ECU Silver Mining Inc. could be on the verge of a “significant resource increase,” according to Blackmont Capital analyst Richard Gray. He is initiating coverage of the company with a “buy” rating and a price target of $3.10 a share, well above current levels. His net asset value estimate is $2.45 a share.

ECU is busy developing the Velardena Project in central Mexico. Early next month, the company will release its latest resource estimate, which Mr. Gray predicts will be in the range of 200 million ounces of silver equivalent.

“We estimate that any resource estimate higher than 150 million ounces of silver equivalent will be accretive to ECU’s (enterprise value per ounce) valuation relative to its peers,” Mr. Gray wrote in a note to clients.

His valuation of ECU assumes that a large mining operation will ultimately be built at Velardena. He figures it could be one of the larger silver mines in Mexico in the next five to seven years.

The price target of $3.10 is based on a 1.25 multiple to net asset value, which is also how he values Silver Standard Resources Inc., another large, non-producing silver company.

Despite being bullish, Mr. Gray also pointed out that an investment in ECU has “considerable” risks.

“The company will need to raise significant capital to build a mine at Velardena. Also, we believe the eventual shift from primary exploration and development to large-scale underground production will be a challenging task for management,” he wrote.

Peter Koven