We visited Revett Minerals’ Troy Mine and Rock Creek deposit last month, and are impressed with the way things are going. Revett Minerals is a USA-based mining company whose 100% owned Troy Mine in Northern Montana currently produces silver and copper. Revett also owns one of the largest undeveloped silver-copper projects in North America – Rock Creek.

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Revett Minerals Inc. – Ethical mining in Montana’s nature

Introduction

We visited Revett Minerals’ Troy Mine and Rock Creek deposit last month, and are impressed with the way things are going.
Revett Minerals is a USA-based mining company whose 100% owned Troy Mine in Northern Montana currently produces silver and copper. Revett also owns one of the largest undeveloped silver-copper projects in North America – Rock Creek. This project has a historical resource estimate of approximately 300Moz of silver and 2.5Blbs of copper.

Troy Mine

The Troy Mine is currently producing approximately 1.25-1.4Moz silver per annum, at cash costs of between $8-10.5/oz, after adjusting for copper credits.
Troy produced almost 350,000 ounces of silver in Q3 at an average cash cost of $8.92/oz and was able to net approximately $7.5M in operational cash flow. However, we expect Q4 returns to be down slightly on the previous quarter and are forecasting a production of 270,000 ounces at a cash cost of $13/oz.

The current total reserve base at Troy currently stands at a little over 12Moz of silver, which in itself should be sufficient for a further 8 years of mine life. However, the company continues to explore and we are confident additional resources will be converted into reserves, extending the life of mine at Troy till well into the 2020’s and very likely longer, as a lot of the property remains unexplored (see image on the right).

Revett Minerals is currently developing the I-Bed (see image below) in the Lower Revett-formation and expects to start production from the I-Bed by 2015. The anticipated capex for this development is approximately $10M, and Revett can fund this with the cash flow they generate at Troy.

Revett usually hedges a part of their annual copper output, and 2013 won’t be any different. The management team is hoping to be able to hedge again at $4/lbs, but we think $3.5-3.75/lbs might be a more realistic and conservative assumption.

Rock Creek

Revett’s most exciting project is its 100% owned Rock Creek project in Montana. This project was previously owned by Kennecott Utah Copper and Asarco. Rock Creek has a historical (and thus non-NI43 compliant) resource estimate of approximately 300Moz of silver and 2.5 billion pounds of copper at a grade of 1.65oz/t and .68%, which makes this project one of the – if not the – largest silver/copper project in North America.

There has been some protest against the project by the Rock Creek Alliance, but the Ninth Circuit court judge has dismissed the Endangered Species Act (ESA) claims made by the environmentalists, and the Forestry Services are expected to grant Revett a new Record Of Decision in late 2013 or early 2014. As Revett doesn’t think they’ll receive all necessary permits to start exploring before the winter, the expected start date to break ground unfortunately has been pushed to the end of Q1 2014.

Once this ROD has been received, Revett plans to start a 2-year exploration program by constructing an adit to start underground exploration that should result in a NI43-compliant feasibility study, outlining a 6Mozpa operation. The company will also continue its mitigation plan, by purchasing additional land (Revett has already purchased a significant portion of land to meet the 2,450 acres required) to mitigate the grizzly bear exposure to their mining activities.

The operational risks at Rock Creek will be low as the company can transfer its skilled labour force from the Troy Mine to Rock Creek which is approximately 30km away by road. By employing skilled workers, the company can jumpstart their operations instead of having to train and educate new employees on the spot.

A back of the envelope production plan outlines an annual production of 6Moz silver and 52Mlbs copper per annum, at a cash cost of $1-5/oz silver net of by-products. We expect the capex on Rock Creek to come in between $400M and $500M, so at a silver price of $30/oz, payback could occur within 3 years of production. We expect Revett should be able to finance Rock Creek without too much dilution to shareholders, as the Troy operations cashflow will enable them to bankroll the early stages of this projects development.

The management team

John Shanahan – President & CEO

Mr. Shanahan was named the Company’s President and CEO in October 2008. Prior to becoming CEO, Mr. Shanahan was the chairman of the board of directors from 2005 until April 2009. Mr. Shanahan’s background is in commodity price risk management and he has held senior management positions with Barclays Capital, Rothschild Inc., Pasminco Ltd, and Australian Mining and Smelting. Mr. Shanahan is also a director of Mediterranean Resources Ltd and Condor Blanco Mines Ltd. Mr. Shanahan holds a bachelor of commerce degree from the University of Melbourne, a graduate diploma in Systems Analysis and Design from the Royal Melbourne Institute of Technology, and an MBA degree from the Columbia School of Business.

Kenneth Eickerman – CFO

Prior to joining Revett Silver as an officer in April 2005, Mr. Eickerman was Controller of Mustang Line Contractors, Inc. (from May 2002 to March 2005), and Controller and Treasurer of Apollo Gold, Inc. (from February 1999 to May 2002). Before that, he worked in various finance capacities for Pegasus Gold, Inc. Mr. Eickerman graduated from the Washington State University in 1981 and is a Certified Public Accountant licensed in the State of Washington.

Doug Miller – Vice President of Operations

Mr. Miller graduated from Montana Tech with a degree as a Mining Engineer in 1978 and oversaw the recommencement of operations at Troy in late 2004. Mr. Miller has over thirty years of experience in operating and producing mines and formerly worked for ASARCO in the Northwest Mining Department at the Galena, Coeur, and Troy Mine. He also worked for ASARCO in the Eastern Mining Department at its Tennessee Mines as the manager overseeing its five zinc mines

Paul Lammers – Director of Environmental Programs

Mr. Lammers has over twenty years of private and public-sector experience as an environmental professional. Mr. Lammers was most recently an Environmental Consultant with Camp Dresser & McKee, Inc. and the on-site CDM operations manager for the Libby, Montana EPA Superfund Project. Prior to that Mr. Lammers served as CDM field project manager at the Upper Tenmile Creek Mining Area in Helena, Montana as well as Environmental Affairs manager with publicly traded United Park City Mines Company and the Park City Municipal Corporation, both based in Park City, Utah. Mr. Lammers holds a Juris Doctorate in Environmental Law and Policy and has extensive experience in environmental litigation and enforcement.
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Conclusion

Whilst production at Rock Creek is several years away, we believe Revett Minerals remains undervalued at this point. The company currently holds approximately $0.95 per share in cash, and we estimate the current NPV of the Troy Mine is around $120M or $3.4/ share. The total value of the cash + Troy is thus $4.35/share, and this assigns a zero dollar valuation to the Rock Creek Project.

Should Rock Creek receive all the necessary permits, Revett Minerals could be producing 7M ounces per annum from 2020 onwards, which would generate an annual cash flow of in excess of $175M, based on a silver price of $30/oz.

Revett Minerals is an unusual mining company, in that they don’t only care about being profitable but also care greatly about their work force. Revett is one of the most ethical companies we’ve visited, and this translates into a very committed workforce. They would even be prepared to take salary cuts to help the company survive during bad times should we revisit the dark times with a single-digit silver price.

We own Revett and will continue to accumulate more on dips as we are very confident John Shanahan and his team are building out a mid-tier silver-copper producer of great substance.

Disclosure: Revett Minerals Inc. is a sponsoring company. The author has visited the Troy and Rock Creek projects in Montana and these site costs were reimbursed by the company. Please see our disclaimer for current positions.


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