECEmbER in the global exploration and mining industry, primarily in South America mETaLS mInInG & (Bolivia, Chile, Peru and Argentina). SECToR ExpLoRaTIon RECEnT pRICE C$0.62 TaRGET pRICE C$3.20 INVESTMENT RATIONALE maRKET Cap C$37.8m SAC is an attractive asset play. SAC has a large existing silver resource base 52-WEEK HIGH - LoW C$0.81 - C$0.29 pRICE/EaRnInGS (TTm) n/a with good exploration upside. The Company has indicated silver resources of pRICE/booK (mRQ) 2.5x 144.6 million oz and inferred silver resources of 177.8 million oz, making it pRICE/SaLES (TTm) n/a one of the largest undeveloped silver resources in the world. The Company SHaRES oUTSTandInG 61.0m also has indicated and inferred indium resource of 845 tonnes and 968 tonnes FLoaT 53.3m respectively. In addition to low operating costs of $3.75 per oz (net of byproduct avG daILY voLUmE (3 moS) 226,952 credits) and low initial capital costs ($103.37 million), the ongoing exploration InSIdER oWnERSHIp 12.6% at Malku Khota covers only 25% of the project’s 15 km strike length, providing As of June 25, 2010 significant opportunity to expand the resource base. FINANCIAL dATA Stock re-rating on transition from exploration to production. SAC’s current REvEnUE (TTm) n/a valuation (EV/oz of C$0.09) reflects its low market visibility and relatively REv (TTm)pER SHaRE n/a recent development of its resource. Though the recent appointment of CEO QRTLY REv GRWTH YoY n/a Greg Johnson and increased investor outreach are positives for the stock, we GRoSS pRoFIT (TTm) n/a believe the real value drivers will come from the following two chronologically opERaTInG maRGIn (TTm) n/a EbITda -$1.8m successive events: 1) the successful transition from a resource definition and nET InComE (TTm) -$1.8m Preliminary Economic Assessment (PEA) stage to a feasibility study stage 2) dILUTEd EpS (TTm) -$0.03 the successful transition to a production decision (expected in 2014) or partners QRTLY EpS GRWTH (YoY) n/a with/sells out to an industry major. CaSH & EQUIv (mRQ) $5.8m CaSH (mRQ) pER SHaRE $0.10 Based on comparable companies and past instances, the transition from resource ToTaL dEbT/EQUITY 3.4% definition to the feasibility stage can potentially increase valuation anywhere booK vaLUE pER SHaRE $0.25 between 5x and 10x, depending on the success and speed of development. The RoE (TTm) n/a subsequent transition to production or a partnership/sellout agreement with a Roa (TTm) n/a major mining producer has a similar upside potential. Moreover, the potential © RedChip Visibility, a division of RedChip Companies, Inc. | 500 Winderley Place, Suite 100, Maitland, FL 32751 | 1-800-RED-CHIP | www.RedChip.com For analyst rating definitions, research coverage universe and other disclosures, please refer to page 37 of this report or write to research@redchip.com
  2. 2. South American Silver Corp. (TSX: SAC) InItIal RepoRt for this multiplier is particularly great in the case of SAC, since the potential for resource expansion through further drilling is significant. We therefore expect a valuation re-rating as the Company moves closer to the production stage (as per our analysis, EV/oz valuation of a silver producer is approx 2.2x EV/oz of a silver exploration company). $4 million financing accelerates resource expansion. On June 18, 2010 the Company announced a $4 million “bought deal” private placement that will help accelerate resource expansion for the Malku Khota project. The financing will also enable SAC to resume drilling at Escalones and progress towards resource definition there. Under the terms of the deal, the underwriters take the entire risk of placement on their book. SAC will issue 6.35 million units at $0.63 each. Each unit comprises a common share and a warrant to purchase half of a common share at a strike price of $0.95. The underwriters also have the option to increase the offering by another $2 million at the same price per unit. Substantially improved investment scenario in Bolivia. The Malku Khota silver-indium deposit is located in Potosi State, a silver mining district in central Bolivia. Three new silver mines—PanAmerican Silver’s San Vicente Mine, Coeur d’Alene’s San Bartolome Mine, and Sumitomo’s San Cristobal mine have came on stream in the last three years from this same region. Under the Evo Morales administration, Bolivia has become one of the fastest growing economies in the Americas, with tightly controlled inflation and a strong trade surplus. Owing to the substantial improvement from the previous administration, Moody’s has upgraded Bolivia’s sovereign rating from B3 to B2 while Fitch and S&P upgraded its ratings from B- to B which is also in line with the EIU’s country’s risk rating of B and positive outlook for the country. Investment in silver is an effective inflation hedge. We believe the current macroeconomic environment makes the economics of precious metal exploration and mining extremely attractive. Investment in silver is viewed as an effective inflation hedge and a counter trade against the US dollar, which is expected to remain under pressure over the medium to long term due to unprecedented monetary easing and a weak economic recovery. Over the long term, this is expected to lead to higher budget deficits and inflationary pressures, supporting silver’s price. Valuation. Our discounted cash flow valuation using a 15% discount rate suggests a net present value (NPV) of C$3.95 per share. Applying a price to net asset value (P/NAV) multiple of 0.8x to the discounted cash flows of SAC’s Malku Khota project derives our price target of C$3.20. Our price target does not assign a value to any resource expansion which may come when the Company issues a resource update possibly in 2011. Similarly, we haven’t valued the Escalones project since there not yet a resource definition and PEA. However, we do want to stress the further upside potential of SAC’s valuation once the Company advances its project through the development curve. At an enterprise value of C$0.09 per oz, SAC trades at a steep discount to peers with similar silver reserve/ resource profiles, such as Bear Creek (EV/oz of C$0.73), Minco Silver Corp (EV/oz of C$0.78) and MAG Silver Corp (EV/oz of C$1.45). We believe SAC’s current depressed valuation is due to a combination of low market visibility, a relatively new resource (released in the turbulent 2008 market) and a risk premium associated with SAC’s presence in Bolivia. Additionally, high project execution risk at the Malku Khota project given its early stage of exploration and production likely to start in 2014 at the earliest, are further tempering the stock. With improvement in Bolivia’s investment environment and ongoing resource expansion by the Company, we view investment in SAC at current valuations as an opportunity to build exposure to lucrative, early stage silver assets. RedChip Visibility | | South American Silver Corp.
  3. 3. South American Silver Corp. (TSX: SAC) InItIal RepoRt INVESTMENT HIGHLIGHTS SAC is an attractive takeover candidate. Given the attractiveness of the precious metals space, exploration companies with good precious metals resource profiles are attractive takeover targets. The recently announced acquisition from Goldcorp of a similar size project by Tahoe Resources at an EV/oz of US$1.51 underscores this trend. The deposit is at an earlier stage compared to SAC’s Malku Khota and has no economic assessment to its credit yet. Being located in the emerging market country of Guatemala, it has a similar risk profile compared to Bolivia. This transaction gives a sense of the upside potential to shareholder value for early-stage precious metals companies, such as SAC. Assessing this transaction, we estimate a takeover valuation of C$3.30 per share, which is 5.3x the recent stock price (C$0.62). Potential for resource expansion is significant. SAC’s current focus is on increasing drilling activity at the site and significantly expanding its resource base. The Company expects to provide an expanded resource estimate by late summer or early fall, following which it will undertake a preliminary economic assessment (PEA) by the end of 2010. SAC wants to continue resource expansion well into 2011 and file a pre-feasibility study by the end of that year, following which it will take the subsequent steps toward production. Given that current resource estimates are based on only 25% of Malku Khota’s 15 Km strike length, we see substantial upside to resource potential from here. Malku Khota’s mining economics are very attractive. The Malku Khota project has indicated resources of 144.6 million oz and inferred resources of 177.8 million oz. The leachable resources can be extracted in a very cost efficient manner. Operating costs (net of credits) are estimated at US$3.75 per equivalent silver oz and initial capital costs at $103.37 million, resulting in a payback period of 1.4 years. Infrastructure along the site also plays a major role. The site is accessible by road, has a power source nearby and moderately warm climate. Resumption of drilling at Escalones to be another positive for the stock. SAC is looking at its Escalones copper-gold project in Chile with renewed interest since Greg Johnson joined the Company. The Escalones deposit is located in a world-class copper district, and has a similar geological setting compared to El Tiente, world’s largest underground copper mine, which is located just 35 km east of the deposit. The property has access to road and water, and has a gas pipeline running across it. With the Company’s recent equity raise, SAC is set to resume drilling activities on the project and is targeting a resource definition by early 2011. This positive development will allow the Company to increase and diversify its asset base. Strong management team. SAC has a strong management team lead by Greg Johnson, Company’s President and CEO. Greg Johnson is a geologist with over twenty years of experience in the mining industry. His prior experience at Nova Gold and Placer Dome gives SAC necessary expertise to drive the transition from resource definition through to the feasibility study stage. As one of the co-founders of NovaGold, Mr. Johnson was part of the team that took NovaGold’s market capitalization from $10 million to nearly $2 billion over a period of 12 years, through resource expansion and advancing its projects up the development curve through feasibility and toward production. He also played a key role in the multi-million–ounce Donlin Creek discovery, one of the largest gold deposits in the world. The SAC management team has extensive exploration experience in South America and is well supported by Ralph Fitch (Executive Chairman Director). Ralph Fitch has over forty years of geologist experience in international exploration management and field work. RedChip Visibility | | South American Silver Corp.
  4. 4. South American Silver Corp. (TSX: SAC) InItIal RepoRt Silver is an effective inflation hedge. Investment in SAC provides exposure to silver with an embedded indium option. A weak global economic outlook coupled with long term inflationary concerns has made precious metals like silver and gold an extremely attractive asset class. Investment in silver is viewed as an effective inflation hedge and a contra trade against the U.S. dollar. The general expectation is that aggressive monetary easing by major central banks and heavy deficit spending by the U.S. and other major economies will lead to higher inflation and a weakened U.S. dollar over the long term. INVESTMENT RISkS Despite improved outlook, Bolivia’s geopolitical risk remains considerable. Presence in Bolivia increases SAC’s geopolitical risk due to the possibility of anti-industry policy decisions, including the imposition of higher taxes on mining companies. These concerns are hightened due to recent decisions by the government to repurchase formerly state-owned businesses such as utilities. However, we do note the improvement in the country’s investment outlook over the last few years under the Morales administration. On many measures, from dramatically reduced inflation rates to double digit trade surpluses and robust internal growth, Bolivia’s recent economic performance is the best it has been in over 30 years. Along with easing political tensions and healthy accumulation of foreign exchange reserves, the three main ratings agencies have all upgraded its sovereign ratings in the last year. Bolivia is also preparing to tap the international markets to finance a $32 billion infrastructure build-out plan in the next seven years. Execution risk due to Company’s early stage of exploration. As per the timeline provided by management, SAC currently expectsthe timeline providedexpanded resource estimate and to release anPEA by the end of 2010. As per to release an by the management, SAC currently expects updated expanded We would then anticipate a pre-feasibility study by the end of 2011, followed by a feasibility study and resource estimate and updated PEA by the end of 2010. We would then anticipate a pre feasibility study by end 2011, followed by a feasibility study and permitting in end 2012, which could lead to a permitting in 2012, whichdecision by the 2013 14 time frame. This 4 year lead time to production adds frame. This 4-year lead production could lead to a production decision by the 2013-14 time to the time to production adds toexecution risk profile. Delays in advancing development Delays in advancing development projects Company’s the Company’s execution risk profile. projects are quite common, and it are quite common, and it often leads to pushed out. Moreover,pushed out. Moreover, increasing environmental often leads to timelines being timelines being increasing environmental regulations has significantly increased production timelines for mining companies. Delays and execution risks can also regulations have significantly increased production timelines forsuch execution risks materialize, it arise from problems or failures in engaging the local communities. If mining companies. Delays and execution risks can also arise from problems orsentiments and valuation. can adversely impact investor failures in engaging the local communities. If such execution risks materialize, it canOur target price impact investor sentiments and valuation. adversely is sensitive to silver prices Our target priceSilver prices have been highly volatile in the past. Recent silver prices been highly volatile in the past. Recent is sensitive to silver prices. Silver prices have have traded in the $17 19/oz silver prices have range, wellin thetheir long term highs of $50/oz in 1980. From the onset of the financial crisis, prices traded below $17-19/oz range, well below their long term highs of $50/oz in 1980. From have been supported by safe haven demand from investors (mainly through ETFs) though industrial the onset of the financial crisis, prices have been supported due to its dual correlation with gold (as a investors (mainly demand has been soft. Historically silver’s volatility has been by safe haven demand from through ETFs) though industrial demand has been soft. Historically silver’s volatility has been due to its store of value) and base metals (for its industrial use). Though we are bullish about silver price in the dual correlation with run, we(as note that ofsilver prices soften overmetals (for itsframe, it will dampen SAC’s long gold do a store if value) and base a prolonged time industrial use). Though we are bullish outlook. about silver price in the long-run, we do note that if silver prices soften over a prolonged time frame, it will dampen SAC’s outlook. Our sensitivity analysis shows that withfrom$1 decline in$15 per oz, Our sensitivity analysis shows that with a $1 decline in silver price a our base case of silver price from our base case of $15 per oz, SAC’s NPV would to C$3.60 per share. However, it is stillper above the current price. SAC’s NPV would decline by 9% decline by 9% to C$3.60 well share. Sensitivity of NPV to Silver Prices Silver Price NPV per share % decline $15 per ounce C$3.95 $14 per ounce C$3.60 9% $13 per ounce C$3.25 18% $12 per ounce C$2.90 27% Source: Redchip estimates RedChip Foreign Currency risk Visibility | | South American Silver Corp. Majority of SAC’s working capital is held in US dollars, with only modest exposure to the Bolivian
  5. 5. $13 per ounce C$2.06 11% $12 per ounce C$1.79 13% South American Silver Corp. (TSX: SAC) Source: Redchip estimates InItIal RepoRt Foreign Currency risk Foreign Currency risk. A majority of SAC’s working capital is held in US dollars, with only modest Majority of SAC’s working capital is held in US dollars, with only modest exposure to the Bolivian exposure to the Bolivian currency and Canadian Dollar. Once production commences, fluctuations in the currency and Canadian Dollar. Once production commences, fluctuations in the exchange rate between exchange rate between the US Dollar and Bolivian Boliviano could have a more material effect on SAC’s results of operations, Bolivian the Company will in a more material effect on SAC’s results of operations, the US Dollar and though Boliviano could have all likelihood hedge its currency risks. though the Company will in all likelihood hedge its currency risks. FINANCIAL SNAPSHOT Financial Snapshot Company financials FY08 actual FY09 actual FY10 Company FY10 RedChip Guidance* Estimate* Revenue ($ million) N.A. N.A. N.A. N.A. Operating Income ($ (3.1) (1.9) N.A. N.A. million) Operating Profit N.A. N.A. N.A. N.A. margin Net Profit ($ million) (3.1) (1.8) N.A. N.A. Net margin N.A. N.A. N.A. N.A. *SAC is expected to start production in 2012 2014. The initial capital cost of $103.37 million will be incurred over a period of six years starting from • The initial to 2016.cost of $124.2 million will be incurred over a period of six years starting from 2011 2011 capital to 2016. the completion of feasibility, the capital spending will be in the range of $100 200 million. After The initial spending be be financed by approximately 80% bank funding and the balance from • The initial spending will willfinanced by approximately 80% bank funding and the balance from fresh equity and equity and the existing cash balance. fresh the existing cash balance. SAC intends to buy the net smelter royalty (NSR) for $500,000 just prior to production. • SAC intends to buy the net smelter royalty (NSR) for $500,000 just prior to production. VALuATION ASSuMPTIONS 5 Discount Rate. At 15%, our discount rate is higher than the 7% rate we normally use for comparable companies with assets in North America. The higher discount rate is primarily to account for Bolivia’s high geopolitical risk profile. Capital expenditure and other outflows in the coming years. Under our base case of 35,000 tons per day heap leach operation, the initial capital cost of $124.2 million will be incurred over a period of six years starting at construction. The initial capital cost under our base case is higher than the $103.4 million estimated in the 2009 Preliminary Economic Assessment dut to an estimated higher throughput (35,000 vs. 20,000). Additionally the Company expects to incur $5-15 million annually over the next couple of years for drilling, and another $15-20 million to complete the feasibility study. Silver Price. We have used a long-term average silver price of $15 per oz in our base case scenario. Though the price assumption is lower compared to the 2010 YTD average silver of approx $17 per oz and current price of approx $18 per oz, we note that average price has ranged between $7 per oz and $15 per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of the macroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver Market Overview’ section. RedChip Visibility | | South American Silver Corp.
  6. 6. South American Silver Corp. (TSX: SAC) InItIal RepoRt NPV and price estimate Capacity utilization. Our NPV calculation is based on the process capacity of 35,000 tpd. In Tax rate 30.0% order to optimize the value of the project, SAC Discount rate 15.0% will most likely increase the throughput to close After-tax Cash Flows to 50,000tpd during the pre-feasibility/feasibility NPV as on 1 Jan 2011 ($ ‘000) 317,861 stage. This can potentially increase average NPV – current ($ ‘000) 296,407 annual silver production to 12.5 - 13 million oz Net debt as on 31st March 2010 ($ ‘000)* used a long term (7,014) silver price of $15 per oz in our base million oz. Our Silver Price: We have average from the current estimate of 9.5 case scenario. Expected cash proceeds the price assumption is lower compared to the 2010 YTD analysis below assesses per ozimpact Though from warrants/options* 8,945 sensitivity average silver of approx $17 the and current price of approx $18 per oz, we note that average price has ranged between $7 per oz and $15 Equity value 312,366 on NPV at varying levels of mining throughput, per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of the Diluted SAC shares (in 000)* 81,923 however in our base case we have used 179.7 macroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver Market NPV per share in $ 3.81 million oz as the silver mined over a period of Overview’ section. Exchange rate as on 23 June 2010 1.04 20 years. NPV per share Capacity in C$ utilization: Our NPV calculation is based on the process capacity of 20,000 tpd used in the PEA. 3.95 In order to optimize the value of the project, SAC will most likely consider increasing the throughput P/NPV during the pre feasibility/feasibility stage. This can potentially double average annual silver production 0.8x Price from the current estimate of 6.4 million oz and shorten the life span to around 20 years. As such, capital 3.20 spending at the time of construction may be in the range of $100 200 million. We have run sensitivity CMP (C$) as on 23 June 2010 0.62 analysis to assess the impact on NPV, in 416.0% Company is able to operate at higher capacity levels Upside / (Downside) case the (factoring in the requirements of higher capital expenditure). In our base case, however, we have used Source: Redchip estimates. *Proforma for the recentlymillion oz$4 million equitymined over a period of 36 years. 160.9 announced as the silver financing. NPV M oz silver Additional Scenarios Production tpd (C$ per Silver Price: We have used a long term average silver price of $15 per oz in our base case scenario. produced share) Capex* Though the price assumption is lower compared to the35,000 YTD average silver of approx 25% - per oz and Base Case 2010 3.95 179.7 $17 Best Case $18 per oz, we note that average price has ranged between $7 per oz and $15 current price of approx 50,000 6.08 201.2 30% per oz in the Source: RedChip estimates is due to our relatively bullish stance on silver, which is 10% Worst Case last five years. This 25,000 2.75 241.4 a result of the macroeconomic imbalances and *From initial PEA estimates increased industrial use of the metal as discussed in the ‘Silver Market Overview’ section. Analysis Sensitivity SENSITIVIT Impact of silver prices/Discount rate on based on the process capacity ON 35,000VALuE order to Capacity utilization: Our NPV calculation is fair value (NPV per share) ANALYSIS - IMPACT OF SILVER PRICES/dISCOuNT RATE of FAIR tpd. In YSensitivity Analysis optimize the Silver Price of the project, SAC will likely increase the throughput to close to 50,000tpd during value $/oz the pre feasibility/feasibility stage, with a life on fair value (NPV20 share) 7.72 Impact of silver prices/Discount rate span of around15.50 years. This can potentially increase per 16.00 16.50 17.00 17.50 18.00 3.9 12.00 12.50 13.00 13.50 14.00 14.50 15.00 9.0% 5.08 5.38 5.67 5.96 6.25 6.55 6.84 7.13 7.42 8.01 8.30 8.59 Discount Rate % 9.5% 4.84 5.12 5.40 5.68 5.96 6.24 6.51 6.79 7.07 7.35 7.63 7.91 8.19 average annual 10.0% production 5.14 12.5 – 135.68 silver 4.61 4.88 to 5.41 million oz from the current estimate7.28 9.5 million oz. We 5.94 6.21 6.48 6.74 7.01 of 7.54 7.81 10.5% 4.39 4.65 4.90 5.16 5.41 5.67 5.92 6.18 6.43 6.69 6.94 7.20 7.45 have run sensitivity analysis to assess the impact on NPV 5.65 varying levels of mining throughput. In our 11.0% 4.18 4.43 4.67 4.92 5.16 5.41 at 5.90 6.14 6.38 6.63 6.87 7.12 11.5% 3.99 4.22 4.46 4.69 4.93 5.16 5.39 5.63 5.86 6.10 6.33 6.56 6.80 base case, however, we have used 179.7 million oz as the silver mined 5.60 a5.82 12.0% 3.81 4.03 4.26 4.48 4.70 4.93 5.15 5.38 over period of 20 years. 6.05 6.27 6.50 12.5% 3.63 3.85 4.06 4.28 4.49 4.71 4.92 5.14 5.35 5.57 5.78 6.00 6.21 13.0% 3.47 3.68 3.88 4.09 4.29 4.50 4.71 4.91 5.12 5.33 5.53 5.74 5.94 Scenarios 13.5% 3.31 3.51 3.71 Production t/d4.30 3.91 4.11 NPV 4.70 4.50 MOz silver 4.90 5.10 Additional 5.29 5.49 5.69 14.0% 3.17 3.36 3.55 3.74 3.93 4.12 4.31 4.50 4.69 4.88 5.07 5.26 5.45 (C$ per share) produced Capex* 14.5% 3.03 3.21 3.39 3.58 3.76 3.94 4.12 4.31 4.49 4.67 4.85 5.04 5.22 Base Case 15.0% 2.90 3.07 3.25 3.42 3.60 3.77 3.95 3.95 4.12 4.30 4.48 4.65 25%- 4.83 5.00 15.5% 2.77 2.94 3.11 3.28 35,000 3.45 3.62 3.78 3.95 4.12 179.7 4.29 4.46 4.63 4.80 16.0% 2.65 2.82 2.98 3.14 3.30 3.47 3.63 3.79 3.95 4.11 4.28 4.44 4.60 Best Case 16.5% 2.54 2.70 2.85 3.01 3.17 3.32 3.48 6.08 3.63 3.79 3.95 4.10 30% 4.26 4.42 17.0% 2.43 2.58 2.74 2.89 50,000 3.04 3.19 3.34 3.49 3.64 201.2 3.79 3.94 4.09 4.24 Worst Case 17.5% 2.33 2.48 2.62 2.77 2.91 3.06 3.20 2.75 3.35 3.49 3.64 3.78 10% 3.93 4.07 18.0% 2.24 2.38 2.52 2.66 25,000 2.80 2.94 3.07 3.21 3.35 241.4 3.49 3.63 3.77 3.91 18.5% 2.15 2.28 2.41 2.55 2.68 2.82 2.95 3.09 3.22 3.36 3.49 3.63 3.76 Source: Redchip estimates. 2.06 19.0% 2.19 2.32 2.45 2.58 2.71 2.84 2.97 3.10 3.23 3.36 3.49 3.62 *From initial PEA estimates, 1.98 19.5% 2.10 2.23 2.35 2.48 2.60 2.73 2.85 2.98 3.10 3.23 3.35 3.48 20.0% 1.90 2.02 2.14 2.26 2.38 2.50 2.62 2.74 2.86 2.99 3.11 3.23 3.35 20.5% 1.82 1.94 2.06 2.17 2.29 2.41 2.52 2.64 2.76 2.87 2.99 3.11 3.22 21.0% 1.75 1.86 1.98 2.09 2.20 2.31 2.43 2.54 2.65 2.77 2.88 2.99 3.10 Source: Redchip estimates RedChip Visibility 7 | South American Silver Corp. | SAC’s fair value (NAV per share) is sensitive to silver price per oz and the discount rate assigned to the future cash flows from the project. A $1 increase or decrease in silver price estimate keeping the
  7. 7. 17.5% 2.33 2.48 2.62 2.77 2.91 3.06 3.20 3.35 3.49 3.64 3.78 3.93 4.07 18.0% 2.24 2.38 2.52 2.66 2.80 2.94 3.07 3.21 3.35 3.49 3.63 3.77 3.91 18.5% 2.15 2.28 2.41 2.55 2.68 2.82 2.95 3.09 3.22 3.36 3.49 3.63 3.76 19.0% 2.06 2.19 2.32 2.45 2.58 2.71 2.84 2.97 3.10 3.23 3.36 3.49 3.62 19.5% 20.0% 1.98 1.90 2.10 2.02 South American Silver Corp. (TSX: SAC) 2.23 2.14 2.35 2.26 2.48 2.38 2.60 2.50 2.73 2.62 2.85 2.74 2.98 2.86 3.10 2.99 3.23 3.11 3.35 3.23 3.48 3.35 20.5% 1.82 1.94 2.06 2.17 2.29 2.41 2.52 2.64 2.76 2.87 2.99 3.11 3.22 21.0% 1.75 1.86 Source: Redchip estimates 1.98 2.09 2.20 2.31 2.43 2.54 2.65 2.77 2.88 InItIal RepoRt 2.99 3.10 SAC’s fair value (NAV per share) is sensitive to silver price per ozoz and the discount rate assigned to the SAC’s fair value (NAV per share) is sensitive to silver price per and the discount rate assigned to the future cash flows from the project. A $1 increase or decrease in silver price estimate keeping the discount future cash flows from the project. A $1 increase or decrease in silver price estimate keeping the rate constant at 15% increases or decreases the NPV per share by about 9%. discount rate constant at 15% increases or decreases the NPV per share by 8.8%. RELATIVE VALuATIONS Relative Valuations Company Name EV C$ (million) Market Cap C$ (million) P/B Silver M Oz* EV/Oz Minco Silver Corp 122.76 129.17 4.7x 156.79 0.78 Silvercrest Mines Inc 61.13 63.38 7.8x 62.45 0.98 Orko Silver Corp 169.99 171.79 31.0x 140.70 1.21 Alexco Resource Corp 145.31 175.52 2.0x 217.10 0.67 ECU Silver Mining Inc 211.20 193.59 3.1x 431.20 0.49 Bear Creek Mining Corp 267.06 321.48 4.1x 365.40 0.73 Tahoe Resources Inc. 409.77 729.87 NA 334.45 1.23 MAG Silver Corp 348.71 372.97 4.2x 240.04 1.45 Median 4.2x 0.88 South American Silver 28.02 37.83 2.71 322.38 0.09 Source: Bloomberg and respective company filings, press releases. rdh Note: Values as on 23 June 2010. *Reported silver resources. The list of peers comprises companies with early stage silver assets in Central and South American The nations. The comprises companies with earlyrisk profile are similar Centralof SAC. Similar to SAC,nations. list of peers resource profile and geopolitical stage silver assets in to that and South American the The peers all have debt free balance sheets. profile are similar to that of SAC. Similar to SAC, the peers all resource profile and geopolitical risk have debt-free balance sheets. 8 • SAC enterprise value per ounce of silver is less than a fourth of the cheapest comparable in the list, ECU Silver Mining. SAC has a large resource base which is large enough to support a higher market valuation similar to other peers like Minco Silver Corp, MAG Silver Corp, Bear Creek and Tahoe. • The peers are in different stages of exploration. However, due to the leachable resource base of SAC, it enjoys low initial capital and operating costs. We therefore believe the market is ascribing a value to SAC’s resource that is nowhere near what can be justified as a fair value based on the ratio of operating costs to the value of metal underground. • The recent transaction between Tahoe Resources and Goldcorp underscores SAC’s undervaluation. Tahoe recently raised C$348 million in an IPO (the second largest IPO in Canada this year) to buy a Guatemalan silver deposit from Goldcorp, valuing the property at an EV/oz of C$1.51. The property is similar to SAC’s Malku Khota in terms of geological profile, but is in an earlier stage of development, and is located in a similar jurisdiction compared to Bolivia. • Another good comparable is Bear Creek with 365 million ounces of silver in Peru at a similar stage of advancement and a similar geopolitical risk profile. Bear Creek is trading at an EV/oz of C$0.73. Though Bear Creek has comparatively better leverage to costs as lead and zinc credits will likely result in negative cash costs per ounce on a byproduct basis, we see no reason why SAC should not trade within 25% of that valuation. RedChip Visibility | | South American Silver Corp.
  8. 8. is in an earlier stage of development, and is located in a similar jurisdiction compared to Bolivia. Another good comparable is Bear Creek with 365 million ounces of silver in Peru at a similar stage of advancement and a similar geopolitical risk profile. Bear Creek is trading at an EV/oz of South American Silver Corp. (TSX: SAC) C$0.73. Though Bear Creek has comparatively better leverage to costs as lead and zinc credits will likely result in negative cash costs per ounce on a by product basis, we see no reason why SAC should not trade within 25% of that valuation. InItIal RepoRt As mentioned earlier, limited market visibility and a high risk premium to its relatively new • As mentioned earlier,base (released in visibility and2008 market)premium to its relatively new resource resource limited market the turbulent a high risk in Bolivia has kept valuations depressed. base (released We expect the 2008 market) innear its has kept valuations depressed. Wefuture oncestock in the turbulent stock to trade Bolivia peer group median in the near expect the SAC to trade near its peer group median in the near future once SAC successfully expands its resource base and successfully expands its resource base and moves closer to the pre feasibility stage. moves closer to the pre-feasibility stage. Relative Valuation Bubble Chart 2.5 SAC is undervalued as compared to its peers despite having a comparatively large resource base. 2.0 MAG Silver Tahoe Resources 1.5 Orko Silver EV/oz 1.0 Bear Creek Silvercrest 0.5 Minco Silver Alexco ECU Silver SAC 0.0 0 50 100 150 200 250 300 350 400 450 500 Silver M oz 9 TAkEOVER ANALYSIS Basis of Valuation. Given its attractive resource base and potential for significant resource expansion, we view SAC as a likely takeover candidate in the next cycle of consolidation in the industry once the financing environment improves. Tahoe’s acquisition of Goldcorp’s Guatemalan silver deposit through an IPO in May 2010, and Fresnillo’s unsuccessful hostile bid for MAG Silver in late 2008 and early 2009 gives us a sense of the latent appetite for development-stage silver assets in risky jurisdictions. The most recent transaction and a good comparable for estimating a takeover price for SAC is Tahoe Resources Inc. due to the similarity in geological profile and resource size. Tahoe paid an all-in acquisition price of $505 million, or $1.51 per oz of silver resource. We use a higher value of $2.25 per oz to estimate SAC’s takeover price since its resource is at a more advanced stage compared to Tahoe with a PEA already done and pre-feasibility expected in 2011. The all-in acquisition price, however, does not reflect the operating and capital cost structure of a mineable deposit. Since the cost structure plays a key role for valuation of such assets, we take our analysis one step further, and deduct the present value of operating and capital costs from the all-in acquisition price, as well as the net debt. RedChip Visibility | | South American Silver Corp.
  9. 9. oz to estimate SAC’s takeover price since its resource is at a more advanced stage compared to Tahoe with a PEA already done and pre feasibility expected in 2011. South American Silver Corp. (TSX: SAC) The all in acquisition price, however, does not reflect the operating and capital cost structure of a mineable deposit. Since the cost structure plays a key role for valuation of such assets, we take our InItIal analysis one step further, and deduct the present value of operating and capital costs from the all in RepoRt acquisition price, as well as the net debt. Takeover Valuation Unit Amount The resulting estimated takeover price of C$3.20 per share equal to All-in Acquisition Price $/oz 2.25 our discounted cash flow valuation of Less: Forecasted Operating Costs $/oz 0.8 $3.20 per share. Enterprise value of 1.5 C$0.78 per ounce using this takeover Less: Forecasted Capital Costs $/oz 0.3 price estimate is also within the Forecasted Taxes 0.5 range of its peer group. The takeover Less: Net Debt (Net Cash) $/oz (0.05) valuation, therefore, is another way of Net Purchase Price $/oz 0.8 justifying SAC’s deeply discounted Recoverable Resources M oz 322.4 valuation. With resource expansion Potential Acquisition Value $ million 251.1 and advancements through the Fully Diluted Shares* million 81.9 development curve, we expect the Potential Takeover Price Per Share C$ 3.20 Company to command a premium over our takeover price estimate. Current $-C$ Exchange Rate 1.04 Source: RedChip Estimates. *Proforma for the recently announced $4mn equity raise. The resulting estimated takeover price of C$3.20 per share equal to our discounted cash flow valuation COMPANY PROFILE of $3.20 per share. Enterprise value of C$0.78 per ounce using this takeover price estimate is also within SAC is a mineral exploration Company that acquires, explores and develops mineral properties. The 10 Company holds interests in two material properties: the Malku Khota silver-indium-gold property in Bolivia and the Escalones copper-gold-molybdenum property in Chile. The Malku Khota silver-indium deposit has indicated resources of 144.6 million oz of silver and 845 tonnes of indium and inferred resources of 177.8 million oz of silver and 968 tonnes of indium. SAC is approximately 3-4 years away from actual metals production at Malku Khota, but the deposit has good exploration upside, as the resource covers only 3.5 km of the project’s 15 km strike length. SAC has guided that it plans to explore the Chile-located Escalones property further in the future, but the estimates of the resources are not yet available. Also, the property is accessible by road resulting in easy access, and its location in the district of El Teniente (which houses the world’s largest open pit copper mine) favors mining activity. Malku Khota Silver-Indium Project The Malku Khota project is located in the Cordilera Oriental, about 98 km east-southeast of Oruro in central Bolivia, and 260 km southeast of La Paz, the capital of Bolivia. The project in Malku Khota had silver mineralization within a surface area of 448,000 square meters and to a drilled depth of up to 400 meters below the surface. The stages of the progress of the project are as depicted below: Significant control. SAC controls a significant block of land in the area around the Malku Khota Project with 100% interest in the property. The total surface covered by the Malku Khota group of properties is 5,475 hectares. It is currently in the exploration phase and requirements for the surface rights for mining operations are yet to be determined. RedChip Visibility | | South American Silver Corp.
  10. 10. South American Silver Corp. (TSX: SAC) square meters and to a drilled depth of up to 400 meters below the surface. The stages of the progress of the project are as depicted below: InItIal RepoRt 2009 2010 2011 2012-2014 RESOURCE PRE PERMIT DISCOVERY DEFINITION FEASIBILITY PRODUCTION FEASIBILITY CONSTRUCT PEA INCREASING RESOURCE INCREASING CERTAINTY RESOURCE DEFINITION PRE EXPLORATION PRELIMINARY ECONOMIC FEASIBILITY / PRODUCERS VALUATION ASSESSMENT (PEA) FEASIBILITY JUNIOR MID TIER DECREASING TECHNICAL RISK / INCREASING MARKET VALUATION Source: Company filings Project: Malku Khota: Key Highlights Rapid Payback. Due to its low initial capital costs and low operating costs, the payback period is Significant control: SAC controls a significant block of land in the area around the Malku Khota Project estimated to be 1.4 years (from start of production). IRR for the project based on post tax cash flows is with 100% interest in the property. The total surface covered by the Malku Khota group of properties is 46.1%. On the contrary, the payback period for Bear Creek Mining Corp.’s Corani project (27-year mine life)5,475 hectares. It3 years. In in the exploration phase and requirements for thepast year’s losses provides is estimated at is currently addition, the tax benefit carried forward from surface rights for mining operations are yet to be determined. an additional upside to SAC’s cash flows. Low cash Payback: Due to itsleachable silver-indium resource operating costs, the paybackcash costs of Rapid costs. Due to the low initial capital costs and low at Malku Khota, operating period is $3.75 per oz (netbe 1.4 yearsand initial capital costs of $103.37 million are lower as compared to its peers. estimated to of credits) (from start of production). IRR for the project based on post tax cash flows is Sabina Gold Silver Corp. comes closest tofor Bear Creek Mining Corp.’s Corani project (27Company has 46.1%. On the contrary, the payback period SAC in terms of cash costs ($4.4/oz). The year mine the lowestestimated at as years. In addition, the tax benefit from carried capital costs year’s lossesthe mine for life) is cash costs 3 shown in the chart below. Although initial forward past to prepare provides production are the lowest the SAC’s cash flows. million), it involves high operating cash costs ($7.47/oz) an additional upside to for Bear Creek ($51 at the time of actual production. Low cash costs. Due to the leachable silver indium resource at Malku Khota, operating cash costs of $3.75 per oz (net of credits) and initial capital costs of $103.37 million are lower as compared to its peers. Sabina Gold Silver Corp. comes closest to SAC in terms of cash costs ($4.4/oz). The Company has lowest cash costs as shown in the chart below. Although, initial capital costs to prepare the mine for production are the lowest for Bear Creek ($51 million) but it involves high operating cash costs ($7.47/oz) at the time of actual production. Source: Company websites 12 Low levels of waste: Significant portions of the resource are in the exposed ridgeline, which should allow for an exceptionally low waste to ore (“strip”) ratio in the early years of mining. The metal RedChip Visibility | 10 | South American Silver Corp. recoveries in the PEA, 80% silver and 70% indium are considered good. Also, the Company estimates that heap leaching recoveries may be lower depending on size of rock material and mill recoveries may
  11. 11. South American Silver Corp. (TSX: SAC) InItIal RepoRt Low levels of waste. Significant portions of the resource are in the exposed ridgeline, which should allow for an exceptionally low waste-to-ore (“strip”) ratio in the early years of mining. The metal recoveries in the PEA, 80% silver and 70% indium are considered good. Also, the Company estimates that heap leaching recoveries may be lower depending on the size of rock material and mill recoveries may be higher. By-product revenue adds to cash flows. A portion of the resources include higher grades that include an indium component which is expected to contribute to higher cash flow in the early years of production. Support from community and government. The Malku Khota Project is of economic importance to the region, and with the potentially long mine life, the project has received encouragement from the government to accelerate its development. Moreover, the BSR Group (Business for Social Responsibility) has been entrusted to develop a pro active community relations program that represents all stake has holders facilitateto smooth transition fromcommunity relations program that represents all stake-holders been entrusted a develop a pro-active exploration to production. to facilitate a smooth transition from exploration to production. SWOT ANALYSIS SWOT Analysis Strengths Weaknesses Malku Khota is one of the largest silver deposit Long lead time to production (expected start of mines in Bolivia with combined indicated and production would be in 2013). inferred resources of approx 323 million oz. SAC has no Proven and Probable (PP) Low operating cost per oz of $3.75 (net of reserves. Resources estimates are only at credits) and low initial capital cost of $103.37 indicated and inferred level. million Low payback period of 1.4 years (since the start of production). only 25% of the project’s 15 km strike length. Geo political risks associated with Bolivia. Opportunities Threats Upside from further exploration of Malku Khota Environmental regulations and terrain risk. mine area as the on going exploration covers Downside risk to silver prices. Liquidity And Capital Resources only 25% of the project’s 15 km strike length. Geo political risk associated with Bolivia. SAC had cash and cash equivalents of US$5.8 million as of the March 2010. Starting the year with a cash balance of $7 million, SAC spent approx $1.2 million in the first quarter. Management estimates spending requirements for the rest of 2010 at $4 million, primarily for drilling activities, which keeps SAC in a comfortable liquidity position. Management expects 2011 spending requirements at the same level Summary financials LIquIdIT Y2010, and is looking to raise additional equity at reasonable costs. as ANd CAPITAL RESOuRCES SAC hadUSD ‘000 (as of December) of US$7 million as of the end of 2009. As2009 the company, the bulk In cash and cash equivalents 2007 2008 per 1Q2010 of the initial capex of $103.4 million will be incurred in 2011 and 2012. Cash and Cash Equivalents 12,870.40 7,422.87 7,013.97 5,814.50 In USD ‘000 (as of December) Shareholder’s Equity 2007 13,710.12 15,767.92 2008 15,396.45 2009 14,961.08 CashMining claims and and Cash Equivalents deferred 3,180.50 12,870.40 6,454.79 8,675.05 7,422.87 9,425.72 7,013.97 exploration costs Shareholder’s Equity Source: Company filings 15,767.92 13,710.12 15,396.45 Mining claims and deferred exploration | 11 | South American Silver Corp. RedChip Visibility 3,180.50 6,454.79 8,675.05 costs
  12. 12. South American Silver Corp. (TSX: SAC) InItIal RepoRt SAC had cash and cash equivalents of US$5.8 million Revenue distribution estimate (March 2009) as of March 31, 2010. Starting the year with a cash balance of $7 million, SAC spent approximately $1.2 million in the first quarter. Management estimates Gold, Copper, spending requirements for the rest of 2010 at $4 million, Lead primarily for drilling activities, which keeps SAC in a Indium 12% comfortable liquidity position. Management expects 18% 2011 spending requirements at the same level as 2010, and is looking to raise additional equity at reasonable costs. Revenue distribution estimate. Based on the Silver 70% preliminary economic estimation, SAC is expecting a large part of its revenue from Silver, Indium and Gold. Source: Company filings Copper and Lead will be derived as by-products adding Source: Company filings to the overall cash inflows. Revenue Model of Malku Khota Project for period 2014E-2018E. Malku Khota project is expected to commence production in 2014 and we estimate total revenues to be $102.38mn in FY2013, of which 87.6% would be contributed by silver. All figures in $’000 2014E 2015E 2016E 2017E 2018E Silver revenue All figures in $’000 156,922 195,669 157,954 2014E 149,962 2015E 170,167 2016E 2017E Indium revenue 15,955 23,901 30,206 36,120 35,876 Silver revenue 156,922 195,669 157,954 149,962 1 By product credit 12,950 18,130 18,130 18,130 18,130 Indium revenue 15,955 23,901 30,206 36,120 Total revenues 185,827 237,700 206,291 204,213 224,173 By product credit 12,950 18,130 18,130 18,130 Total cash operating costs 47,310 67,074 73,674 76,531 72,151 Total revenues 185,827 237,700 206,291 204,213 2 Depreciation 5,192 6,241 6,241 6,241 6,241 Total cash operating costs 47,310 67,074 73,674 76,531 EBIT 133,325 164,385 126,376 121,440 145,781 Depreciation 5,192 6,241 6,241 6,241 EBIT (%) 71.75% 69.16% 61.26% 59.47% 65.03% EBIT 133,325 164,385 126,376 121,440 1 Source: Redchip estimates Ownership EBIT (%) 71.75% 69.16% 61.26% 59.47% 6 Source: Redchip estimates OWNERSHIP Pattern Shareholding Ownership Stake Ralph Fitch 4.7% Gregory Johnson Shareholding Pattern 2.5% Stake Felipe Malbren Ralph Fitch 2.2% 4.7% Richard Doran Gregory Johnson 1.3% 2.5% Felipe Malbren 2.2% Public and others 89.3% Richard Doran 1.3% Total 100.0% Source: Company. Public and others 89.3% Total 100.0% Technical Report: Key Highlights Source: Company. RedChip Visibility | 1 South American Silver Corp. Favorable economic assessment: SAC completed a |preliminary economic assessment on its Malku Technical Report: Key Highlights Khota project in Bolivia. The study estimated a base case, pre tax net cash flow of $1,233 million (NPV of
  13. 13. Total 100.0% Source: Company. South American Silver Corp. (TSX: SAC) Technical Report: Key Highlights Favorable economic assessment: SAC completed a preliminary econ InItIal RepoRt Khota project in Bolivia. The study estimated a base case, pre tax net ca $326 million at a 10% discount rate) and an internal rate of return o kEY HIGHLIGHTS FROM TECHNICAL REPORT 20,000 tonnes per day acid heap leach operation with a mine life of 36 y Favorable economic assessment. SAC Summary of Key Economic Indicators Details completed a preliminary economic assessment on its Malku Khota project in Bolivia. The Initial Capital Cost ($million) 103.37 estimated a local case, pre-tax is customary Life make agreements with the local users of the land studyare owned by base individuals. It net cash to of Mine 36 years of $1,233 million (NPV construction work Net Cash Flow, pre tax ($million) flow before proceeding with any of $325 million such as road building for drill site access. 1,233.30 at a 10% discount rate) and an internal rate of Internal Rate of Return (IRR) 50.7% return of 50.7%. The study suggested a 20,000 Payback period from start of production 1.4 years tonnes per day acid heap leach operation with a Source: Company filing mine life of 36 years. Environmental liability and permitting: SAC faces no environmenta Environmental liability and permitting. project. As per the technical report, some alpine natural lakes near the SAC faces no environmental liabilities additional monitoring to ensure that exploration activities do not jeopa associated with the project. As per the lakes. The project has a current environmental permit for its continued technical report, some alpine natural lakes near the site contain fish and may need additional monitoring to ensure that 14 exploration activities do not jeopardize the water quality in these lakes. The project has a current environmental permit for its continued exploration work. Surface rights are owned by local individuals. It is customary to make agreements with the local users of the land before proceeding with any construction work such as road Source: Company filing building for drill site access. Large resource base: All the resources estimated are in the indicated and inferred category. It is base Source: Company filing on 25% exploration of the total length of 15Km. Large resource base. All of the resources estimated are in the indicated and inferred category. It is based on 25% explorationbase: All the length of 15km. MATERIAL in the indicated 1and inferred category. Pit 4 is based Large resource of the total resources estimated are TOTAL Pit Pit 2 Pit 3 It Pit 5 Pit 6 TOTA on 25% exploration of the total length of 15Km.Indicated+ (Waste+ Inferred) t 65,727,111 34,845,709 13,932,233 21,802,827 68,669,759 290,549,100 495,526,73 Mineral Resources (indicated + Inferred) t 39,161,547 27,004,076 Pit 1 Pit 2 Pit 3 Pit 4 Pit 5 11,912,973 Pit 6 16,763,707 46,448,429 TOTAL 106,035,758 247,326,49 Silver grade g/t 40.26 36.27 33.34 27.49 17.55 19.12 25.3 TOTAL MATERIAL Indium grade ppm 7.46 9.70 3.44 6.98 3.22 5.69 5.9 (Waste+ Indicated+ Indicated Mineral Resources t 37,683,346 21,757,221 Inferred) t 65,727,111 34,845,709 13,932,233 21,802,827 68,669,759 11,602,157 11,401,720 21,378,156 290,549,100 495,526,738 41,867,712 145,690,31 Silver grade g/t 40.96 35.35 33.65 30.03 18.89 17.49 28.7 Mineral Resources Indium grade ppm 7.37 9.49 3.46 7.43 2.77 5.38 6.1 (indicated + Inferred) t 39,161,547 27,004,076 11,912,973 16,763,707 46,448,429 106,035,758 247,326,490 Inferred Silver grade g/t 40.26 Mineral Resources 36.27 t 33.34 1,478,202 27.49 5,246,855 17.55 310,816 19.12 5,361,987 25,070,272 64,168,046 101,636,17 25.30 Silver grade g/t 22.48 40.10 21.47 22.10 20.1916.40 20.4 Indium grade ppm 7.46 9.70 Indium grade ppm 3.44 6.98 9.55 10.57 3.22 2.79 5.69 6.02 5.92 5.90 3.61 5.6 Indicated Mineral Resources t 37,683,346 21,757,221 11,602,157 Source: Company data 11,401,720 21,378,156 41,867,712 145,690,313 Silver grade g/t 40.96 35.35 33.65 30.03 18.89 17.49 28.70 Indium grade ppm 7.37 9.49 3.46 7.43 2.77 5.38 6.13 Inferred Mineral Resources t 1,478,202 Global Metals and Minerals market overview 5,246,855 310,816 5,361,987 25,070,272 64,168,046 101,636,177 Silver grade g/t 22.48 The 40.10 of global21.47 value precious metals and minerals market shrank (year over year) by 1.5% in 2008 22.10 16.40 20.19 20.42 Indium grade ppm 9.55 reach $38.5 billion. The market is forecasted at $47.4 billion by5.90 growing at a 5 year CAGR of 4.2% 10.57 2.79 6.02 3.61 2013, 5.62 Source: Company data. GLOBAL METALS AND MINERALS MARKET OVERVIEW RedChip Visibility | 1 | South American Silver Corp. 15 The value of global precious metals and minerals market shrank (year over year) by 1.5% in 2008 to
  14. 14. South American Silver Corp. (TSX: SAC) InItIal RepoRt GLObAL METALS ANd MINERALS MARkET OVERVIEW The value of global precious metals and minerals market shrank (year-over-year) by 1.5% in 2008 to reach $38.5 billion. The market is forecasted at $47.4 billion by 2013, growing at a 5-year CAGR of 4.2%. Precious Metals Market Size Excluding Gold ($ billion) 50 4.2% 5yr CAGR 45 40 35 30 $ billion 25 47.4 20 38.5 15 10 5 0 2008 2013E Source: Datamonitor, Oct. 2009 Silver comprised 17% ($11.0 billion) of the total precious metals market in 2008. Precious metals in turn occupied 3.9% of the $1.7 trillion metals and minerals market globally. Market Segmentation: Metals and Mining by Value (2008) 3.9% 5.6% Iron and Steel 8.6% Coal Base Metals Aluminium $1,661.4billion Precious Metals and 18.4% Minerals 63.4% Source: Datamonitor, October 2009 RedChip Visibility | 1 | South American Silver Corp.
  15. 15. South American Silver Corp. (TSX: SAC) InItIal RepoRt Market Segmentation: Precious Metals by Value (2008) Source: Datamonitor, October 2009 Silver Market Overview Source: Datamonitor, October 2009 Demand – Supply Fundamentals Silver Market Overview SILVER MARkET OVERVIEW Silver Supply Demand – Supply Fundamentals Silver Supply. Despitegrowth in mine production, the supply sidethe supply side for silver remains under Despite continuing continuing growth in mine production, for silver remains under pressure from pressure from falling scrap supply and net government production registered its registered its seventh falling scrap supply and net government sales. Mine sales. Mine production seventh consecutive year consecutiveSupply2009 risingin 2009, rising by 4% year on year to 709.6Supply ofounces. Supply to a 13 Silver year of growth in of growth by 4% year on year to 709.6 million ounces. million scrap silver fell of scrap silveryear low with a 6%low with a 6% year while net government sales government sales fell by over 50%. fell to a 13-year year on year decline on year decline while net fell by over 50%. Despite continuing growth in mine production, the supply side for silver remains under pressure from falling scrap supply and net government sales. Mine (million ounces) World Silver Supply production registered its seventh consecutive year World Silver Supply (million ounces) of growth in 2009 rising by 4% year on year to 709.6 2004 ounces. Supply of scrap silver fell2009 13 2002 2003 million 2005 2006 2007 2008 to a year low with a 6% year on year decline while net government sales fell by over 50%. Supply Mine Production 593.9 596.6 613.0 636.8 640.9 664.4 684.7 709.6 World Silver Supply (million ounces) Net Government sales 59.2 88.7 61.9 65.9 78.2 42.5 27.6 13.7 2002 2003 2004 2005 2006 2007 2008 2009 Old Silver Scrap 187.5 184.0 183.7 186 188 181.8 176 165.7 Supply Producer Hedging 9.6 27.6 Mine Production 593.9 596.6 613.0 636.8 640.9 664.4 684.7 709.6 Implied Net Disinvestment 11.6 Net Government sales 59.2 88.7 61.9 65.9 78.2 42.5 27.6 13.7 Total Supply 852.2 869.3 868.2 916.7 907.5 888.4 888.4 889.0 Source: Silver Silver Survey 2009 compiled by GFMS Ltd. Old World Scrap 187.5 184.0 183.7 186 188 181.8 176 165.7 Producer Hedging 9.6 27.6 • According toNet Disinvestment Silver World Silver Survey 2009, compiled by GFMS, silver mine production Implied 11.6 According toInstitute’s Institute’s World Silver Survey 2009, compiled by GFMS, silver mine the Silver the in 2009 roseSupply or 25 2009 rose by 4%new high of 709.6 a new high of907.5 million oz.last year’s2008, Total production in million oz to a 852.2 million oz 868.2 916.7 Unlike in 2008, 888.4 889.0 by 4% or 25 869.3 to million oz. 709.6 888.4 Unlike in growth Source: World Silver Survey 2009 compiled by GFMS Ltd. was driven by increases in primary mine supply. Silver produced as a by-product of gold mining was once again strong, registering a growth of 21% year over 18 although supply from base metal sources were year, minimal. According to the Silver Institute’s World Silver Survey 2009, compiled by GFMS, silver mine production in 2009 rose by 4% or 25 million oz to a new high of 709.6 million oz. Unlike in 2008, RedChip Visibility | 1 18 South American Silver Corp. |
  16. 16. South American Silver Corp. (TSX: SAC) InItIal RepoRt Mine production (million Oz) 720 700 680 million Oz 660 709.6 640 684.7 664.4 620 640.9 600 2006 2007 2008 2009 Source: GFMS. • At just 13.7 million oz, net government sales reached their lowest level in more than a decade. Sales were down more than half year on year due to a large drop in Russian sales along with continued absence of Chinese and Indian sales. Net Government sales (Million oz) 90 80 70 60 million Oz 50 40 78.2 30 20 42.5 10 27.6 13.7 0 2006 2007 2008 2009 Source: GFMS. • Old silver scrap, the second-largest source of silver supply after mine production, continued its decline in 2009. Scrap supplies totaled about 165.7 million oz in 2009, versus 176 million oz in 2008. The largest single contributor to silver scrap recycling is the photographic sector. The ongoing shift toward digital cameras from traditional photographic film cameras is sharply reducing the demand for silver nitrates, and hence the supply of silver scrap from the photographic sector. Recovery from medical equipment also remained soft during the year. Consequently, we expect a continued decline in scrap sales in the next few years, though scrap sales will still remain a big source of supply due to recycling of jewelry and silverware. RedChip Visibility | 1 | South American Silver Corp.
  17. 17. South American Silver Corp. (TSX: SAC) InItIal RepoRt • Jewelry and silverware was estimated to have increased marginally in 2009, primarily due to strong recycling activity in India, as silver prices in rupee terms recorded a 10% year on year gain in the country. Old Silver scrap (million Oz) 190 185 180 (million Oz) 175 170 188 165 181.8 176 160 165.7 155 150 2006 2007 2008 2009 Source: GFMS. 2010 Silver Supply. ForecastMine production remains by far the largest component of silver supply accounting for around 78% of the total supply in 2009. For 2009, according to the estimates, the mine output is expected to increase by an additional 15 million oz. The charts below illustrate the global supply of silver for 2008 and 2009 (based on forecasts done in Nov 2009). Case of derived supply. Almost 65% of silver supply is either a co- or by-product of production as a natural consequence of the mining of copper, lead, zinc and gold. Thus, silver gets mined irrespective of the silver price. The following charts indicate the silver output by source metal for 2008 and 2009. Silver Output By Source Metal: 2008 Silver Output By Source Metal: 2009 0.5% 0.4% 23.5% 23.4% 29.1% 30.1% 10.4% 12.2% 36.5% 33.9% Primary Gold Lead/Zinc Copper Other Primary Gold Lead/Zinc Copper Other Source: GFMS As per the chart, silver price has consistently moved in line with the price of other metals. Higher prices RedChip Visibility | 1 | South American Silver Corp. of other metals lead to higher production of such metals resulting in higher supply of silver as a by product. Hence by product silver production depends on production of other metals, which is a
  18. 18. South American Silver Corp. (TSX: SAC) InItIal RepoRt As per the below chart, the silver price has consistently moved in line with the price of other metals. Higher prices of other metals lead to higher production of such metals resulting in higher supply of silver as a by-product. Hence by-product silver production depends on production of other metals which is a function of prevailing market prices. Silver And Other Metals: Indexed Price Movement 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 Lead Copper Zinc Silver Gold Source: Bloomberg Geographic coverage for Silver mining Top 25 Silver producing countries in 2008 (Millions of ounces) 140 123.9 120 104.7 100 89.1 80 52.6 39.2 60 42.6 42.2 41.8 39.8 40 21.7 19.6 17.1 14.0 8.7 8.3 20 7.7 7.3 4.2 3.5 2.6 0 ia Au na ite hile Sw y sia ala ru d an M en ut ran lia ia A r da a a In cco at ia ico es e in ric Ka lan liv ss Gu Ind Pe at ra rk i st na ed ne m ex Ch nt I o C Af Ru Bo St kh Tu Po st or er Ca ge M do h za d So Un Source: GFMS • Peru was the largest producer of silver in 2008 with production of 118 million oz. The Americas, which include 6 of the 10 largest silver producing countries, contribute to nearly half of global silver production. RedChip Visibility | 1 | South American Silver Corp.

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