Small Caps | Jun 28 2012
– Alcyone Resources an emerging silver producer
– Highly leveraged to spot silver prices
– Exploration upside also an attraction
– DJ Carmichael initiates coverage with a Spec Buy
By Chris Shaw
Emerging silver producer Alcyone Resources ((AYN)) is the reincarnation of Macmin Silver, which was placed into administration during the Global Financial Crisis. Alcyone is well advanced in the ramp-up stage of silver production at the Texas project in Queensland. The project contains both the Twin Hills heap leach operation and the less developed Mt Gunyan deposit.
DJ Carmichael has initiated coverage on Alcyone with a Speculative Buy rating, attracted to both the company's leverage to the silver spot price and the potential for exploration to boost reserves and production in the future.
In terms of leverage to spot silver prices, DJ Carmichael notes unit operating costs at the Texas project should be around $15 per ounce once the company is in full production. This should be around the end of this year, at a rate of around 1.5 million ounces per annum for a 10 plus year operation.
This implies good margins, while DJ Carmichael estimates for every 10% change in silver prices there is a 17% impact on valuation for Alcyone. As well, a 10% change in the Australian dollar is forecast to translate to a 9% valuation impact.
The other point with respect to leverage is that from the beginning of 2013 Alcyone should be fully unhedged, as at present the company only has forward silver sales and pre-paid commitments of around 300,000 ounces.
As DJ Carmichael points out, Alcyone currently has a resource base of around 21 million ounces of silver. Exploration is targeting an increase in this base to 30-50 million ounces, with further upside from base metal targets within the more than 1,100sqkm of highly prospective tenements held in the Texas region of Queensland.
Alcyone currently has an exploration budget of $3 million for the second half of this year and this budget is likely to be extended in coming years. Production will assist in financing further exploration efforts.
From around the end of the first quarter this year the Alcyone share price has struggled, to the extent DJ Carmichael suggests a value gap between the share price and the silver spot price has now opened up. As evidence of this, the broker notes while the current share price has fallen by around 77% from record highs, silver prices have only fallen by around 47% from their record highs.
Past performance leads DJ Carmichael to suggest there is greater leverage in the Alcyone share price than is available by purchasing silver directly through an ETF.
Based on a long-term silver price of US$26 per ounce, an AUD/USD rate of 0.90 and a mine life of seven years, DJ Carmichael comes up with a DCF valuation based price target for Alcyone of 7.0c. Risk is to the upside from extensions to the resource base from exploration success.
DJ Carmichael's target offers upside of around 100% from current share price levels, which the broker sees as enough to justify its Spec Buy rating. Also supportive is Alcyone offers one of the few ways to gain exposure to silver prices on the Australian Stock Exchange outside of silver ETFs.
Alcyone currently receives little coverage by the broader market, which reflects a market capitalisation of around $50 million at current levels. None of the brokers in the FNArena database research the company.
Shares in Alcyone today are slightly weaker in a stronger overall market and as at 11.15am were down 0.1c at 3.6c. This compares to a range over the past year of 3.1c to 12.5c.
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