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Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
Sac initial report
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Sac initial report

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  • 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. 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. 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. 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. $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 $15 per oz in the last five years. This is due to our relatively bullish stance on silver, which is a result of the macroeconomic imbalances and increased industrial use of the metal as discussed in the ‘Silver Market Overview’ section. RedChip Visibility | | South American Silver Corp.
  • 6. South American Silver Corp. (TSX: SAC) InItIal RepoRt NPV and price estimate Capacity utilization. Our NPV calculation is based on the process capacity of 35,000 tpd. In Tax rate 30.0% order to optimize the value of the project, SAC Discount rate 15.0% will most likely increase the throughput to close After-tax Cash Flows to 50,000tpd during the pre-feasibility/feasibility NPV as on 1 Jan 2011 ($ ‘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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.
  • 19. South American Silver Corp. (TSX: SAC) InItIal RepoRt • A handful of mines account for the bulk of global primary silver output. Silver Standard’s Pirquitas mine is one of the largest primary silver mines in the world (produced approximately 6 million oz of silver in 2009 and expected to produce approximately 10 million oz in 2010). • Bolivia has reasonably high silver resources, although the silver extracting companies are few. It might be due to high geo-political risk perceived by the investors. Silver Demand Demand for silver comes from both industrial applications as well as from investment in the form of ETFs, coins and jewelry. It has a wide variety of special applications in the areas of power transmission, germicide and anti-bacterial agents, solar cells, water purification, catalytic agents, soldering products, bearings, batteries, and photography. World Silver Demand (million ounces) 2001 2002 2003 2004 2005 2006 2007 2008 2009 Demand Fabrication Industrial Applications 335.2 339.1 349.7 367.1 405.1 424.5 453.5 447.2 352.2 Photography 213.1 204.3 192.9 178.8 160.3 142.4 124.8 104.8 82.9 Jewelry 174.3 168.9 179.2 174.9 173.8 166.3 163.5 158.3 156.6 Silverware 106.1 83.5 83.9 67.3 67.8 61.2 58.8 57.3 59.5 Coins Medals 30.5 31.6 35.7 42.4 40.0 39.8 39.7 64.9 78.7 Total Fabrication Demand 859.2 827.4 841.4 830.5 847.0 834.2 840.3 832.5 729.8 Producer De Hedging 24.8 20.9 6.8 23.5 5.6 22.3 Implied Net Investment 11.7 7.0 37.7 69.6 66.6 24.7 50.2 136.9 Total Demand 870.9 852.2 869.3 868.2 916.7 907.5 888.4 888.4 889.0 Source: World Silver Survey 2009 compiled by GFMS Ltd. • The global demandglobalsilver infor silver in 2009 stood at 889 million oz. Fabrication demand fell by 11.9% year on The for demand 2009 stood at 889 million oz. Fabrication demand fell by 11.9% year to 730 million ozon year todue to the impact ofdue to the impact of the global recession. Accelerated year mainly 730 million oz mainly the global recession. Accelerated decline in photographic decline in photographic demand also contributed to the fall in fabrication. This was the second demand also contributed to the fall in fabrication. This was the second consecutive year of decline in consecutive year of decline in fabrication demand, after a 1.6% drop in 2008. fabrication demand, after a 1.6% drop in 2008. Fabrication Demand (million Oz) 860 842.5 836.4 Millions Oz 840 828.6 Fabrication Demand (million Oz) 820 860 836.4 842.5 Millions Oz 800 828.6 840 780 820 760 800 740 780 729.8 760 720 740 729.8 700 720 680 700 660 680 2006 2007 2008 2009 660 Industrial fabrication 2006 accounted for the 2007 of decline in fabrication demand, falling by 20.6% to bulk 2008 2009 a six year lowBloomberg Moz (10,955 tones), in the process eclipsing 2001’s technology related Source: of 352.2 decline. The drop in industrial demand was largely a first half event, brought about by a slump in RedChip Visibility | 1 | South American Silver Corp. orders and an extended period of pipeline destocking.
  • 20. South American Silver Corp. (TSX: SAC) InItIal RepoRt • Industrial fabrication accounted for the bulk of decline in fabrication demand, falling by 20.6% to a six- year low of 352.2 Moz (10,955 tons), in the process eclipsing 2001’s technology-related decline. The drop in industrial demand was largely a first half event, brought about by a slump in orders and an extended period of pipeline destocking. Industrial applications (million oz) 500 456.1 443.4 427 Millions Oz 400 352.2 300 200 100 0 2006 2007 2008 2009 Source: Bloomberg • Like gold producers, silver producers have tended to close out or buy back hedges in recent years. According to the Silver Survey, de-hedging contributed 22.3 million oz of demand in 2009, up from 11.6 million oz in 2008. The global silver hedge book as a percentage of total mine production is estimated to be low; consequently, we expect de-hedging to decline in the coming years. World Silver Demand 2010 Forecast. Silver demand is dominated by the industrial applications category, which accounts for approx 39% of total demand in 2009 as against 51% in 2008. World Silver Demand 2009 7.00% 10% 9% World Silver Demand 2010E 12.00% 1.00% 2% 25% 24.00% 39% 51.00% 5.00% 15% Coins De Hedging Industrial Coins De Hedging Industrial Investment Jewelry and Silverware Photography Investment Jewelry and Silverware Photography Source: GFMS RedChip Visibility | 0 | South American Silver Corp.
  • 21. South American Silver Corp. (TSX: SAC) InItIal RepoRt Silver Demand Fabrication demand covers silver’s use in industry, photography, jewelry manufacturing and in the making of coins. Industrial demand has fallen sharply in 2009, due to the severity of the economic downturn. In 2010, however, a rebound is expected, given an improvement in global GDP, industrial production and stock replenishment. Jewelry Silverware fabrication, on a combined basis, was largely flat in 2009, declining by a modest 0.4% year on year. Softness in major western and far-eastern/southeast Asian jewelry markets were largely offset by strong demand in India and China. Silver has benefited in several important jewelry markets from substitution at gold’s expense. However, the weak economy and high silver prices have also restrained growth in demand. Moreover, some of the rise in fabrication reflects an increase in trade stocks in India, where surging local prices have constrained incremental consumer demand at higher prices. Photographic use of silver dropped by approximately 21% in 2009 as demand continues to be affected by the switch to digital technology. Silver usage in the cinematic industry has also been hit hard, as a lack of financing has led to a drop in the number of films produced. Investment Demand in silver continued to surge in 2009, rising by a whopping 90% following an 84% rise in 2008, as investors flocked to the metal in search of a safe haven amid global financial turmoil. Much of the surge took place in the early part of 2009, and was dominated by demand for physical metal and ETFs, as investors sought refuge in silver when fears over counterparty risk and the overall financial system remained rampant. Overall, the January-October 2009 timeframe saw a 3,110-tonne rise in ETF holdings coupled with an increase of 5,306 tonnes in the ‘investor’ net long positions in Comex futures. Investors’ bullion stocks have increased substantially in FY09 on a net basis. We expect investment demand to rise further in the near future owing to the Euro zone sovereign debt problems. However, over the long term, conditions should eventually become less supportive of investment demand as some level of GDP growth returns for the global economies. Physical Demand/Supply Balance – Moving from a Deficit to Surplus. The chart below shows the physical demand/supply balance, excluding investment demand. As seen from the chart, industry dynamics have undergone a structural shift, with demand lagging supply for the first time in the last 10 years in 2008. Lower industrial production worldwide has reduced the demand for silver in electronic, electrical, and other manufacturing processes, while shrinking consumer income has eroded the demand for silver jewelry. Source: World Silver Survey 2009 (prepared by GFMS) Meanwhile, mine RedChip Visibility | 1 | South American Silver Corp. supply growth is increasing, with greater primary mine production more than compensating for lower mine byproduct output. Deleted: Luke stopped reading and graphing here on 6 10 2010 at 5:58pm
  • 22. South American Silver Corp. (TSX: SAC) InItIal RepoRt Meanwhile, mine supply growth is increasing, with greater primary mine production more than compensating for lower mine byproduct output. New uses of silver in industrial applications to drive demand in the long-term While the price of silver is currently benefiting from its precious metal status, it will undoubtedly be its industrial properties in future years that will ensure physical demand endures (well after the current investment cycle subsides), with the metal expected to play a pivotal role in new industrial applications. While main growth areas in the past have been electronics and photographic equipment, novel areas of silver demand are likely to emerge from the renewable energy and health sectors. Over the last decade, the photovoltaic (PV) industry has emerged as a significant user of silver. The PV industry’s silver use is estimated to have reached 28 million oz in 2009. Industry projections put silver offtake at 186 million oz by 2020. Silver’s use as an anti-bacterial substance in medical equipment and applications, as well as in household applications, is expected to be boosted in the future once new technologies using silver gain acceptance. SILVER PRICE OuTLOOk Silver is currently trading around the $18 /oz level, below the March 2008 high of $20.92/oz, but well above the 4-year low of $8.97/oz in October 2008. Silver prices have been buoyed by investor demand. The silver demand is likely to get most of its growth from investment demand (Investments accounted for 15% of demand in 2009 as against 5% in 2008), especially with the economic uncertainty surrounding the Euro zone and the macroeconomic imbalances in the U.S.. Hence despite reduced fabrication demand, silver prices rallied (along with other assets including gold and oil) between April-October 2009, before undergoing a correction in November- December, following which the EU crisis orchestrated the ongoing rally. The general expectation among investors is that aggressive monetary easing and heavy deficit spending by the U.S. and other major economies would lead to higher inflation and weakened fiat currencies over the longer term. Silver is also highly correlated to base metals. Owing to its large industrial demand (far more than other precious metals, such as gold and platinum), silver prices tend to move in tandem with other base metals, such as copper, lead and zinc. This correlation is also influenced by the fact that bulk of the silver production is in the form of a by-product from producing other base metals. 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 RedChip Source: Bloomberg Visibility | | South American Silver Corp.
  • 23. South American Silver Corp. (TSX: SAC) InItIal RepoRt As the chart shows, silver tanked along with other base metals since the onset of the recession in the U.S., even as gold, due to its safe haven demand, was on the rise. ETFs are a favored investment option for investors. Along with physical demand for coins and bars, silver ETFs have been a favored investment vehicle to seek exposure to silver. Like the gold ETFs, the silver ETFs have been popular, absorbing substantial amounts of bullion and effectively replacing speculators and hedge funds as the principal source of investor demand. The data from the Commodity Futures Trading Commission (CFTC) shows that silver’s net long speculative positions amounted to 166 million oz at end-July 2009, above the 125.8 million oz low of the year set in April 2009, but still well below the peak of 378.9 million oz in February 2008. While Comex positions (speculative long positions) are responsive to prices (with long positions increasing on rally in silver prices and vice versa), ETF funds have been increasing positions regardless of price direction. Though liquidation of ETFs would have a negative impact on silver prices, we view ETFs as long-term investors having a stabilizing effect on the price, and thus should be favorable for our long-term bullish outlook for silver. MARkET FOR INdIuM Production: With an abundance in the Earth’s continental crust of 0.05 parts per million (ppm) and its oceanic crust of 0.072 ppm, indium is somewhat more abundant than its lookalike, silver. However, since it does not occur in the same concentrations as silver, indium is never mined in its own right. Instead, like many other strategic and minor metals, indium is mined as a by-product of the production of other ore. Traditionally, the largest source of indium has come as a by-product of zinc production. As a result, indium production and prices tends to be fairly correlated to zinc production. Extraction rates remain small, while processing and recycling is largely wasteful: Historically, less than 20 percent of the indium content in concentrates is extracted. Even with modern technological improvements, producers can only extract 30 percent of the 1,500 mt of indium mined every year worldwide, according to the Indium Corporation of Utica, NY. Moreover, considerable quantities of the metal remain to be recovered both through extractions from unprocessed base metal concentrates and through recycling. 30% of the indium in base metal concentrates never reaches the smelter. Of the remaining 70%, the final average rate of extraction of the metal is only around 50%. Therefore, there is currently a great deal of indium-bearing concentrate that could be processed but goes wasted currently. Additionally, the sputtering process is extremely wasteful, with less than 30% of the ITO actually ending up on the panel. The remaining 70% ends up on the walls of the sputtering chamber, the substrate and in the grinding sludge. While 60-65% of that indium can now be recovered, the remainder still goes wasted. An increase in recovery rates will only come from improvements in recycling methods. Indium Demand: Eighty percent of indium demand is for electronics applications, primarily for fabrication of thin uniform film indium-tin oxides (ITO) on glass, which create unique optically transparent electrical conductors for LCDs. The growing usage in CIGS (copper-indium-gallium-selenides) in the manufacture of thin film photovoltaic (PV) applications in solar panels has potentially a greater demand than its use in LCDs with growing interest in developing alternative energy resources. Presently CIGS applications account for only 6% of demand. RedChip Visibility | | South American Silver Corp.
  • 24. South American Silver Corp. (TSX: SAC) InItIal RepoRt Indium Prices: The U.S. producer price for indium remained at $500 per kilogram from the start of 2009 through mid-October. The New York dealer price range for indium began the year at $350 to $400 per kilogram, decreased steadily until mid-July reaching a low of $290 to $340 per kilogram, and then rose until at least mid-October to $495 to $510 per kilogram. Refinery Production and Reserves: China is the world’s largest refiner of the metal, using feedstock either produced domestically or imported from abroad. China has held on to its leadership position in indium refining for the last five years at least, with Japan coming a distant second. Refinery production 2008 2009 2008 2009 China 310 300 Korea Republic 75 85 Japan 65 60 Canada 45 50 Belgium 30 30 Other countries 25 30 Peru 6 20 Russia 12 12 Brazil 5 10 United States Source: Bloomberg Outlook. The total market for indium has experienced annual growth averaging over 10% for the past 5- 6 years and is expected to grow at a similar rate for the foreseeable future. The forecast growth in indium demand will be largely met by an increase in recycling, initially in Japan and later in the rest of the world. Increased production of secondary indium will meet much of the projected increase in demand over the years. COMPETITIVE LANdSCAPE We have classified silver companies into three categories as small, medium and large silver players based on the Company’s market capitalization (which, in our opinion, reflects the Company’s total reserves and resources). Details of some of SAC’s competitors are presented below: Alexco Resource Corp. (Alexco): Alexco operates two principal businesses: mineral exploration and development in Canada, primarily in the Yukon Territory, and provision of consulting and project management services in respect of environmental permitting and compliance and site remediation and reclamation, both in Canada and the United States. Alexco’s principal mineral exploration activities in the Yukon are being carried out within the Keno Hill district. Alexco’s material property within the Keno Hill district is the Bellekeno property. Alexco holds several other property interests within the district, including but not limited to Onek, Lucky Queen and Silver King. Bear Creek Mining Corporation (Bear Creek): Bear Creek is a Canada-based company. Bear Creek is engaged in acquiring and exploring mineral properties, principally located in Peru. Bear Creek controls RedChip Visibility | | South American Silver Corp.
  • 25. South American Silver Corp. (TSX: SAC) InItIal RepoRt a 100% interest in the Santa Ana silver project. The property is comprised of 6,300 hectares located in the Puno region in southern Peru. Bear Creek has completed 55,574 meters of drilling in 306 drill holes. Bear Creek owns 100% interest in the 1,000 hectares Antash concession. On 17 July 2008, Bear Creek completed its 100% acquisition of the Corani Project from Rio Tinto Mining and Exploration Limited (Rio Tinto). ECU Silver Mining Inc. (ECU): ECU is engaged in gold, silver and base metals exploration and development, and has its mining operations in the Velardena mining district of Mexico. ECU owns three properties located in the Velardena mining district. These properties, collectively known as the Velardena District Properties are comprised of the Velardena Property, the Chicago Property and the San Diego Property. The Velardena Property contains the Santa Juana mine. The property consists of 20 contiguous mineral concessions totaling 233.2 hectares. The Chicago Property is located approximately two kilometers south of the Velardena Property. This property contains the historical Los Muertos-Chicago mine and consists of eight contiguous mineral concessions, totaling 315.88 hectares. Kimber Resources Inc. (Kimber): Kimber is a Canada-based exploration-stage company, engaged in the acquisition and exploration of mineral right interests in Mexico. Kimber focuses on gold-silver exploration in Mexico. Kimber’s mineral rights are located in the states of Chihuahua and Estado de Mexico, Mexico. Kimber owns three exploration projects located in Mexico. The principal project is Monterde, which is 29,266 hectares in size and is located in the prolific Sierra Madre Gold-Silver belt of Northern Mexico. The Monterde project hosts substantial gold-silver mineralization and has three deposits located within two kilometers of each other. Kimber owns a 100% interest in the El Coronel mineral concessions. MAG Silver Corp. (MAG): MAG is engaged in the mineral acquisition, exploration and development business. MAG’s property interests are located in Mexico. MAG’s two properties include its 44% joint venture interest in the Juanicipio property and the 100% owned Cinco de Mayo property. MAG’s subsidiary, Minera Los Lagartos, S.A. DE C. V. (Lagartos) is the owner of a 44% interest in Minera Juanicipio, S.A. DE C.V. (Minera Juanicipio) and Fresnillo plc (Fresnillo). Minco Silver Corporation (Minco Silver): Minco Silver is engaged in the acquisition, exploration and development of silver mineral properties in the People’s Republic of China. Minco Silver has a 100% interest in Foshan Minco with the 10% carried interest in Foshan Minco in the Fuwan Silver Deposit, situated along the northeast margin of the Fuwan Silver Belt in Guangdong Province, People’s Republic of China. Minco Silver has a 51% interest in the Changkeng Silver Interest. Minco Silver has interests in three additional silver exploration permits in China, referred to as the Guanhuatang Property, the Luoke- Jilinggang Property and the Guyegang-Sanyatang Property. Orko Silver Corp. (Orko Silver): Orko Silver is an exploration-stage company. The Company is engaged in the acquisition and exploration of mineral resources in Mexico either directly or through its investment in Proyectos Mineros La Preciosa S.A. Silvermex Resources Ltd. (Silvermex): Silvermex is an exploration-stage company. Silvermex is engaged in the acquisition, exploration and evaluation of mineral resource properties in Mexico, through its wholly owned subsidiary, Minera Terra Plata, S.A. de C.V. Its property portfolio includes Penasco Quemado Project; Lobos Project; Cerro de Plata Project; Lety Project; El Rayo Project; San Marcial Project and La Frazada Project. RedChip Visibility | | South American Silver Corp.
  • 26. South American Silver Corp. (TSX: SAC) InItIal RepoRt Sabina Gold Silver Corp. (Sabina): Sabina is a mineral exploration company. Sabina focuses on the acquisition, exploration, and development of mineral resource properties. Sabina is primarily focused on its Hackett River silver-zinc project in Nunavut in the Canadian Arctic. Sabina also has exploration properties in the Red Lake gold camp in Ontario and the Del Norte silver-gold project in the Stewart-Eskay Creek mining district, in British Columbia. Sabina’s Hackett River project consists of approximately 10,637 hectares and is located approximately 480 kilometer (km) north east of Yellowknife, and approximately 75 km from Bathurst Inlet. Silver Crest Mines Inc. (Silver Crest): Silver Crest is a Canada-based exploration and development company with a portfolio of silver-gold deposits. Silver Crest’s properties include the Santa Elena project and the Cruz de Mayo project in Sonora, Mexico. As of December 31, 2008, Silver Crest has completed a total of 98 core holes, four geotechnical core holes, and 21 reverse circulation drill holes in Santa Elena project. Silver Crest completed a Phase II drill program on Cruz de Mayo project, which included a 27 reverse circulation (RC) drill hole program totaling 2,907 meters. RC drilling was completed and a total of 10 holes measuring approximately 2,000 meters were drilled to test the Cruz de Mayo mineralization trending to the north-northwest. Name Major EV (C$ Reserves/ Stake Key highlights Assets million) Resources (million oz) Oremex Tejamen 8.97 47.5 100% To date, Oremex has completed 240 Resources Inc Property drill holes for a total of 37,500 metres (Mexico) of drilling on the property. The Company expects to increase the resource base through additional drilling programs. The Tejamen mineral resource remains open at depth and along trend. Silvermex Penasco 32.63 42.3 100% Well financed with over US$6 million in Resources Ltd Quemado working capital and Resources situated project , San in near surface, potentially bulk Marcial mineable deposits project (Mexico) Silvercrest High grade 39.76 62.4 100% Expected to start commercial Mines Inc precious production in 2010 metals properties in Mexico (Santa Elena and Cruz de mayo) and El Salvador Kimber Monterde 68.28 54.1 100% NA Resources Inc (Mexico) Minco Silver Fuwan Silver 68.13 156.8 90% The Fuwan property is one of the few Corp deposit RedChip Visibility | | South American Silver Corp. world that mineral projects in the located in already has a significant infrastructure southeaster in place, which is expected to save the
  • 27. Mexico (Santa Elena and Cruz de mayo) and South American Silver Corp. (TSX: SAC) El Salvador Kimber Monterde 68.28 54.1 100% NA InItIal RepoRt Resources Inc (Mexico) Minco Silver Fuwan Silver 68.13 156.8 90% The Fuwan property is one of the few Corp deposit mineral projects in the world that located in already has a significant infrastructure southeaster in place, which is expected to save the n China company in development costs. Alexco Bellekeno, 195. 14 217.1 NA Undertaking construction activity at Resource Corp Onek, Lucky Bellekeno mine after exploration Queen, program in 2009. Silver King (Canada) Orko Silver La Preciosa 187.04 135.3 45% On April 14th, 2009 Pan American Corp silver Silver Corp. and Orko Silver agreed for project a joint venture to develop the La (Mexico) Preciosa project. Pan American will contribute 100% of the funds in consideration for a 55% interest in the joint venture. Orko Silver retains a 45% interest fully carried to production. 30 ECU Silver Velardena 228.54 431.2 100% Company achieved an average daily Mining Inc district throughput of 650 tpd in last two Properties, months of 2009 much above its target Mexico of 500tpd. Undergoing pre feasibility study at one of the larger mills in Velardena. Bear Creek Peru (Corani 319.12 500.2 100% The company's 100% held Tassa Mining Corp and Santa silver gold prospect is undergoing Ana exploration Projects) Further drilling is in progress at its two advanced development projects; Santa Ana and Corani. Tahoe Escobal 505.00 334.45 100% Acquired the property from Goldcorp Resources, Inc. silver for $505 million, financed through an project, IPO, which was the second largest in Guatemala Canada this year. MAG Silver Juanicipio, 356.69 189.4 44% Recently conducted independent Corp Cinco de scoping study at Juanicipio mines. Mayo, Undertaking drilling activities at Cimco Mexico de mayo. Source: Various company websites and search engines RedChip Visibility | | South American Silver Corp.
  • 28. South American Silver Corp. (TSX: SAC) InItIal RepoRt MANAGEMENT TEAM ANd bOARd OF dIRECTORS Greg Johnson, President and CEO. Mr. Johnson was appointed as President and Chief Executive Officer of South American Silver Corp. in April 2010. As an exploration geologist with more than 20 years of experience in the mining industry, Mr. Johnson brings considerable corporate finance, project development and exploration experience to the Company. He most recently served at NovaGold Resources as Vice- President, Strategic Development, where during his 12 years there he was part of the team that grew NovaGold from a $10-million market capitalization to nearly a $2-billion company. While at NovaGold, Mr. Johnson was prominently involved with the acquisition and advancement of three world-class deposits, including the completion of three feasibility studies. He was a co-winner of the respected Thayler Lindsay International Discovery Award for his role in the discovery and advancement of the 40-million-ounce Donlin Creek gold deposit in Alaska. Mr. Johnson began his career with Placer Dome Inc., where he worked in the U.S. and International Exploration Groups with responsibilities for several projects from early discovery stage to development and operations. He graduated with honors from Western Washington University, where he earned a B Sc. in Geology. Mr. Johnson has served as a director of the Company since May 2009. Ralph Fitch, Executive Chairman Director. Mr. Fitch, one of the founders of South American Silver Corp., High Desert Gold Corporation and previously, General Minerals Corporation, is an exploration geologist with over forty years of international exploration management and field experience. His prior positions included Chief Geologist (Worldwide) and Manager of U.S. Exploration for the Chevron Minerals Group. His extensive exploration experience includes work in South America, Australia, West Africa, South Africa and the United States. Mr. Fitch is credited with a number of major international discoveries and was awarded the Chevron Chairman’s Award for his part in the discovery of the Ujina deposit at the Collahuasi copper porphyry project in Chile. As Chief Geologist for Chevron, he also directed the ore reserve estimations for the Lisheen zinc project in Ireland, another Chevron discovery, and the Stillwater platinum group metals project in Montana. Earlier in his career he was involved in the discovery at the Bend and Horseshoe massive sulphide deposits in Wisconsin, the Henkries uranium deposit in South Africa, the Coppins Gap Archaen porphyry copper molybdenum deposit in West Australia, and the Pah- My-Yah diamond field in Liberia. Mr. Fitch received his B.Sc. (Special) Honours Degree in Geology from the Imperial College of Science and Technology, London. Felipe B Malbran, Vice President, Exploration South America. Prior to the formation of SASC, Mr. Malbran served as vice president of Exploration South America (1995-2006) for General Minerals Corporation; in addition, his career includes work as a consultant for base and precious metals exploration in Chile, project geologist for base metals exploration in Chile with Min. Cominco Resources Chile (1991- 1994), and as project geologist for base and precious metals exploration with Geoestudios Consultants (1983-1990). Mr. Malbran has a wealth of experience in both economic geology and geotechnical and regional geology; he received his degree in geology from the University of Chile in 1983. Richard Doran, Vice President. Mr. Doran has been associated with South American Silver since its beginning and currently serves as the Executive Vice President of investor relations and corporate secretary. Prior to joining General Minerals, Mr. Doran served as the North American marketing manager for the European-based metals company Union Miniere. He was the commercial manager for Chevron RedChip Visibility | | South American Silver Corp.
  • 29. South American Silver Corp. (TSX: SAC) InItIal RepoRt Corporation’s mining division from 1985 through 1994. Prior to this, he was marketing research manager for Getty Mining Company. Mr. Doran holds a professional engineering degree in metallurgical engineering from the Colorado School of Mines and an M.S. degree in mineral economics from Pennsylvania State University. He completed additional graduate studies in international economics at the University of Denver. Peter Harris, Director. Mr. Harris is a consulting engineer with over 40 years of mining industry experience including experience as Senior VP and Chief Operating Officer at Nova Gold Resources Inc., and Senior VP of Project Development at Placer Dome Inc. Mr. Harris has been involved in the construction and operation of over 20 different mines in North and South America, Africa, Australia and Papua New Guinea. William Murray, Director. Mr. Murray is an engineer in the mining industry with over 33 years of experience in construction management and project evaluation in North America and Africa. He currently serves as the executive chairman and director of Polymet Mining Corp. Mr. Murray has been involved in numerous successful projects while working at Fluor Daniel, Denison Mines, Optimum Project Services and Anglo American Corp. in South Africa. Paul Haber, Director. Mr. Paul Haber is a Chartered Accountant and a Certified Public Accountant with a strong background in US/Canadian accounting and finance. He is presently managing the private company Haber Co. Ltd. Prior to March 2007, he was Vice-President, Chief Financial Officer and Corporate Secretary of a TSX Venture Exchange listed company. John W. Paul, Director. Mr. John W. Paul held various legal positions with Chevron Corporation over the period of 1988 to 2005. He holds B.B.A., M.B.A. and J.D. John Watson, Director. Mr. John E. Watson has been the President of a TSX Venture Exchange listed company since 2002. He is also the manager/member of a limited liability corporation that owns and manages commercial real-estate. Tina Woodside, Director. Ms. Woodside is currently the head of the corporate finance department in Gowlings’ Toronto office and a member of the firm’s National Executive Committee. Ms. Woodside practices corporate and securities law with particular emphasis on corporate finance, mergers and acquisitions and corporate governance matters. Ms Woodside was seconded to the Ontario Securities Commission in 1993 and became a partner in 1996. Ms. Woodside was listed in Lexpert Magazine as one of Canada’s 15 Women Lawyers to Watch and was awarded the BV rating in Martindale-Hubbell. RedChip Visibility | | South American Silver Corp.
  • 30. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Quarterly Income Statement All Figures in US$ FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10 Total Revenue - - - - - Cost of Sales - - - - - Gross Profit - - - - - Expenses and Other Items General and Administrative expenses Consulting 24,188 36,485 19,422 75,790 39,792 Depreciation and Amortization 6,685 5,989 6,834 8,845 9,737 Director's Fees 19,500 19,550 15,750 15,750 29,250 Filing and transfer agent fees 30,447 2,984 (2,632) 3,628 33,946 Office and Administration 56,518 63,193 51,894 54,542 58,218 Professional Fees 66,204 34,017 27,914 68,416 103,463 Reconnaissance and Sundry Exploration 35,171 15,704 7,043 15,101 11,829 Shareholder information 39,284 96,587 43,962 83,250 132,736 Stock-based compensation 183,359 120,609 121,953 122,522 90,482 Wages and benefits 66,726 50,924 53,285 106,403 78,946 Provision for value added tax credits - - - - - Operating Income (Loss) (528,082) (446,042) (345,425) (554,247) (588,399) Other Income (expense) Interest and other income 3,170 1,248 1,046 1,200 1,133 Foreign currency gain (loss) (22,119) 48,424 29,723 26,900 14,336 Loss on disposal of assets (631) - - - - Write-down of mining claims - - - - - Net loss and comperhensive loss for the period (547,662) (396,370) (314,656) (526,147) (572,930) EPS Basic (0.01) (0.01) (0.01) (0.01) (0.01) Diluted (0.01) (0.01) (0.01) (0.01) (0.01) Shares Outstanding Basic 50,676,295 51,456,665 51,456,665 54,455,000 60,235,879 Diluted 50,676,295 51,456,665 51,456,665 54,455,000 60,235,879 RedChip Visibility | 0 | South American Silver Corp.
  • 31. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Annual Income Statement All Figures in US$ FY Ending December 31, FY07 FY08 FY09 Total Revenue - - - Cost of Sales - - - Gross Profit - - - Expenses and Other Items General and Administrative expenses Consulting 132,874 117,855 155,885 Depreciation and Amortization 36,619 45,501 28,353 Director's Fees 58,000 62,500 70,550 Filing and transfer agent fees 42,303 50,603 34,427 Office and Administration 143,727 208,530 226,147 Professional Fees 219,589 212,712 196,551 Reconnaissance and Sundry Exploration 16,160 10,600 73,019 Shareholder information 96,137 178,404 263,083 Stock-based compensation 1,507,714 1,031,578 548,443 Wages and benefits 291,807 200,326 277,338 Provision for value added tax credits 160,846 - - Operating Income (Loss) (2,705,776) (2,118,609) (1,873,796) Other Income (expense) Interest and other income 576,463 231,992 6,664 Foreign currency gain (loss) 119,048 (211,679) 82,932 Loss on disposal of assets - - (631) Write-down of mining claims - (1,023,677) - Net loss and comperhensive loss for the period (2,010,265) (3,121,973) (1,784,831) EPS Basic (0.05) (0.06) (0.03) Diluted (0.05) (0.06) (0.03) Shares Outstanding Basic 42,710,466 49,831,438 52,011,146 Diluted 42,710,466 49,831,438 52,011,146 RedChip Visibility | 1 | South American Silver Corp.
  • 32. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Quarterly Balance Sheet All Figures in US$ FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10 Assets Current assets Cash and cash equivalents 6,564,682 5,718,880 5,051,663 7,013,973 5,814,496 Receivables and prepaids 76,993 71,441 52,862 75,138 140,840 Total current assets 6,641,675 5,790,321 5,104,525 7,089,111 5,955,336 Mining claims and deferred exploration costs 6,872,859 7,465,736 7,918,994 8,675,051 9,425,714 Equipment 30,807 66,598 69,973 94,305 87,877 Total non-current assets 6,903,666 7,532,334 7,988,967 8,769,356 9,513,591 Total assets 13,545,341 13,322,655 13,093,492 15,858,467 15,468,927 Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities 194,097 240,445 194,092 462,017 507,851 Total current liabilities 194,097 240,445 194,092 462,017 507,851 Total liabilities 194,097 240,445 194,092 462,017 507,851 Shareholders' equity Share capital 44,891,866 44,891,866 44,891,866 47,251,095 47,866,568 Contributed surplus 1,894,969 2,022,305 2,154,151 2,818,115 2,340,198 Deficit (33,435,591) (33,831,961) (34,146,617) (34,672,760) (35,245,690) Total shareholders' equity 13,351,244 13,082,210 12,899,400 15,396,450 14,961,076 Total liabilities and shareholders' equity 13,545,341 13,322,655 13,093,492 15,858,467 15,468,927 RedChip Visibility | | South American Silver Corp.
  • 33. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Annual Balance Sheet All Figures in US$ FY Ending December 31, FY07 FY08 FY09 Assets Current assets Cash and cash equivalents 12,870,407 7,422,870 7,013,973 Receivables and prepaids 76,950 50,396 75,138 Total current assets 12,947,357 7,473,266 7,089,111 Mining claims and deferred exploration costs 3,180,496 6,454,790 8,675,051 Equipment 59,575 37,209 94,305 Total non-current assets 3,240,071 6,491,999 8,769,356 Total assets 16,187,428 13,965,265 15,858,467 Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities 419,509 255,144 462,017 Total current liabilities 419,509 255,144 462,017 Total liabilities 419,509 255,144 462,017 Shareholders' equity Share capital 43,660,920 44,276,393 47,251,095 Contributed surplus 1,872,955 2,321,657 2,818,115 Deficit (29,765,956) (32,887,929) (34,672,760) Total shareholders' equity 15,767,919 13,710,121 15,396,450 Total liabilities and shareholders' equity 16,187,428 13,965,265 15,858,467 RedChip Visibility | | South American Silver Corp.
  • 34. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Quarterly Cash Flow Statement All Figures in US$ FY Ending December 31, 1Q09 2Q09 3Q09 4Q09 1Q10 Cash flow from operating activities Net Income (547,662) (396,370) (314,656) (526,143) (572,930) Depreciation and amortization 6,685 5,989 6,834 8,845 9,737 Gain on disposal of investments / assets (631) - - - - Investor relation fees settled by warrants - - - - 36,282 Write-down of mining claims - - - - - Stock based compensation 183,359 120,609 121,953 122,522 90,482 Change in receivables and prepaids (26,597) 5,552 18,579 (22,276) (65,702) Change in accounts payable 12,380 (42,679) (44,441) 226,926 (89,222) Cash flow from operating activities (371,204) (306,899) (211,731) (190,126) (591,353) Cash flows from investing activities Deferred exploration costs (486,070) (497,123) (445,277) (704,984) (604,815) Purchase of equipment (914) (41,780) (10,209) (33,177) (3,309) Proceeds on disposal of investments - - - - - Cash flows from investing activities (486,984) (538,903) (455,486) (738,161) (608,124) Cash flows from financing activities Proceeds from issuance of capital stock, net of issue costs - - - 2,890,597 - Proceeds from exercise of compensation warrants - - - - - Net capital contribution from (reimbursement to) parent - - - - - Cash flows from financing activities - - - 2,890,597 - Net Change in Cash (858,188) (845,802) (667,217) 1,962,310 (1,199,477) Net Cash - Beginning Balance 7,422,870 6,564,682 5,718,880 5,051,663 7,013,973 Net Cash - Ending Balance 6,564,682 5,718,880 5,051,663 7,013,973 5,814,496 RedChip Visibility | | South American Silver Corp.
  • 35. South American Silver Corp. (TSX: SAC) FInancIal StatementS InItIal RepoRt Annual Cash Flow Statement All Figures in US$ FY Ending December 31, FY07 FY08 FY09 Cash flow from operating activities Net Income (2,010,265) (3,121,973) (1,784,831) Depreciation and amortization 36,619 45,501 28,353 Gain on disposal of investments / assets - - (631) Investor relation fees settled by warrants - - - Write-down of mining claims - 1,023,677 - Stock based compensation 1,507,714 1,031,578 548,443 Change in receivables and prepaids (47,076) 26,554 (24,742) Change in accounts payable 197,614 (164,365) 152,186 Cash flow from operating activities (315,394) (1,159,028) (1,079,960) Cash flows from investing activities Deferred exploration costs (2,212,015) (4,265,374) (2,133,454) Purchase of equipment (77,118) (23,135) (86,080) Proceeds on disposal of investments 103,611 - - Cash flows from investing activities (2,185,522) (4,288,509) (2,219,534) Cash flows from financing activities Proceeds from issuance of capital stock, net of issue costs 14,891,170 - 2,890,597 Proceeds from exercise of compensation warrants 419,101 - - Net capital contribution from (reimbursement to) parent 8,366 - - Cash flows from financing activities 15,318,637 - 2,890,597 Net Change in Cash 12,817,721 (5,447,537) (408,897) Net Cash - Beginning Balance 52,686 12,870,407 7,422,870 Net Cash - Ending Balance 12,870,407 7,422,870 7,013,973 RedChip Visibility | | South American Silver Corp.
  • 36. South American Silver Corp. Source Document for the data inputed in this tab (unless stated otherwise) is the Technical report dated March 19th 2009 Acid Heap Leach Process (tonne/day) 35,000 InItIal RepoRt 1 Troy ounce = Grams: 32.15 Valuation - Case B - Assumes the throughput of 30,000 tonnes per day and measures the impact on NPV Total 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E Material extracted [Tonnes] 192,683,823 6,846,223 10,033,913 13,342,068 14,774,464 12,578,624 9,583,013 9,741,665 9,578,896 8,565,664 7,588,885 8,562,086 7,712,625 10,651,329 13,564,448 13,046,890 9,133,655 8,277,763 9,087,302 10,014,310 9,187,110 Pre-Production [Tonnes] 494,543 494,543 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 Leach Tonnes 229,250,000 8,750,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 12,250,000 7,000,000 Grade (g/t) 30.5 48.93 43.58 35.18 33.40 37.90 45.38 32.97 35.02 38.88 34.89 32.98 30.05 26.17 28.27 13.69 14.23 15.00 17.06 20.84 22.53 In [g/t] 6.4 4.57 4.89 6.18 7.39 7.34 13.63 6.40 8.26 13.34 9.22 3.36 5.71 8.43 4.71 3.30 3.37 3.44 3.54 3.58 2.70 Waste (36,566,177) (1,903,777) (2,216,087) 1,092,068 2,524,464 328,624 (2,666,987) (2,508,335) (2,671,104) (3,684,336) (4,661,115) (3,687,914) (4,537,375) (1,598,671) 1,314,448 796,890 (3,116,345) (3,972,237) (3,162,698) (2,235,690) 2,187,110 Contained Silver [kg] 6,987,890 428,138 533,855 430,955 409,150 464,275 555,905 403,883 428,995 476,280 427,403 404,005 368,113 320,583 346,308 167,703 174,318 183,750 208,985 255,290 157,710 Contained Indium [kg] 1,462,090 39,988 59,903 75,705 90,528 89,915 166,968 78,400 101,185 163,415 112,945 41,160 69,948 103,268 57,698 40,425 41,283 42,140 43,365 43,855 18,900 South American Silver Corp. (TSX: SAC) Silver Recovery [%] 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% Indium Recover [%] 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% RedChip Visibility | | South American Silver Corp. Silver [oz] 179,734,121 11,012,039 13,731,178 11,084,507 10,523,665 11,941,524 14,298,321 10,388,181 11,034,095 12,250,303 10,993,134 10,391,332 9,468,148 8,245,638 8,907,306 4,313,442 4,483,586 4,726,197 5,375,261 6,566,263 4,056,427 Indium [kg] 1,023,463 27,991 41,932 52,994 63,369 62,941 116,877 54,880 70,830 114,391 79,062 28,812 48,963 72,287 40,388 28,298 28,898 29,498 30,356 30,699 13,230 Payable Silver [tr oz] 170,747,415 10,461,437 13,044,619 10,530,282 9,997,482 11,344,448 13,583,405 9,868,772 10,482,390 11,637,787 10,443,478 9,871,765 8,994,741 7,833,356 8,461,941 4,097,770 4,259,406 4,489,887 5,106,498 6,237,950 3,853,606 Payable Indium [kg] 972,290 26,592 39,835 50,344 60,201 59,793 111,033 52,136 67,288 108,671 75,108 27,371 46,515 68,673 38,369 26,883 27,453 28,023 28,838 29,164 12,569 Silver Price [$/t oz] 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 Indium Price [$/kg] 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 Cash flow ($ x 000) Silver revenue 2,561,211 156,922 195,669 157,954 149,962 170,167 203,751 148,032 157,236 174,567 156,652 148,076 134,921 117,500 126,929 61,467 63,891 67,348 76,597 93,569 57,804 Indium revenue 583,374 15,955 23,901 30,206 36,120 35,876 66,620 31,282 40,373 65,203 45,065 16,423 27,909 41,204 23,021 16,130 16,472 16,814 17,303 17,498 7,541 By-Product Credit 339,290 12,950 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 18,130 10,360 Total revenue [$ x 000] 3,483,875 185,827 237,700 206,291 204,213 224,173 288,501 197,443 215,739 257,899 219,847 182,629 180,960 176,834 168,080 95,726 98,493 102,292 112,030 129,197 75,705 Mining costs 384,404 13,658 20,018 26,617 29,475 25,094 19,118 19,435 19,110 17,088 15,140 17,081 15,387 21,249 27,061 26,029 18,222 16,514 18,129 19,979 18,328 Plant costs 596,050 22,750 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 31,850 18,200 General and administrative 229,250 8,750 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 12,250 7,000 Sustaining capital for plant 52,728 2,013 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818 1,610 Final Reclamation 2,639 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 139 Total Cash Operating Cost [$ x 000] 1,265,071 47,310 67,074 73,674 76,531 72,151 66,174 66,491 66,166 64,145 62,196 64,138 62,443 68,306 74,117 73,085 65,278 63,571 65,186 67,035 45,277 Depreciation 121,662 5,192 6,241 6,241 6,241 6,241 6,241 7,066 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 6,517 EBIT [$ x 000] 2,097,143 133,325 164,385 126,376 121,440 145,781 216,086 123,886 143,056 187,238 151,134 111,975 112,000 102,012 87,446 16,125 26,698 32,205 40,328 55,646 23,911 Taxes 627,456 38,817 49,274 37,879 36,401 43,699 64,783 37,135 42,884 56,135 45,307 33,561 33,572 30,579 26,207 4,824 7,996 9,647 12,082 16,674 7,161 EBIT*(1-T) [$ x 000] 1,469,687 94,508 115,111 88,496 85,040 102,083 151,303 86,752 100,172 131,103 105,827 78,414 78,429 71,433 61,239 11,300 18,702 22,558 28,246 38,972 16,750 Operating Cash Flows [$ x 000] 1,591,348 99,700 121,352 94,737 91,281 108,324 157,544 93,817 106,689 137,620 112,344 84,930 84,945 77,950 67,756 17,817 25,219 29,074 34,762 45,488 23,267 Capital cost [$ x 000] 25% Assumed additional capex for higher output than technical report Initial Cap. Plant 62,500 25,000 12,500 Pre-Production 1,236 1,236 Initial Cap. Mine 16,475 6,590 3,295 Initial Cap. Infrastructure 25,000 10,000 5,000 Contingencies, Working Capital 18,955 4,222 6,451 2,708 943 409 Initial Capital [$ x 000] 124,167 47,049 27,246 2,708 943 409 - - - - - - - - - - - - - - - - Sustaining capital - Mine [$ x 000] 45,325 15,108 15,108 15,108 Royalty / NSR [$ x 000] 875 875 Total capital costs [$ x 000] 170,366 47,049 28,121 2,708 943 409 - 15,108 - - - - 15,108 - - - - 15,108 - - - - Return of Working Capital [$ x 000] - Salvage [$ x 000] - Net Cash Flow, pre-tax [$ x 000] 2,048,438 (47,049) 110,396 167,918 131,674 127,272 152,022 207,218 130,952 149,572 193,755 157,651 103,383 118,517 108,528 93,963 22,641 18,107 38,722 46,845 62,162 30,428 Net Cash Flow, post-tax [$ x 000] 1,420,982 (47,049) 71,579 118,644 93,794 90,872 108,324 142,436 93,817 106,689 137,620 112,344 69,822 84,945 77,950 67,756 17,817 10,111 29,074 34,762 45,488 23,267 Diluted SAC shares (in 000) 81,923 valuatIon Tax rate 30.0% Discount rate 15.0% NPV per share in $ 3.82 Silver Price 15.0 Exchange rate as on 24 June 2010 1.04 After-tax Cash Flows (000 $) NPV as on 1 Jan 2011 318,795 NPV per share in C$ 3.96 NPV - Current 297,278 P/NPV 0.8x Net debt as on 31st March 2010 (7,014) Price 3.20 Expected cash proceeds from warrants/options 8,945 Market Price (C$) as on June 23, 2010 0.62 Equity value 313,237 Upside / (Downside) 415.5%
  • 37. South American Silver Corp. (TSX: SAC) DIScloSuReS InItIal RepoRt Analyst Certification The analysts contributing to this report do not hold any shares of SAC. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. RedChip Companies Inc. certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst authoring this report. RedChip Visibility Research Universe RedChip Visibility, a division of RedChip Companies Inc., covers small and micro cap companies with market caps ranging from $5.5M to $1.2B. Each company is typically covered for at least 12 months. New companies may be added or removed at any time. RedChip Visibility Coverage Universe Percentage of Rating Number of Covered Companies Universe Strong Buy 5 22.7% Buy 14 63.6% Speculative Buy 3 13.6% Hold 0 0.0% Sell 0 0.0% RedChip Rating System STRONG BUY The current price reflects a substantial discount from the market and from its peers, and the company does not possess significant financial risk within its risk category. Future growth potential is undervalued relative to the company’s stock price. The analyst believes the stock at current levels represents a compelling opportunity for capital gains over the time period to its target price. BUY The current price reflects a discount from the market and from its peers, and the company does not possess significant financial risk within its risk category. The analyst believes the stock at current levels will provide an opportunity for capital gains over the period of its target price. Several factors can indicate an undervaluation of the company’s shares. SPECULATIVE BUY The current price appears to offer potential gains though risk is considerably higher given its risk category. There may be insufficient historical data or clear-cut prospects to warrant a “Buy,” but the analyst believes that the long run prospects of the Company are positive. The analyst believes its risk reward ratio advocates purchase of the stock. In the short term, the stock may be subject to high volatility and continue to trade at a discount to its market. HOLD The analyst is unable to assign a buy rating due to a number of specified factors noted in the report. These include the stock being fairly valued rela- tive to its peers and the market, or the company may have risks that make it potentially unsuitable for investment within its risk category. Similarly there are no currently known compelling factors that would warrant selling. The analyst will remain neutral pending developments. SELL The analyst believes that the Company is overvalued based on its current status. The future of the Company’s operations may be questionable and there is an extreme level of investment risk relative to reward given its risk category. An investment in the company may produce below market returns and/or deficits. About RedChip RedChip Companies is an international, small-cap research and financial public relations firm headquartered in Orlando, Florida; with affiliate offices in Qingdao, China; Paris and San Diego. RedChip delivers concrete, measurable results for its clients through its extensive national and international network of small-cap institutional and retail investors. RedChip has developed the most comprehensive platform of products and services for small- cap companies, including: RedChip Visibility Research™, Traditional Investor Relations, Digital Investor Relations, Institutional and Retail Conferences, RedChip Small-Cap TV( TM), Shareholder Intelligence, Social Media and Blogging Services, Webcasts and RedChip Radio( TM). RedChip is not a FINRA member or registered broker/dealer. None of the profiles issued by RedChip Companies, Inc., constitutes a recommendation for any investor to purchase or sell any particular security or that any security is suitable for any investor. Any investor should determine whether a particular security is suitable based on the investor’s objec- tives, other securities holdings, financial situation needs, and tax status. South American Silver Corp. (“SAC”) paid RedChip Visibility, a division of RedChip Companies, Inc., thirty thousand dollars for eleven months of RedChip Visibility Program services, which includes the preparation of the equity research reports. The equity research report(s) are prepared for informational purposes only and were paid for by the company portrayed in the report. Information contained in the equity research report(s) is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. These reports are not a recommendation of a solicitation to purchase or sell any security, nor do they constitute investment advice. RedChip Companies, Inc., is currently engaged by this company to provide investor awareness services. Investor awareness services and programs are designed to help small-cap companies communicate their investment characteristics. South American Silver Corp. agreed to pay RedChip Companies, Inc., a fee of thirty thousand dollars in cash for eleven months of these investor relations services and, subject to approval by the Toronto Stock Ex- change, warrants to purchase up to two hundred thousand shares of common stock with an exercise price of $0.80 per share, exercisable for a period of 24 months. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. Additional information about the subject security, analyst, or RedChip Companies Inc. is available upon request. To learn more about RedChip’s prod- ucts and services, visit http://www.redchip.com/visibility/productsandservices.asp, call 1-800-RedChip (733-2447), or email at info@redchip.com Company Contact Info: 880-580 Hornby Street Vancouver, BC V6C 3B6 Phone: (604) 684-0693 RedChip Visibility | | South American Silver Corp.

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