Equity Silver quarter won’t reflect price rise

Silver has often been described as the”poor man’s gold” and it has tended to follow the yellow metal upward, something that appears to be happening again today. That could be good news for Equity Silver Mines, whose cash costs are $3.15(US) per oz which represents a 36% drop from two years ago.

At the company’s annual meeting, A.J. (Tony) Petrina, president, said the mine’s 1986 production costs “were the lowest since operations began.” But Equity only managed to break even last year because of weaker silver prices which averaged $5.47(US) per oz. Net earnings were $22,000 on revenues of $63.7 million.

Mr Petrina conceded that first- quarter 1987 results will not reflect “the firmer silver prices we are now enjoying.” Indeed, he pointed out that prices were slightly weaker than in the comparable 1986 quarter. Those results will also reflect higher depreciation charges and a weaker U.S. dollar, he added. In order to make a reasonable profit in 1987 he admitted “the average silver price will need to be significantly higher than it was in 1986.”

Mr Petrina said the mine continues to generate a much higher cash flow than was initially projected. Main zone ore is being treated more economically than anticipated because of an expanded milling operation which averaged 10,700 tons per day in the second half of 1986. The expansion project was completed ahead of schedule last June at a total cost of $10.8 million, resulting in a 25% drop in milling costs.

As of March 31, Equity had sold 825,000 oz of silver forward at an average price of $6.65(US) over an 11-month period. In addition, 46,100 oz gold were sold over a 15-month period at a price of $422(US) per oz. About one-quarter of last year’s gold production came from the scavenger circuit which treats mine tailings. The plant operated below design capacity because of technical problems which are being resolved.

Equity will be exchanging its remaining project debt for an increased stake in the company by its parent Placer Development. That debt was converted into a commitment in 1984 to deliver silver to Placer over a period of several years. Equity has decided to purchase and immediately deliver to Placer all the silver still outstanding under the agreement. The plan will be financed by issuing Placer treasury shares thereby increasing its equity to 74.6%.

Mr Petrina said the transaction will create a contributed surplus of $37 million “from which dividends may be paid when cash is available.” This would allow them to pay dividends on preferred shares and possibly common shares as well. It will also add $6 million after tax to Equity’s second quarter earnings. Equity expects to retire its bank loan this year which now stands at about $6.8 million.

“We are extremely cautious, however, concerning the outlook for earnings,” he said, noting the current mine life of less than five years and the “substantial depreciation charges” that will continue to apply.