Silver Lake Resources: Result 2013

Silver Lake Resources has fulfilled expectations of a poor full-year result. Although production rose 82% to 150,000 ounces of gold for the year, the miner faced a litany of problems that crunched underlying earnings. Compared to a net profit of $31m last year, Silver Lake reported a net loss of $319m.

That includes a previously flagged asset writedown of $321m, a result of rapidly falling gold prices, but there were other problems. Low grades at the Mt Monger mine have been a key concern.

Compared to underground grades of over 6 grams per tonne (g/t) last year Mt Monger yielded just 3.6g/t this year, the lowest grade on record. For an underground operation, that is simply too low. Silver Lake has started mining material more selectively to increase grades; for the current quarter, grades have risen back above 6g/t.

Higher costs have been especially savage: while output rose 82%, operating costs increased 182%. The bulk of this increase was a result of processing additional low grade ore and higher wage costs. Most miners are now reporting easing wage pressures and cheaper contracting rates but Silver Lake is still cutting its workforce and eliminating costs. This year, total costs are expected to fall from about $1,200 an ounce to $1,050.  

No more debt

The financial report also reveals why the surprise capital raising was needed. By year end, Silver Lake was required to make a $44m debt repayment. Clearly, the bank wasn’t happy about rolling the loan over, an indication of the extreme credit conditions in the sector. If Silver Lake is having difficulty accessing debt, other gold producers have little chance.

Following the capital raising, the company will be debt free. The exploration budget has been cut from $15m a year to $7m and ambitions have been scaled back: Silver Lake is now targeting 300-350,000 ounces as a target rather than 400,000 ounces. That is fine with us. We’d rather see more profits than output.

As ever, the gold price will be vital. With the local currency falling, the Australian dollar gold price is now only marginally lower than a year ago. At current prices, the company should be happily profitable but, if prices were to fall towards $1,200 again, expect further production cuts. A fall towards $1,100 would mean cancelled projects and vanishing profits. Anything lower would mean mine closures. The miner remains hostage to gold prices.

Those who don’t want exposure to the gold price have no business holding Silver Lake. But if you’re looking for gold price exposure, this is a sound place to get it for a small part of your portfolio. At current prices, Silver Lake can generate operating profits of about $60m and trades with a market capitalisation under $400m, making for an intriguing option on the gold price. With the share price down marginally since 27 Aug 13 (Speculative Buy – $0.95), we’re sticking with SPECULATIVE BUY.

Note: The Growth Portfolio owns shares in Silver Lake Resources.