LA Private

Shares in Silver Lake plunge

Silver Lake Resources (ASX:SLR) shares have had a shocking start to the week, with a slump of more than 20% following Monday’s release of a confusing quarterly statement for the three months up to June and the 2022-23 financial year.

It’s not that the company didn’t perform well – it met its gold and copper guidance for 2022-23. However, it was the confusing outlook for 2023-24 that surprised investors, especially the news of a major (temporary) change in activity in Canada.

On Friday, the shares closed at $1.12 but on Monday, after the quarterly report was released, they plummeted. They opened at 95 cents, reached a low of 84 cents (a 12-month low), and were trading around 88 cents shortly after midday, marking a nearly 21% decline.

Silver Lake reported a record 261,604 ounces of gold production for the 2023 financial year, along with 1,483 tonnes of copper. The average sales price for gold was $A2,697 per ounce, with an all-in-sustaining cost (AISC) of $A1,941 per ounce.

Looking ahead, Silver Lake informed investors that it expects to sell between 210,000 and 230,000 ounces of gold during the 2024 financial year, with an AISC between $1,850 and $2,050 per ounce.

These production figures clearly indicate a slowdown compared to the results of FY2023, but with a similar, if not slightly higher, cost base. This could be one reason why the shares slumped.

However, the ASX release contained surprising news about the immediate future of the company’s Sugar Zone mine in Ontario, which battled wildfires in the June quarter during the 2023-24 year.

Sugar Zone produced 38,976 ounces of gold in 2022-23 (and sold 38,639), but it seems Silver Lake will not have those ounces available in the coming year as the company plans to prioritize drilling rather than mining.

“Consistent with Silver Lake’s proven margin over short-term ounces strategy, activities at Sugar Zone will pivot to an investment in drill data acquisition in parallel with an idling of mining and processing activities to facilitate a reset of mining practices and upgrading of site logistics network, necessary to support a higher margin and long-life operation,” Silver Lake said.

“Significant progress has been made at Sugar Zone throughout FY23, with the delivery of several core low capital intensity infrastructure upgrade projects and identification of further value-enhancing opportunities available to the operation.

“Accordingly, Silver Lake will pivot its focus in FY24 to prioritize the acquisition of drill data to deliver the step change in ore body knowledge necessary in ensuring a more predictable and valuable long-term operation.

“To effect this, mining and processing activities will be idled in FY24 to allow for the development of three dedicated exploration drives, completion of ~93,000 meters of drilling, and the upgrade of site logistics with the relocation of the White River Camp to the Sugar Zone site.”

The loss of sales from Sugar Zone looks like it will cost Silver Lake an estimated $A100 million or more in revenue for the year (it is a high-cost operation with an AISC in 2023 above $A3,300 an ounce).

Silver Lake recently attempted to gain control of St. Barbara’s Gwalia assets at Leonora in WA but was unsuccessful. Genesis Minerals won that protected battle, leaving Silver Lake to regroup and presumably reconsider its ambitions for its Sugar Zone asset in Ontario.

Silver Lake explained that it would be spending $43 million in 2023-24 on exploration, marking “the largest exploration investment in the Company’s history and demonstrates Silver Lake’s confidence in the continued low capital intensity organic growth potential to leverage the significant installed infrastructure across all its operations.”

The work at Sugar Zone accounts for the largest portion, with a budget of $28 million (including the costs associated with the development of three dedicated exploration drives).

“The investment in exploration at Sugar Zone is the first dedicated program of its kind designed to deliver a step change in data to unlock the potential of the extensive resource base, highly prospective broader mine corridor, and extensive land package hosting two large greenstone belts,” Silver Lake explained.

Investors simply looked at the bare bones of Monday’s report and sold, ignoring Silver Lake’s rationale, especially for the Sugar Zone suspension and other work.