Santacruz Silver Mining: Leveraged to Rising Silver Prices with Deleveraged Balance Sheet

• Santacruz Mining reported impressive financial results for the third quarter of 2024, generating $78 million in revenue and $16 million in EBITDA
• The company's balance sheet is in good shape following the successful restructuring of its agreement with commodities trading firm Glencore. As a result of this transaction, Santacruz's only remaining debt is a $40 million payment owed to Glencore, which is not due until November 2025.
• Santacruz has implemented a range of initiatives to optimize its mining operations in Mexico and Bolivia, resulting in meaningful improvements in efficiency and lower production costs including changes to ore blending processes to boost silver recoveries, investments in new mining equipment to enhance productivity, and synergies between different mine sites.
• The company has a clear path to organic production growth in the near-term without requiring significant capital outlays: restarting the past-producing Soracaya silver mine in Bolivia and constructing a new mill at the San Lucas process ore on site.
• CEO Arturo Prestamo believes the current silver price around $20/oz is a "solid floor" and expects the supply/demand balance to remain tight for the foreseeable future, supporting even higher prices ahead.

Santacruz Silver Mining, a mid-tier silver producer with assets in Mexico and Bolivia, is positioning itself for growth after significantly strengthening its balance sheet in 2024. In a recent interview, CEO Arturo Préstamo Elizondo provided an update on the company's Q3 results, debt profile, operational improvements, and outlook for the silver market. For investors seeking exposure to silver, Santacruz offers an attractive proposition based on its improved financials, organic growth prospects, and leverage to rising silver prices.

Strengthened Financial Position

One of the key developments for Santacruz in 2024 was the successful restructuring of its agreement with commodities giant Glencore. This transaction allowed Santacruz to retain more cash flow from its Bolivian assets while extending the timeline on its remaining debt obligations. Préstamo explained:

"With the restructuring, we now keep the VAT tax that we are starting to collect, around $58 million, so now those monies are going to be for working capital purposes. We have also eliminated the NSR that was meant to be paid on a yearly basis, which was around $8 million."

The company's only major debt is now a $40 million payment due to Glencore on November 1, 2025 (additionally there is $4M due to Trafigua and being paid monthly over the next 3 years). On the Glencore debt, Préstamo says Santacruz is "in very good shape" to pay, potentially even earlier than next November, if they can secure a discount for early repayment. This deleveraging, combined with strong cash flow generation, has put Santacruz in its best financial position in years, with +$20 million cash in the treasury as of the interview.

Operational Improvements Drive Margins

In addition to cleaning up its balance sheet, Santacruz has been laser-focused on optimizing its mining operations to reduce costs and expand margins. These initiatives take many forms, from changing ore blending to increase silver recoveries, to installing new equipment to boost efficiency:

"We're doing certain works and having initiatives across all our mines to achieve better production and lower costs," said Préstamo. "For example, at the Zimapan mine, we have two incline shafts, one of which might be coming into production in a few months time and will allow us to have cost reductions."

"At the Caballo Blanco mine, just changing ore blending is allowing us to recuperate 5% more silver from certain veins. Those are the kind of efficiencies we're working on."

These efforts are paying off, with Caballo Blanco now positioned as Santacruz's lowest cost mine. The company is implementing similar programs across its portfolio and seeing steady improvements in all-in sustaining costs. This focus on operational excellence and cost containment provides significant operating leverage to benefit from higher silver prices.

Interview Executive Chairman & CEO Arturo Préstamo Elizondo

Organic Growth on the Horizon

Beyond optimizing its existing asset base, Santacruz sees meaningful opportunities for organic production growth in the near-term. One key project is the past-producing Soracaya mine in Bolivia, which was originally built to produce 4 million ounces of silver annually.

"Soracaya is a mine that with a little bit of investment, we can take into production," noted Préstamo. "It's almost fully permitted for 500 tons per day. So that can allow us to keep growing organically."

Another initiative in the works is building a new mill for the San Lucas mine, also in Bolivia. Currently, San Lucas processes ore at third-party facilities. By bringing milling in-house, Préstamo estimates Santacruz can double San Lucas' output to 4 million silver equivalent ounces per year, while freeing up capacity for its other mines. Together, these two projects represent low-cost, low-risk growth that could meaningfully move the needle on production.

The Silver Bull Case

Underpinning the Santacruz investment case is a bullish outlook for silver itself. Prestamo believes current prices in the low $20s have established a solid floor based on strengthening industrial demand.

"More and more industrial uses are coming for silver, not only solar panels but many others for environmental and pharmaceutical use," he explained. "Unlike gold, silver is used up. You lose always around 30% which cannot be renewed, so you always need new ounces out of the ground."

This dynamic of increasing end-use demand against the backdrop of finite mine supply is highly constructive for the silver price over the long run. Further price upside would provide a strong tailwind for Santacruz given its high operating leverage.

The Investment Thesis for Santacruz Mining

• Deleveraged balance sheet and strong free cash flow generation after Glencore restructuring
• Operational improvements driving lower costs and margin expansion across asset base
• Visible organic production growth from Soracaya restart and San Lucas mill construction
• High operating leverage and torque to rising silver prices; current $20/oz level seen as a floor
• Valuation remains compelling even after strong performance in 2023-24; potential for further re-rating

The outlook for the global silver market is brightening, driven by robust growth in industrial demand. Silver's unmatched thermal and electrical conductivity properties make it a critical metal for the green energy transition, with applications spanning solar panels, electric vehicles, 5G networks and more.  As governments worldwide adopt stricter emissions standards and invest heavily to decarbonize, silver consumption from these end-markets is projected to rise steadily for the foreseeable future.

Meanwhile, mine supply is likely to remain constrained due to years of underinvestment and declining ore grades across the industry. This widening supply/demand imbalance points to a structural deficit in the silver market, which should be supportive of sustainably higher prices. Against this constructive macro backdrop, mid-tier producers like Santacruz that can consistently grow production while keeping a lid on costs are best positioned to outperform.