TGR: Would that be at Caylloma in Peru or San Jose in Mexico?CT: San Jose. Its new high-grade zone, Trinidad North, is within easy reach of existing development. What this means for Fortuna is a tremendous opportunity for organic production growth and cash-flow growth. The grade of this new discovery is better than the head grade of its current operation. For example, select assays published July 14 include 399 grams per ton (399 g/t) silver and 2.15 g/t gold (528 g/t silver equivalent) over 13 meters. So Trinidad North will have a very favorable effect on San Jose's overall cost structure and growth profile. Fortuna is the sort of company we really look for and really like. We see potential here for an additional lift in valuation. That will be determined by its ability to increase San Jose's production capacity beyond the current 2,000 ton per day (2,000 tpd) mill rate. TGR: What can you tell us about Tahoe's Escobal project in Guatemala? CT: The project was commissioned earlier this year, and, by all accounts, its ramp-up seems to be going smoothly. Tahoe is a company that offers an exceptionally well-qualified and well-respected management team. The Escobal asset is an anomaly in many respects in the silver sector. It is a very high-grade and a very economically robust project, one that stands to deliver significant cash flow in the near term. So in many respects Tahoe commands a premium valuation in the silver market at the moment for these reasons. There are a couple of key items that we're looking for from Tahoe by the end of 2014. The first would be, obviously, the completion of its production ramp-up to 3,500 tpd. The second would be the declaration of a dividend, which the company had announced previously it intends to deliver. The third would be a balance-sheet reorganization. We anticipate that the company will take on a level of debt, which in many respects would be a relatively small component of the company's current capitalization. As far as our outlook for Tahoe goes, while we consider it fairly valued at current metal prices, we recognize the excellent job that management has done in building the industry's largest and most profitable silver projects.
TGR: How do you rate Guatemala as a jurisdiction, especially after the increased cost of mining in Mexico due to its new tariff?CT: Guatemala's mining industry is relatively immature in comparison with Mexico's. Mexico is, by far, the better jurisdiction. It has a longer history of mining and produces many more silver ounces than Guatemala. Guatemala is a more challenging place to operate from a geopolitical and a community perspective. It is much poorer than Mexico, with a nominal per-capita GDP of only 31% of its northern neighbor. And when you have one of the largest and most profitable silver mines in the world being developed in such a poor country, it can be a contentious issue. TGR: How has Mexico's 7.5% flat tax on earnings before interest, taxes, depreciation and amortization (EBITDA) affected mining companies? CT: It has been largely factored into market prices for the Mexico-focused precious metal producers. Mexico remains a very important jurisdiction for world silver production. It offers a trained labor force and, as far as infrastructure is concerned, remains the preferred destination for developing silver exploration opportunities. These realities far outweigh the negative effect the flat tax has had on Mexico's ranking as a mining jurisdiction. TGR: No one likes paying more to the government, but mining companies are looking for stability. Do they continue to see Mexico as a stable mining regime? CT: Nationally, Mexico remains a stable mining regime, but understand that Mexico is a large, federal jurisdiction with many states that differ in how accepting they are of mining. TGR: Could you comment on other silver companies with operations in Mexico? TGR: Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) has performed very well in the marketplace over the last year. This is one company that has adapted well to a lower silver price environment. It is well managed, and I expect it to continue to pay an attractive dividend. It has one of the strongest balance sheets in the sector. At current metal prices, I consider it fairly valued in the market today. SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT) is a very interesting story. It is in the process of redeveloping its key asset, the Santa Elena mine, from a heap-leach deposit to an underground milling operation. I understand that commissioning is proceeding on plan and on budget. (Editor's Note: SilverCrest announced on Aug. 11 that it completed the mill commissioning.) My feeling is that Santa Elena at depth offers significant production-growth potential. The key will be whether the company can maintain a low-cost profile while remaining cognizant of the higher costs associated with underground production.
TGR: How does the grade compare underground?CT: The grade is higher than the heap leach. The benefit, though, will be the mill, whose operation will engender higher recoveries. TGR: Were there any other companies you want to mention? CT: Our preferred micro-cap story in the silver space is Santacruz Silver Mining Ltd. (SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE). It is ramping up production from its Rosario mine in Mexico a little slower than anticipated but pretty much on track with our outlook for the operation. A key component of Santacruz's valuation will be its development-stage project, San Felipe. We await a preliminary economic assessment of this, which will better define how much of an opportunity it is. Santacruz is definitely a company to watch. TGR: Having been hurt so much in the recent past, many investors await evidence that the tide has turned before they return to mining stocks. Do you think the worst is behind us? CT: I don't think the mining sector is in a bull market at the moment. What is working in this sector's favor now is reduced volatility, not only with metals prices but also equity prices. If these trends continue, we can expect to see companies like the Fortunas and Tahoes of the world make tremendous strides in adding value at current prices. Such companies will find traction in the marketplace, and their shareholders will be rewarded. Our outlook doesn't in any way suggest that the whole market will move in unison, but provided that metal prices stay stable, we do expect that well-managed companies meeting expectations and delivering real cash flows will shine brightly. TGR: Chris, thank you for your time and your insights. Chris Thompson, PGeo, is an analyst for Raymond James specializing in precious metals and small to mid-cap developers and producers. He worked previously for Haywood Securities. He holds a Bachelor of Science in mining and exploration geology, a Master of Science in mineral economics and a graduate diploma in mining engineering from the University of the Witwatersrand in South Africa. He was awarded the 2011 StarMine Top Analyst Award for Stock Picker in the Metals and Mining sector.