Silver Lake Resources

After terminating a takeover of Phillips River Mining last month, Silver Lake has agreed to purchase the struggling miner’s assets. These assets, dubbed Great Southern by Silver Lake, add a potential third production centre to the existing Mt Monger and Murchinson mines. Phillips River will receive $20m in Silver Lake shares, which will be that company’s sole asset.

With just 800,000 ounces of resources, Great Southern is currently puny and will require more exploration and development work. For Silver Lake shareholders, the deal represents a cheap option on additional production. For Phillips River investors, it’s an admission of defeat. It’s a familiar story: the miner could not attract cash without demonstrating further development work, which it could not accomplish without attracting more cash. A winding up of Phillips River is now likely, a reminder that gold resources alone are insufficient to succeed in this industry.

Silver Lake, however, continues to find success. After increasing its resources to 3.6m ounces, it is now targeting an aspirational 10m ounce resource. Today this sounds ambitious, but so too was the previous 5m ounce target, a goal almost certain to be met. Despite success with the drillbit, falling gold prices have hit all miners. Silver Lake’s share price has fallen 4% since 16 Mar 12 (Hold - $3.34) and we recommend you HOLD.

Note: The Growth portfolio owns shares in Silver Lake Resources