Hi, you (Inderes) have been negative about Sotkamo for a while now. At times, there has been talk about ramp-up risks, production volume, and the price of silver. Sotkamo’s production volumes were as expected, and at the same time, the price of silver has risen by over 4% since the previous report (27.8) and by approximately +20% since the beginning of the year. All other precious metals have also risen, in addition to a strengthened USD. Could you comment on why you don’t give more weight to the aforementioned issues in your analysis? I understand that there are risks associated with future production volume, but the rise in precious metal prices has surely provided a buffer for that.
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Perhaps @Antti_Viljakainen can comment on this, and it will also open up the Sotkamo Silver thread on the forum at the same time 
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Hi!
You are absolutely right, the rise in silver prices and the simultaneous strengthening of the dollar have given the company a tailwind and a buffer. The real million-dollar question that all valuators must solve independently relates to what silver price should be used in Sotkamo Silver’s future modeling. With almost any valuation methodology, the silver price used has a very strong impact on forecasts and thus on the view of the company. Our valuation methodology is explained in more detail in last year’s comprehensive update, which can be read freely at Potentiaali on oikein hinnoiteltu - Inderes.
I personally don’t feel particularly qualified to make price forecasts for silver, so for almost all of the 3+ years we’ve been analyzing the company, we’ve consistently used Reuters’ consensus price forecasts for the next two years. Currently, the spot price happens to be higher than the consensus forecasts (we acted similarly when the forecasts were clearly above the spot price), which is why the sharp rise in the spot price has not significantly reflected in our view of the company recently. The consensus has not changed since the end of last August’s update, and therefore the silver price parameter has not necessitated an update to our view after the publication of the Q2 update. Neither the production figures released by the company yesterday nor the information about the subsidiary’s positive operating profit were significantly different from our forecasts. I will check the forecasts after the quarter when the realized metal price is known. It remains to be seen whether there will be a need to update the forecasts and the view of the company.
If you use the beginning of the year as a comparison point, it is worth remembering that certain negative surprises have also occurred at Sotkamo Silver (investment budget overrun, a slightly slower mine start than expected, and an increase in the number of shares due to a directed share issue). These have slightly diluted the support for our target price caused by the consensus forecasts for silver (consensus forecasts were above spot prices at the turn of the year) that rose during the year. I remember writing a bit more about this in our Q2 update in August.
In principle, the spot price could always be used in the valuation of Sotkamo Silver and silver companies, but that also has its own problems if forecasts and the view of the company were to follow the very volatile and difficult to predict spot price. I would be happy to hear reasoned opinions/feedback on what kind of silver price forecasts should be used in the company’s valuation. A comprehensive report on Sotkamo Silver is still coming at the end of the year, and an update to the valuation methodology is also under consideration in connection with it.
Regards, Antti
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Thanks for the comprehensive answer, Antti. I agree that there’s no point in reacting to daily movements in metal prices by constantly changing forecasts. I would use hybrid pricing in forecasts, which takes into account long-term consensus forecasts and spot prices.
Some of us look at the company with romantic eyes and others with analytical ones. I belong to the former group. In my opinion, the worst clouds have cleared from above the company, even compared to a year ago. Now the mine is “up and running” and there is strong market support for the business. Positive news flow in relation to this year’s setbacks makes Sotkamo look much stronger in the eyes of a romantic.
What’s your view on Sos’s break-even price for silver?
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If you ask me, it was somewhere around the $11-12 range. Antti can confirm..
Tj’s interview about the mine’s opening for Yle news on March 27, 2019. The silver mine’s biggest current financial risk is the price of silver. Currently, it’s around 15.50 US dollars per ounce, while the silver mine’s target price is 15–17 dollars.
Sotkamo Silver still includes individuals who conducted the first studies in the area over 40 years ago. Their belief certainly hasn’t run out, and hopefully the timing was just right.
“I would use hybrid pricing in the forecasts, which takes into account long-term consensus forecasts and the Spot price.”
An idea worth considering. We’ll ponder on it!
“What do you think is Sotkamo Silver’s break-even price for silver?”
In the 2017 Technical Report, the All-in Sustaining Costs (AISC cash cost) for the project, taking into account sustaining capital, was estimated to be on average 8.8 USD/oz over a six-year mine life (there might have been slight cost inflation in recent years, for example, due to energy and fuel). Additionally, when considering the group, the parent company’s (administration) costs, which are roughly 1.5 USD/oz, must be taken into account, so the group’s production cost could be roughly at the level of 10.5 USD/oz. Interest on debts is also practically mandatory to pay, which also takes roughly 1.5 USD/oz. So, on average, at a silver price of approximately 11.5-12.0 USD/oz, the company could (on an annual basis, this varies depending on the quality of the ore being mined) somehow operate without the acute threat of crisis. In practice, Sotkamo Silver (and indeed many competitors as well) would already be in difficulties at this level of silver, as there would be no cash flow for debt repayment and development activities.
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As someone who has owned international gold and silver mining stocks for several years, it’s probably wise to prepare for sharp price fluctuations with Sotkamo Silver as well. At least for gold, the worse things go in international politics (read: the threat of trade wars and actual wars), the better gold mines perform, and vice versa.
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@Antti_Viljakainen how do you see today’s announcement, where SoSi informs that they will exceed their previous mining forecast for this year by +20%? Do you see environmental risks regarding sulfur and nitrogen? As I understand it, silver mine operations are much simpler than, for example, Talvivaara, so environmental risks are manageable.
Initially, I don’t believe that the increase in the total mining volume forecast will significantly affect the end product output for the current year, as the process bottleneck is at the concentrator.
Regarding environmental impacts and risks, I am by no means an expert. However, the silver mine’s process is significantly simpler, more traditional (proven technology), and “lighter” (chemicals used) than Talvivaara’s. Therefore, I believe that the probabilities of risks materializing and their potential impacts are substantially smaller than those at Talvivaara. Nevertheless, it is difficult to assess the authorities’ reactions (including the conditions of the new permit currently under consideration) to the likely exceedances of nitrogen and sulfur emissions this year.
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Thanks for your answer
Sotkamo Silver’s Q3 Report Is Difficult to Interpret. Revenue was strong and EBITDA clearly beat our estimates, even though silver production was slightly below our expectations (Q3: silver production 358 koz vs. estimate 373 koz). Despite large depreciations, EPS was positive. On the other hand, cash flow was weak at only SEK 7 million, and the cash balance is still thin (SEK 7 million at the end of Q3). Production guidance decreased slightly to 1.0-1.1 million ounces of silver (previously 1.15-1.25 Moz), as we have estimated.
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@Antti_Viljakainen now that the interim report has been corrected twice, is the drop more about lack of trust or the numbers?
It’s difficult to pinpoint the exact reasons for Friday’s reaction, as the report contained so many “pulling” factors in different directions. On the positive side, the income statement as a whole was good, and production volume was also at a good level, especially in September. The weaknesses were in cash flow (incl. high investments), and the downward revision of production guidance might also have played a role in the share price decline, although this wasn’t really a surprise to me. More detailed comments on Sotkamo Silver’s Q3 can be found in the morning report. Additionally, the company’s share price had been in a slight upward trend in November, so expectations had risen, and higher expectations are always harder to meet.
We did indeed update our sum-of-the-parts model for Sotkamo Silver after the report, and the favorable development of market parameters, in particular, supported our model. In our opinion, the reward/risk profile is starting to look cautiously attractive, and we have turned positive on the stock for now. However, we are still closely monitoring cash flow, and in our opinion, ramp-up risks cannot be considered eliminated until free cash flow (incl. investments) starts flowing into the company.
Correcting reports after the fact certainly doesn’t give a good impression of the company, but from the perspective of the company’s overall picture, we didn’t consider the corrections significant.
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The stock is currently trading at around €0.4. The price of silver is currently at its recent peak, around $18.5 USD/ounce. Forecasts for Q2 and Q3/2020 are at $17.5 USD/ounce. The price spike is likely due to the geopolitical situation. The organization has been strengthened over the past year and the mine has been started. In the eyes of a layman, the company is an attractive investment target relative to the risk. What is your view on the risks associated with the company?
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No major changes have occurred on the risk side. In my opinion, Sotkamo Silver’s main risks remain those typical for all mining companies: metal prices, currencies, geology, and regulatory developments. Production risk is also a noteworthy factor for a single mine operation.
The market is certainly favorable for Sotkamo Silver, and at current silver and gold price levels, and with the prevailing EUR/USD exchange rate, the company is performing well according to our estimates. However, prices around the turn of the year have likely been driven mainly by geopolitics, where it is difficult/impossible to predict developments. Thus, in my opinion, there is no reason for greater enthusiasm after the events of recent days, but the overall picture for the company is moderately positive, which is also reflected in our recommendation and target price.
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Kauppalehti today, the reporter has apparently read my previous writings on the subject:
“Sotkamo Silver, on the other hand, finally got its mine running in Sotkamo in the second half of last year. The company has also reported improved key figures. In July-September, it made an operating profit of three million Swedish kronor, while the comparative period’s balance was an operating loss of nine million kronor. Achieving an operating profit so soon after starting production can be considered a good achievement.
Sotkamo Silver’s good news has only had a small impact on the share price. In six months, the share has risen by just over ten percent.”
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Sotkamo Silver as an investment target was once again updated. Here’s a link to the conclusions.
Production is getting into good shape and the market situation is quite favorable. This is a good basis to continue, but on a quarterly basis, fluctuations and surprises are inevitable due to the nature of the industry, in both directions. Gradually, attention is shifting to the next exploration investments for the Silver Mine, which the company, in our assessment, can start within a year, and results can be expected in 2-3 years. For the company’s long-term investment story, the success of exploration investments and the potential continuation of the Silver Mine’s lifespan are of great importance. However, the potential is evident in the light of previous studies, and in my opinion, this has hardly been priced into the stock. In the short term, the direction will be determined by the development of silver prices, currencies, and production.
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Great, thanks