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ECU Silver Mining Inc. (ECU-TSX, $1.02)
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Sector Perform; Target: $1.20 — Initiating Coverage
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Tip Of The Iceberg
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We are initiating coverage on ECU Silver (“ECU” or the “company”) with a Sector Perform rating and a 12-month target price of $1.20/share. Our recommendation is based on the following three points:
1. Forecast production in 2011 of around 1.4M oz Ag Eq (815k oz pure Ag) from its Velardeña District mines at negative cash costs per oz Ag (net of credits).
2. Likely expansion of the sulphide operation from current 320 tpd capacity to 2,000 tpd or greater capacity during 2013 transforming ECU into a ~6M+ oz Ag Eq producer.
3. A NI 43-101 compliant resource base of ~284M oz Ag Eq at Velardeña which supports the expansion plan envisaged in point 2 above.
Valuation
We have valued ECU using a blend of P/NAV and P/CFPS multiples. ECU’s ultimate value is not in its immediate production profile but in the planned expansion of its sulphide operation (captured by NAV) and as such we have blended our NAV target ($1.30) and CFPS target ($0.95) on a 67/33 basis to derive a target price of $1.20 per share.
Conclusion
With current production and the possibility of a significant expansion in the near future, ECU represents a compelling silver story for investors.
However, the early nature of the work associated with the expansion scenario comes with a high degree of risk. As ECU advances the confidence associated with the expansion scenario (including upgrading the sulphide resources), this risk should diminish.
We are initiating coverage with a $1.20 target price and a Sector Perform rating.
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Company Name
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Disclosures
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ECU Silver Mining Inc
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9
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Disclosure List
1. Within the last 12 months, Stonecap or its affiliates have provided investment banking and/or related services for the subject issuer.
2. Within the last 12 months, a director, officer, or analyst with Stonecap has provided services for remuneration, other than investment advisory or trading services, to the subject issuer.
3. The research analyst(s) or a member of the research analyst’s(s’) household has a long position in the shares and/or is long calls/short put options of the subject issuer.
4. Stonecap or its affiliates is a market maker, or is associated with the specialist that makes a market in the securities of the subject issuer.
5. Stonecap or its affiliates collectively beneficially own 1% or more of any class of the issuer’s equity securities.
6. An employee, officer, or director of Stonecap is a member of the Board of Directors, Officer of, or an advisor to, the subject issuer.
7. The research analyst(s) has viewed the material operations of the subject issuer. All expenses (transportation, lodging, meals, etc.) for the analyst's site visit have been paid for by the issuer.
8. The research analyst(s) has viewed the material operations of the subject issuer. All expenses (transportation, lodging, meals, etc.) for the analyst's site visit have been paid for by Stonecap Securities Inc.
9. The research analyst(s) has viewed the material operations of the subject issuer. Expenses (transportation, lodging, meals, etc.) for the analyst's site visit have been paid for by both the subject issuer and Stonecap Securities Inc.
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Investment Rating Guidelines
Outperform: The stock's risk adjusted total return is expected to materially outperform sector peer returns over the next 12 months.
Sector Perform: The stock's risk adjusted total return is expected to approximate sector peer returns over the next 12 months.
Underperform: The stock's risk adjusted total return is expected to materially underperform sector peer returns over the next 12 months.
Under Review: The stock rating is under review, pending evaluation of material new information.
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Risk Qualifier Guidelines
Average: Operational and financial risks are assessed as being in line with sector peer levels.
Above Average: Operational and financial risks are assessed as being significantly above sector peer levels.
Speculative: Operational and financial risks are assessed as being exceptionally high, low predictability of financial results.
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Analyst Certification
Each analyst of Stonecap Securities Inc. whose name appears in this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of the research analyst’s compensation was, is, or will be, direct or indirectly related to the provision of specific recommendations or view expressed by the research analyst in the research report.
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Disclaimer
This report has been prepared by Stonecap Securities Inc. (“Stonecap”)
Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information contained herein is for information purposes only and this report is not, and is not to be construed as, an offer to sell or a solicitation of an offer to buy any securities. The information and opinions contained herein have been compiled or derived from sources believed reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither Stonecap nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.
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