How to Recover From a Scorpio Sting

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Shareholders of Scorpio Mining (OTC: SMNPF.PK) received a nasty sting last week. No effective salve exists to immediately remove the pain, and this one is likely to cause some extended discomfort. Still, scorpion stings are rarely fatal, so panic would be unwarranted.

Polymetallic silver producer Scorpio Mining spoiled an otherwise solid year of operations with a horrific fourth-quarter performance that saw adjusted EBITDA chopped in half from the prior-year mark despite a corresponding 17% increase in mill throughput. A laundry list of pitfalls yielded the quarter's $1 million loss, including increasing site costs, lower base-metal prices, unsold silver production contained in lead concentrate inventory at year end, and some rather unsettling discrepancies between the company's estimates of contained metals in concentrate delivered for smelting and the payable content reported at the smelter. On that latter point, the company reports that such discrepancies have "subsequently returned to acceptable ranges," but the vague nature of the information provided on the issue (including during Monday's conference call) casts a touch of uncertainty as to whether it is fully resolved.

Like Fortuna Silver Mines (NYSE: FSM  ) , the other silver miner to experience a gut-wrenching drop last week, Scorpio suffered a dramatic deterioration of its cost structure in the fourth quarter as total costs per payable silver ounce rose from negative $1.82 one year ago to $9.65 per ounce. It is worth noting, however, that the full-year cost for 2011 remained exceptional at just $1.14 per ounce.

Although I had anticipated a potentially sizeable drop in Scorpio's shares, I didn't manage to escape this Scorpio's sting. When I offered Scorpio Mining as my top pick for silver in 2012, I urged investors to "hold back on building a full position in Scorpio Mining until that updated resource estimate is in hand." But in addition to being exacerbated by a confidence-shaking quarterly result, the latest indication is that the downward catalyst I anticipated will prove a more severe blow to the operation than I expected. The loss of resources to be incurred when Scorpio releases a revised resource estimate for the Nuestra Senora mine during the second quarter may have more venom in store. In its fourth-quarter report, Scorpio conceded that "the mineral deposit at Nuestra Senora is not as continuous as previously interpreted" and that the deposit is "more variable in distribution and continuity, and more confined in extent than anticipated."

During Monday's conference call, I asked CEO Parviz Farsangi whether the deteriorating nature of the estimated resource base at Nuestra Senora casts new light on the company's recent decision to expand the mill capacity to 2,750 tons per day. While he agreed that emerging indications regarding the severity of the resource reduction did alter the context a bit, I found some comfort in his assertion that he would make the same decision over again even with the latest information available to him. To me, this suggests that the company retains confidence in the broader mineral potential of its district-scale landholding; and that, after all, was the focus of my long-term bullish outlook.

I remind my readers at this juncture to consider the breadth of experience Scorpio's management team represents. Farsangi served multinational mining giant Vale (NYSE: VALE  ) as chief operating officer; and Scorpio's on-site manager of operations, John Sadek, served as mine superintendent for the world-class Yanacocha mine owned by Newmont Mining (NYSE: NEM  ) and Compania de Minas Buenaventura (NYSE: BVN  ) . This is a highly capable team that still believes strongly in the potential of its asset portfolio.

A downward adjustment of previous expectations for the stock was certainly in order, and the market has responded accordingly with the swiftness of a scorpion's strike. While the market's adjustment does raise one speculative, opportunistic eyebrow, I believe investors lack the information they require at present to make a fully informed assessment of the shares. Although I will continue to hold my shares, I approach the stock with some caution even after the preceding sell-off.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Scorpio Mining. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2012, at 7:06 AM, skypilot2005 wrote:


    I was performing some ongoing D. D. on Scorpio and uncovered this.:

    “As of March 26, 2012, Scorpio Mining holds approximately 11.3 million shares of Scorpio Gold Corporation (TSXV:SGN; "Scorpio Gold").

    Scorpio Gold is involved in the acquisition, exploration and development of mineral resource properties and holds a 70% interest in the Mineral Ridge Gold Mine located in Esmeralda County, Nevada. “


    "Icing on the cake" ?


    Official Web Link Assistant to Sinch

  • Report this Comment On April 04, 2012, at 7:13 AM, skypilot2005 wrote:

    Reference links for fellow Fools:

    Scorpio Mining Management:

    Peter J. Hawley, BSc, PGeo

    Non-Executive Chairman of the Board, Director

    Founder and former CEO, Peter Hawley's mining-industry experience spans grassroots exploration through to development and production. He has worked extensively as a consulting geologist to a large number of intermediate and senior mining companies including Teck Corp, Noranda Inc, Placer Dome Inc and Barrick Gold Corp. He is currently President and CEO of Scorpio Gold Corporation.


    Scorpio Gold Drilling Intersects 6.10 Metres Grading 5.82 g/t Gold on Mary Zone, Mineral Ridge Project

    Peter J. Hawley, President and CEO reports, "The 2011 drilling program has successfully defined the extent of mineralization for the final pit design over the Mary Zone. In addition, drill results have increased the overall width of the zone and confirmed that gold mineralization extends southwest from the Mary Zone to the adjacent Mary LC Zone, encompassing a strike length of 780 metres."

    Read more:

  • Report this Comment On April 04, 2012, at 9:09 AM, XMFSinchiruna wrote:

    Thanks for pointing that out, Sky. It is certainly a factor to for prospective investors to consider.

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