Whenever investors see a stock chart that looks like Revett Minerals's (RVM) they should know that there are serious risks related to the investment. As you can see in the chart below, RVM investors have lost 80% of their investment's value in the last year as the stock price plummeted from a little under $3.50 per share in December 2012, to 62 cents per share on 11/29/2013.
We won't sugarcoat it; there are serious risks for Revett Minerals. Many investors have already bailed out of the company, and fellow Seeking Alpha author Itinerant penned this piece expressing his frustration and selling his shares at a hefty loss. We don't blame him or any other investors that bailed out of the company - after all there is a certain point where an investor needs to sell the investment even after taking significant losses.
But we wonder if the drop in Revett's share price has created an opportunity that may be quite lucrative for investors. After all, when other investors reach a point of complete disgust with a stock they may be selling at prices that are quite attractive to new investors looking for bargain basement deals. The best entry points are always found at these times, and with RVM we may be seeing quite a bargain at current prices for investors willing to take the risk and buy when everybody else is selling.
Let's first start with a quick overview of the company and its risks.
Brief Overview
Revett Minerals is a North American silver and copper miner, with its primary two assets located in northwest Montana:
(click to enlarge)
The Troy mine is the company's only producing asset, and in December of 2012, Revett announced that it would suspend ore extraction at the Troy Mine after seismic activity made some areas of the mountain unsafe for workers. The company made several attempts to find a new entrance to the main ore body during the past year, but none have proven safe enough to continue. Instead, the company is now planning to bore an entirely new entrance through virgin rock in a more stable part of the mountain - a costly solution that will take much longer than the company had hoped.
The other main asset that the company controls is the Rock Creek Project, which is a pre-development stage project which could have world-class potential. This project contains inferred historical resource estimates of 300 million ounces of silver and 2.5 billion pounds of copper - which would make this potentially the biggest silver project in North America.
Additionally, there would be significant synergies for the company since this project is located close to Troy mine operations and it has the same geochemistry as the Troy mine. What this means is that the company should be very familiar with the Rock Creek concentrates and geology, which is always good in the mining industry.
Major Risks Abound for Revett Minerals
As we've stated earlier, a company doesn't drop 80% in one year without having significant risks. Revett is no exception to this rule and now we'll quickly go over the major risks that we see with this investment.
Troy Mine Operations - In December of 2012, the company announced that it was suspending operations at the Troy mine - the company's only operating mine and source of revenue. This suspension was due to concerns about the stability of the rocks and the need to reassess operations for the safety of its workers. They stated the following in the aforementioned press release:
"The company will review ground conditions on a daily basis and will resume underground operations as soon as possible. At this stage, we believe it may take up to two weeks to assess, monitor and return to full operations."
Note: the emphasis is ours.
It didn't take two weeks to start up operations - in fact, the company still hasn't started up its operations almost one year later. The company had tried to use its previous access routes, but the stability of the geo-structures didn't make this feasible and in the end the company issued a press release stating that they would have to build a new route through previously unmined areas. The cost of this new decline would be estimated at $12 million dollars and could be completed (with additional funding) by the end of next year. That was a surprise for investors and they hammered RVM's stock price to where it currently stands today, at a little over 60 cents per share.
This is obviously the largest risk associated with the company, because without the Troy mine operations they have no source of revenue. This new access route is probably the last hope for the company as a stand-alone entity, and even that will require almost a year of construction and additional financing. So if something goes wrong, there is really not much more for the company to do other than cease operations, declare bankruptcy and auction off assets to the highest bidder - and the mining assets business is not a seller's market by any stretch of the imagination.
Commodity Price Risk - A close second to the risk associated with the Troy mine is the risk associated with silver and copper prices. As we mentioned earlier, the company will need outside financing of some type to finish construction on the new access route for the Troy mine. They expect to get the financing next year (which would be very probably if commodity prices improve), but if they don't improve and silver drops below $20 per ounce, it may be very difficult to get these funds. Thus the price of both copper and silver play a huge role in the valuation of RVM's assets and the company as a whole - if investors do not believe the silver price will rise over the next year then they shouldn't invest in Revett.
Rock Creek Mine Permits and Environmental Study - The company previously received a positive decision about the environmental consequences of its Rock Creek development proposal, but they still need to issue a supplemental environmental impact statement. They hope to have this available for public comment by early 2014 and have a record of decision by the end of the year. That will allow for initial road improvements by early 2015.
The obvious risk here is that the environmental groups (who oppose Rock Creek development), are able to derail the project. Though the company has already won a few court decisions that show that the project can be developed without harming the environment, there is always quite a bit of uncertainty when it comes to local opposition, and any burden on the Rock Creek project would remove significant value from the future potential of Revett.
These risks are not the only risks facing the company - there are others - but we believe these are the significant risks worth mentioning. Now, let's take a quick look at why we believe Revett may offer quite a bit of value for investors.
Revett's Valuation Based on Troy Mine Alone
Now, let's take a look at the valuation based on the company's Q3FY13 balance sheet, prior production from the Troy mine, and the estimated reserve still present at Troy.
(click to enlarge)
Taking a look at the company's balance sheet we find that the "Cash Hoard" (Cash & Marketable Securities minus Current Debt, Long-term Debt, and Current Capital Lease) is approximately $10.5 million. We also must add the expected cost of the new Troy mine decline ($12 million) to the liability side. Subtracting the Cash Hoard from the Market Capitalization and adding in the Decline liability, we get a simple Enterprise Value of approximately $24.5 million.
Said in another way, Wall Street currently values all of the company at the current share price at approximately $24.5 million dollars. Additionally, if an acquirer wanted to purchase Revett at a 40% premium to the current valuation, they would have to pay approximately $34.3 million dollars after subtracting the "Cash Hoard" and adding in the Decline liability - which includes the 40% premium.
Now, let's take a look at the Troy mine reserves, which as of December 31st, 2012, when the company stopped mining operations, was the following:
(click to enlarge)
As investors can see, Troy reserves are measured at approximately 12.44 million ounces of silver and 98.87 million pounds of copper. Besides the fact that these are already economic reserves, we also have a relatively high degree of certainty because Revett already had mining operations that were only halted due to structural issues, and not grade or ore-related issues.
Finally, let's take a look at the last full quarter of production (Q3FY12) and the first nine months of 2012 (last consecutive quarterly periods of production).
(click to enlarge)
We used these quarters because they represent the last quarters when the company was operating fully. At production costs in the low $20 range, the company's cost were in-line with much larger competitor Hecla Mining (HL) which had total costs for the period in that range. Additionally, the third quarter of 2012 was actually a very strong quarter for the company with an outstanding all-in cost of $21.52 at the current silver-to-copper conversion rate (6.66 copper pounds per silver ounce).
Now, let's put this all together and value the company based on its reserves and the potential silver price.
(click to enlarge)
Based on the current known reserves at the Troy mine, Wall Street is valuing RVM at 90 cents per silver-equivalent ounce. An acquirer paying a 40% premium on the company's current valuation, would be acquiring RVM's reserves at approximately $1.26 per silver-equivalent ounce. That is extremely cheap considering that the company has all the infrastructure in place to mine the Troy deposit - it's being valued more as an explorer then a potential producer.
We can run some off the cuff comparisons to other silver producers to see that this valuation is extremely low. For example, based on its declared reserves, Hecla Mining, another US silver producer, has a rough 400 million silver-equivalent ounces as reserves and a current $1 billion dollar valuation, or approximately a $2.50 value per silver-equivalent ounce. First Majestic Silver (AG) has approximately 100 million silver-equivalent reserve ounces and a $1 billion valuation, which is close to $10 per silver-equivalent ounce (their valuation is higher because their costs are much lower - but this is a different discussion). Pan American Silver (PAAS) has declared reserves at 500 to 600 million reserve silver-equivalent ounces and a market capitalization of $1.6 billion dollars, which puts a $3 value on each silver-equivalent ounce.
All of these other silver miners are being valued based on their reserves at anywhere from 2.5 to 10 times more than Revett's silver reserve valuation. Investors should also know that in our valuation for RVM we have included the $12 million dollar for the new access decline, so it is pretty much the costs expected to return the company back to production.
If it wasn't for the fact that long-term Revett shareholders would probably not want to sell off the company anywhere close to the current valuation, Revett would be a very interesting acquisition target for a few of the previously mentioned primary silver miners. At a total cost of $34 million, which includes a 40% premium and a $12 million liability for the Troy access route, the company is quite cheap and affordable for many of the other silver miners.
Hecla Mining, for example, has operations right across the state border in Idaho and the acquisition may make a lot of sense for them especially for the Rock Creek property that may be one of the largest undeveloped silver projects in North America. For a company like HL, funding wouldn't be a problem at all.
Some of the Mexican silver producers such as First Majestic Silver, also would have a logical target in RVM. After recent tax increases on mining in Mexico, some of the cash rich silver producers may want to consider a little diversification, and Revett offers them a cheap target with a large potential deposit in Rock Creek - a great way to get a foothold in another silver-producing jurisdiction.
Conclusion for Investors
Based on the reserve valuation, Revett is being valued at a significant discount even after including the money necessary to bring Troy back to production - a discount that, in our opinion, is a bit extreme. Additionally, the valuation that we've set forward for Revett Minerals assesses no value to the Rock Creek project, which may be one of the largest undeveloped projects in North America and makes the company an attractive potential target for larger silver producers.
We think the market has erroneously valued Revett at a valuation that befits an explorer, when the company really should be valued much closer to a producer's valuation since the only thing keeping it from production is the $12 million dollar access ramp. We are bullish on silver prices, so we believe that RVM has the cash resources necessary to see it through to a higher silver price, in which case it will be a lot easier to raise the additional $3 or $4 million dollars necessary to complete the access ramp.
We think it would be prudent for investors with a higher risk tolerance and who are bullish on the future price of silver, to consider a position in Revett Minerals. Since we can't brush off the high risk present in the company, we think it is better for investors to acquire their desired position in multiple tranches (for example purchase one-third now, one-third in a month, and the final one-third in two months).
Finally, investors should keep an eye out on management purchases in RVM since they will have the best feel for the future of the company. Timothy Lindsay, chairman of the board of directors, purchased a number of shares over the last few weeks, which is a bullish sign. But we'd like to see more purchases from other Revett insiders (especially John Shanahan, the president and CEO) before we would turn any more bullish on the company and rate it anything more than an undervalued speculative investment.
Revett Minerals is not a company for everyone to own, but at its current valuation it offers higher risk investors an opportunity to purchase a silver producer at silver explorer prices. Additionally, its Rock Creek project has the potential to attract both potential acquirers and potential financiers - which at this point is very important for the company. Initiating a speculative position at the current valuation offers investors a pretty good rick-to-reward scenario - though we would wait on future news or increases in the silver price before we would increase it any further than a small speculative position.
Disclosure: I am long RVM, AG, SIVR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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