Issue link: http://resourceworld.uberflip.com/i/638235
f e b r u a r y / m a r c h 2 0 1 6 www.resourceworld.com 27 and Qualified Person for this company; I was largely responsible for the design and implementation of the mine development phases that de-risked investments in the project. The chronology of events leading up to production at Santa Elena illustrates the systematic and responsible phased- approach that built this mine into a success story despite the financing challenges of a bear market. Important events included: the Deal: 2005 – SilverCrest success- fully negotiated and acquired the historical Santa Elena Mine. The success was based on building a relationship with the local owner of the mine and not over-commit- ting the company to large payments or royalties. The project was purchased for US $4 million over five years with part of the $4 million paid in company shares, thereby preserving precious cash. No residual royalties reduced non-productive drains on cash flow. Discovery: 2006 – The initial discovery of the first 15 million ounces silver equiva- lent in the deposit was potentially open pittable. The discovery cost was less than 10 cents per silver equivalent ounce. Feasibility: 2007 to 2008 – Expansion of the open-pittable resource and identifi- cation of potential underground resources provided the basis for engineering and economic studies, operations permitting, and surface access rights negotiation. permitting: 2009 – The company received the operations permit in approxi- mately six months after application. A phased-approach business model and plan was put in place for next five years of con- struction and expansion. Financing: 2009 to 2010 – US $20 mil- lion for Phase 1 construction of an open pit heap leach operation was secured at the bottom of the market. Fully engaged man- agement assured construction of Phase I on time and under budget. The operation was cash flow positive from the outset. operations: 2010 to 2013 – Phase 1 was a successful and profitable open pit heap leach operation with strict cost controls established that led to increasing free cash flow for further expansion. expansion and transition: 2014 to 2015 – Positive cash flows and cash bal- ances enabled the funding of Phase II and III for an US $100 million invest- ment, mostly from operating profits. These phases included the successful expansion and transition of the mine from an open pit heap leach operation to an open pit and underground mining operation with a new milling facility. Expansion construction again was on time and on budget. During the period from 2005 to 2015, this phased-approach model was success- ful for the Santa Elena Mine. Under the management of SilverCrest Mines Inc., stakeholders experienced a significant increase in wealth while trust in manage- ment was built. The company minimized shareholder dilution and mitigated risk at every stage of development. During this successful period, market capitalization of SilverCrest reached a high of $276 million in comparison to approxi- mately $20 million in 2005, a more than 10-fold increase in value. Without the phased approach, it is unlikely the ulti- mate project would have been financed at that time, nor the operating risks reduced to produce rapid recovery of the initial investment. In today's mining environment, there are multiple and significant risks to be considered before investing in a project. Such risks start at the exploration stage and escalate to the point of committing to a significant financing and investment for mine construction. A responsible manage- ment team will track these risks from day one and keep them in check until a pro- duction decision is made. However, most project risk does not occur until signifi- cant market value is placed on the project and a production decision is made. At this point, risk significantly increases. Major risks include; technical chal- lenges, financing availability, legal and permitting issues, political and social risks, market recognition, and management per- formance. In my experience, the highest risk items on this list, in priority, are man- agement performance, legal and permitting issues, and local social risks. By using a phased-approach to development, all three of these risks are reduced for the investor. Let's review each of these priority risks and the phased-approach benefit. managemenT PerFormance Most say that a good project will get financing for development in any market conditions. The corollary to that is that good management can be successful with a marginal project while poor management can ruin a good project. From project acqui- sition to mine closure, management can destroy a good technical project through one or all of the following (not all inclusive); • Upfront inexperience in responsibly negotiating the terms of an acquisition. This results in over commitment in time and cost to the company. • Lack of ownership in company and proj- ect. You will protect and build wealth if you have an invested interest. • Commitments to expensive financings; bad timing for equity raises with significant dilution, and very expensive financings for construction that can cripple a good project. • Minimal knowledge of obtaining and maintaining proper Corporate Social Responsibility. Management must get this right from the beginning at all levels from the mine site to the upper regulatory agen- cies and senior political departments or the risk may become too high to proceed or to achieve production economically. • If executive management is not hands on and consistently present on the ground for on-site decision-making then project fail- ure is increased. To remain on time and on budget for any stage of a project is almost impossible without executive boots on the ground. • Lack of cost controls and immediate deci- sion-making. Executive management must have intimate knowledge of budgets and controls for spending with priority focus on cost overruns or red flags. • Mismatched technical expertise. You need to admit your strengths and weak- nesses before building a mine. Rarely do The Santa Elena Mine in Sonora State, Mexico. Photo-illustration courtesy Eric Fier.