Monday, April 18, 2016

Excellon Reports Its 1Q 2016 Production Report And Investors Overreact

Today Excellon Resources (EXN:TO) announced its 1Q 2016 production report. 
The market reaction was very optimistic. At the time of writing, Excellon shares are up 21%, compared to the previous trading day.

In my opinion, Excellon share prices are currently fuelled by the three main factors:

  • most importantly - a few days ago Eric Sprott, a notable resource investor, announced that he purchased 6.7 million shares in the company (plus the same amount of the half-share warrants)
  • this year the company is going to implement an investment program to solve all water problems it was facing before; what is more, the successful implementation of this program should bring production costs substantially lower
  • the production report, published today, is being perceived as a very promising

The first two issues I am discussing in my Seeking Alpha article. 

In this post I want to discuss the third issue, which, in my opinion, is quite good but not good enough. Therefore investors are overreacting. 

Firstly, let me enclose the company's production results:

Having the above listed figures, I am able to estimate the potential results delivered by the company in 1Q 2016. In my calculation I am assuming that in 1Q 2016 the average realized prices of metals, produced by Excellon, were as follows:

  • silver: $14.91 per ounce
  • lead: $0.79 per pound
  • zinc: $0.76 per pound

Mine economics

Metal content 

Now I have to find the value of metals contained in one ton of ore processed. Let me start from silver.
As the table shows, in 1Q 2016 the company was processing the ore grading 483 grams of silver per ton of ore processed. Apart from that, the company's mill was able to recover 91.6% of silver contained in this ore. It means that each ton of ore processed contained 442.4 grams of silver (483 x 91.6%) or 14.2 ounces of silver (442.4 grams x 0.03215 ounces per gram). Because in 1Q 2016 the silver was trading at $14.91 per ounce (on average), one ton of ore processed contained 14.2 ounces showing the market value of $212.1 (14.2 ounces x $14.91 per ounce). 

In the same way I also calculated the market value of zinc and lead, contained in one ton of ore. It was $81.7 and $69.7, respectively.

So, one ton of ore processed contained metals (silver, zinc and lead) representing the market value of $363.5, in total.  

Production costs

Excellon does not report production costs in its production reports. Therefore I assumed that in 1Q 2016 the direct production cost were standing at the level reported in 4Q 2015, i.e. $255.3 per ton of ore processed. 

Additionally, the company has to pay fees to the refiner, which processes the company's concentrates (silver-lead and silver-zinc). In this case I assumed a fee of $52.9 per ton of ore processed (the same fee as that paid in 4Q 2015).

So the direct production costs should stand at $308.2 per ton of ore processed. 

Gross margin

Gross margin is defined as revenue less direct production costs. In the case of Excellon it should stand at $363.5 less $308.2 = $55.4 per ton of ore processed.

It means that the company should have made around $55.4 per ton ore processed. 

However, apart from direct costs, there are the other expenses, mainly depreciation and overheads. In 2015 these additional expenses were standing at $124 per ton of ore processed so it is rather impossible that Excellon made any profit in 1Q 2016. Quite opposite, the company most probably made a loss of around $68.6 per ton of ore processed (gross margin less additional expenses). 

Summarizing - although Excellon:

  • improved its production results in 1Q 2016
  • the company, as other miners, was supported by higher prices of silver, lead and zinc

in my opinion, the company made a loss in the last quarter.

Note: a few relevant cost figures are missing: processing costs, treatment fees and overheads - in my calculations I assumed that these costs were similar to those reported in 4Q 2015 or 2015 - however, it is only a rough assumption. Additionally, I am assuming that in 1Q 2016 the company sold all ore processed in that quarter - however, Excellon does not report sales figures so I may be wrong. 

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