San Miguel open pit; Pirquitas Mine
1. Introduction
Although silver does not get much love lately, there are silver plays
around that could move significantly as soon as the price of the metal
recovers in more positive precious metals sentiment. One of these plays is Golden Arrow
Resources Corp. (GRG:TSX.V; G6A:FSE; GARWF:OTCQB). Despite the name, this
junior doesn't own one NI-43-101 compliant ounce of gold in the ground yet.
Its flagship project is called Chinchillas, located in the Jujuy province in
Argentina, and is a large, open pit silver/lead/zinc project. At the moment
it is on the brink of production, as part of the Puna Operation, a joint
venture (JV) with much larger gold/silver producer SSR Mining (SSRM.TO,
market cap of C$1.6B, formerly known as Silver Standard).
The Chinchillas deposit has been turned into an open pit mine recently,
and production is ramping up towards nameplate capacity. The ore is being
delivered to the nearby Pirquitas processing plant, as the Pirquitas silver
mine, previously owned by SSR Mining itself, was depleted this year.
SSR Mining has financed this whole operation, and Golden Arrow can sit
back front row after paying back its 25% share of capex, and watch the show
unfolding while being paid. As Golden Arrow gets 25% of after-tax net cash
flow generated by Pirquitas, this is not much at this stage and silver price,
but as soon as full production is reached by the end of this year and
especially as the silver price starts rising again, the share price will
probably see a strong re-rating. To get an indication of the upside
potential, and other ins and outs of Golden Arrow, let us take a closer look.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
2. Company
Golden Arrow Resources is an exploration and development company operating
in Argentina, and member of the mining investment firm called Grosso Group,
founded by Joe Grosso, who already pioneered successfully in mining for over
two decades in Argentina. The Grosso Group made four major discoveries during
that period: Gualcamayo, Navidad, Chinchillas and Amarillo Grande. The
flagship project of Golden Arrow is the 25/75% Puna JV with operator SSR Mining,
based on the Chinchillas deposit and the Pirquitas Mine, 45 kilometers away,
which until very recently was one of the largest primary silver mines in the
world, in the Jujuy province.
Both companies have a long history in this area, which probably has been
beneficial for operations. Besides the Puna project, Golden Arrow also owns
several gold/silver/copper exploration projects in Argentina and recently
acquired the advanced Atlantida and Indiana copper-gold projects in Chile.
These advanced exploration projects are united in a subsidiary called New
Golden Explorations, and the plan is to acquire more projects, and spin this
out from Golden Arrow in the early part of next year.
Chinchillas deposit; Argentina
Golden Arrow Resources has C$5 million in cash at the moment according to
management/financial statements, and no long-term (LT) debt. The company recently (July 6, 2018 per MD&A) arranged a US$10
million credit facility with JV partner SSR Mining, confined to Puna capex
obligations, with an interest rate of US Base rate plus 10% and a final
maturity date of December 31, 2020. This short period explains the relatively
high interest rate, but raising it through equity would have caused a lot of
dilution anyway, so this way it can proceed with funding its part of capex.
The loan is secured by the 25% ownership of Golden Arrow in Puna Operations.
Management, Board, insiders, friends and family control about 50% of
shares, which is good to see, and JV partner SSR Mining holds about 5% of
outstanding shares. There are 4.5 million warrants, with an average exercise
price of C$0.70, and 9 million options with an average exercise price of
C$0.53.
As of November 7, 2018, Golden Arrow Resources has a share price of C$0.25
and a market cap of C$25.4 million, with 101.97 million shares outstanding,
and fully diluted 115.48 million. All options and warrants are out of the
money at the moment. The average volume is a pretty liquid 294,195 shares.
Share price GRG.V, 3 year period (Source: tmxmoney.com)
Overall sentiment on the Venture isn't positive at the moment, but Golden
Arrow has been hit particularly hard lately, most likely in my opinion
because of the last financing round it initiated.
The company tried to raise C$2.625 million @ C$0.35 including a full
2-year warrant @ C$0.55 for general working capital, but failed unfortunately
due to "current adverse mining market conditions," according to the
news release of October 22, 2018. Golden Arrow had in
fact raised most of the money, but did not want to lower the financing price
as requested by several parties, so it decided to not pursue this further at
this moment. Fortunately, it has the financial resources in place to fulfill
the capex funding obligations for Puna Operations, and other, not further
disclosed, near-term objectives.
As you see often, when a company wants to raise money, the word gets out
among interested parties, and especially when these parties can get a full
warrant they tend to sell lots of shares in advance, in order to walk the
share price down to lower levels as much as possible, so most likely the
upcoming placement gets priced not only at a discount but also at a discount
to these lower levels, plus they get a free and most likely low priced
warrant. It looked like this is exactly what happened, in addition to a sell
recommendation of a U.S. based newsletter when there was a peak volume. The
company was looking at re-pricing the financing, but decided not to proceed
with it after all, which I actually consider to be not a very bad thing as
almost 10% dilution at, for example, C$0.25 (which is a 2.5 year low) isn't
very good for existing shareholders. A negative is that Golden Arrow can't
use proceeds to acquire/fund exploration projects and needs to wait for
another opportunity.
On the other hand I view this failed financing as a blessing in disguise,
as the share price probably got walked down to lower levels than otherwise
achievable in the market, as fundamentals didn't change in the last two
months. As an indication of relative low valuation of Golden Arrow there is a
nice table provided by Fundamental Research (report available through Golden
Arrow), showing that the company is positioned at the bottom for EV/oz ratios
for producers:
Of course an EV/oz ratio doesn't say much for producers as it doesn't take
into account all sorts of things like profitability of ounces, jurisdiction,
permitting, etc., and large resources usually are valued lower per ounce
anyway, but in my view this table represents a nice overview and gives a
first, very global indication of silver producer valuations.
3. Puna operation
As mentioned, the Puna operation consists of a JV between Golden Arrow and
SSR Mining, formerly called Silver Standard. The JV assets are the
Chinchillas deposit of Golden Arrow, and the depleted Pirquitas Mine of
Silver Standard. There is a bit of history behind the Pirquitas Mine, as it
didn't get depleted completely according to plan. This was the result of a
massive and not intended scaling back of reserves, reducing them by 52% in 2011 compared to the 2008 resource estimate.
Just one year before that, CEO Robert Quartermain, after 15 years with
Silver Standard (old name of SSR Mining), left the company in 2010 and
started heading a certain spin-out called Pretium Resources, which has had
its fair shares of controversies as well (and might be in for more, as this
resource model isn't free of discussion either). But that is another story.
Right now SSR Mining has earned itself a strong reputation as a great
operator in the mining industry, and that is what counts here in my view.
The 25/75% JV between Golden Arrow and SSR Mining (the operator and
majority owner of Chinchillas and Pirquitas) revolves predominantly around
the following terms:
- Golden Arrow received an upfront US$15 million payment
from SSR Mining representing 25% of Pirquitas mine earnings (less
certain expenditures) in 2017. Golden Arrow has to pay its part of
capex, which is about US20 million in total, and has to pay 25% of any
future capex requirements.
- Golden Arrow benefits from net earnings (25%) generated
by the still producing Pirquitas Mine, but for this year this will be
marginal, as only 1 Moz Ag per quarter from remaining stockpiles is
being processed at the moment, at cash costs being above the current
silver price.
- Golden Arrow had paid about US$3–4 million of capex
until Q3 2018, US$14 million up to now, and has to pay the majority of
its US$20 million capex share (about US$19 million) before year end of
2018. This is probably where the recent US$10 million loan comes in.
Golden Arrow is probably looking to repay most of the eventually drawn
amount by future revenues coming from the Puna Operation.
As Golden Arrow sees itself as a minefinder next to a developer (of
Chinchillas), it burned through quite a bit of cash in 2017, after the US$15
million was received. At that point the company had about C$24 million in its
treasury (July 2017). At the end of 2017, this was brought down to C$16.2
million, most of it spent on exploration, but also significant spending on
marketing and management compensation (considerable performance bonuses
because of the JV deal).
Fortunately, marketing and compensations have normalized quite a bit, and
the company is focusing on exploration again. At the moment, Golden Arrow has
enough cash to fulfill its obligations towards the construction and ramping
up of Chinchillas, to do some exploration, and do some acquisitions, while
SSR Mining is doing the hard work. When Chinchillas is fully operational, I
expect cash costs to go down considerably, with Golden Arrow to reap the
benefits of this strategy.
Golden Arrow already drilled an N-I43-101 resource estimate on Chinchillas
of 203 Moz (M&I and Inferred) silver equivalent at a decent average grade
of 140 g/t AgEq, which is large and decent grade for open pit, and completed
a Prefeasibility Study (PFS) in March 2017, with solid economics of an
after-tax NPV5 of US$178 million and IRR of 29% at a silver price of
$19.50/oz Ag. This is the 2016 resource estimate:
And this is how the orebody looks, pit constrained:
In my view it seems realistic to assume that the higher grade Measured and
Indicated part is fairly continuous and not spread out irregularly, hereby
limiting future potential to convert Inferred resources into the same kind of
higher grade M&I resource (and eventually into Reserves). I don't see
this as a problem as there is enough M&I resource already to increase the
life of mine and production, as I will discuss later on.
As the price of silver has been trading at US$14.60/oz Ag lately, the
resulting NPV5 would be close to zero and the project wouldn't stand a chance
of getting capex funding, but the good news is of course that SSR Mining
already provided the necessary capital (about US$81 million) to build the
mine at Chinchillas, which is already producing and ramping up right now.
According to the PFS, the average operating margins based on cash costs
are US$7.40/oz Ag net of by-products, with average all in sustaining costs
(AISC) at US$9.75/oz net of by-products, which are very low numbers. The
by-products lead and zinc are priced at US$0.95/lb lead and US$1.00/lb zinc
in the PFS, whereas the current spot prices are US$0.85/lb lead and
US$1.17/lb zinc. As lead revenues are about triple the zinc revenues, current
metal prices result in slightly lower by-product revenues than planned,
increasing AISC to an estimated US$10.50, which is still robust.
The average cash costs are higher in the beginning, as is presented by SSR
Mining in their presentation (in US$):
The PFS shows that this is no coincidence, as the total mining costs per
tonne of ore are much higher in the beginning as well:
According to the mining schedule, they don't have the possibility to front
load the mine with much higher grade in the beginning, as year 1 sees about
20% lower silver grade than average and lead even more for the first two
years, at the same time having a higher strip ratio in the first three years:
Pirquitas Mine; SSR Mining
The Pirquitas Mine is producing marginal amounts of silver from the last
remaining low grade stockpiles at the moment, achieving 0.95 Moz silver @ 110
g/t Ag in Q2 2018, at high cash cost of US$14.73/oz Ag, causing the mine to
operate barely break even. This is all expected to change during the fourth
quarter of this year, and ore is already being trucked from Chinchillas to
the mine since July, with the processing of this ore expected to commence
this month. The first test mining results are coming in according to plan, with the strip ratio (7-8:1)
also close to PFS figures:
"Pre-stripping activities at the Chinchillas site continued to
advance during the quarter. Approximately 2.1 million tonnes of waste and 0.3
million tonnes of ore were mined, with ore grades reconciling well to the
geological model. Approximately 73,000 tonnes of ore from the Chinchillas pit
were delivered to the Pirquitas site, of which approximately 39,000 tonnes
were processed in two separate test runs as part of the project execution.
The tests successfully validated metallurgical performance of the ore and
produced saleable lead-silver and zinc concentrates."
SSR Mining has a forecast of 3–4.4 Moz Ag for 2018, so this means it
doesn't expect to add much from Chinchillas for this year. The PFS outlines
an average annual production during an eight year life of mine (LOM) at a
4,000 tpd throughput of 6.1 Moz Ag, 35 million lb Pb and 12.3 million lb Zn,
which is 8.4 Moz AgEq. This is based on 81 Moz AgEq reserves. As the total
resource stands at 203 Moz AgEq, and nameplate capacity of the Pirquitas
plant is 5,000 tpd, there are options to increase the life of mine and
revenues/cash flow, more on this in the next paragraph.
The company itself also mentions exploration upside for both Chinchillas
and Pirquitas, and the possibility of a limited high-grade underground
operation at Pirquitas, which ore can be blended at the mill according to
management. A 2015 drill program completed at the Chocaya, Oploca and
Cortaderas veins returned interesting highlights of 3.16m @ 1,436 g/t silver,
1.93m @ 1,890 g/t silver, and 0.83m @ 2,670 g/t silver, and an evaluation
study of this potential will be completed by SSR Mining before the end of
2018. SSR Mining sports a 18.6 Moz @ 292 g/t Ag and 4.46% Zn M&I
underground resource, which could probably be economic with the plant and
infrastructure already in place, and this potential could be enhanced further
by the high-grade vein mineralization.
4. Expansion scenario
In order to review full future economic potentialof Chinchillas for the
Puna operation, some assumptions have to be made. First of all there is the
aforementioned throughput increase to the nameplate 5,000 tpd, which doesn't
cost anything, and could bring annual production to 10.0–10.5 Moz AgEq.
The second assumption is converting more resources into reserves. As we
have seen, the Inferred part of resources is much lower grade, probably not
containing higher-grade ore and therefore likely less profitable. Therefore,
I would like to include another 40 Moz AgEq from 62 Moz AgEq M&I
resources into the current reserves, bringing these to 121 Moz AgEq. Taking
into account the underground Pirquitas resource being developed and kicking
in after, let's say, one year, this could add another 10 Moz AgEq. This high
grade could balance the potentially lower grade coming from Chinchillas or
even increase it, increasing annual production and profitability, but I'll
take a somewhat conservative approach here.
When using 120 Moz AgEq of total production at 10.0 Moz AgEq per annum,
the new life of mine would be 12 years.
Another item we have to take into consideration is the proposal of
Argentina to impose temporary new taxes on exports, to the tune of
12%, on top of the current corporate tax of 30% (which has just been lowered
from the long-lasting 35% this year). This is quite a swing from revoking the
5% mining export tax two years earlier. This isn't a done deal yet as Yamana
has expressed great difficulties with it, and would have serious impact on
foreign mining investments again. It also has a serious impact on NPV.
As none of the warrants and options are even close to being in the money,
I use the outstanding number of shares of 102 million.
I am using a 5% discount despite the Puna Operation being located in the
Jujuy Province in Argentina. The Pirquitas Mine has been operating for eight
years without interference from the government or strikes, and the
Chinchillas open pit mine is constructed and commencing production without
issues so far. For currency exchange rates I use today's USD:CAD of 1:1.31.
This results, as a reference, for the current eight year life of mine
plan, assuming no export taxes or expansions, in the following sensitivity
for NPV5:
Clearly at current metal prices the NPV5 is close to zero. However, this
doesn't mean that the assets of Golden Arrow are worth nothing either. The
Pirquitas plant, etc., in itself has a breakup value in this condition of at
least 25–30% of replacement value, I estimate this at US$30–40 million for a
5,000 tpd operation, and Golden Arrow owns 25% of this which means US$7.5–10
million, which is C$9.75-13 million. The company has about C$5 million in
cash, and it has several exploration projects, two of them with historic
resource estimates. I estimate all of these projects at C$5 million combined.
Chinchillas, although with zero NPV, should be worth at least C$5 million
as all leveraged plays are worth something (sometimes quite a lot, see Seabridge).
Total asset value would come in this way at an estimated C$25–28 million,
which would come very close to the current market cap. As long as Golden
Arrow can repay its credit facility from Puna cash flows, and keep the lights
on, I would estimate a structural bottom of C$0.15–0.20 per share no matter
what happens with metal prices, which is a nice cushion in my view for the
somewhat defensive mining investor.
The calculated NPV5 numbers are used to generate NAV per share, based on
cumulative discounted cash flows. The capex of US$81 million is subtracted
from NPV5 as the mine has been built and there is hardly any debt (up to
US$10 million per the credit facility). The result is adjusted for ownership,
currency exchange rate and divided by 102 million outstanding shares. The
resulting table looks like this:
One could think that based on NPV the stock is slightly undervalued at the
moment, but this is not exact science, of course. The leverage on a rising
silver price becomes quite obvious, and is in my view the main strength of
Golden Arrow as an investment. However, if we take into account the 12-year
scenario, bigger capacity and new taxes, there is more upside to be expected:
A lot of upside is taken away by the increased taxes, so if this desperate
move by Macri can be changed or discarded it would add half the 8y NPV5. The
NAV per share looks like this:
Without the extra export tax you could add roughly 20–25% to these numbers,
which explains why, for example, Yamana is not too pleased about this new
tax.
I actually like Golden Arrow as a leveraged play, as the profitability at
current metal prices is zero, so the multiplier of cash flows relative to a
rising metal prices is largest in this situation. Golden Arrow isn't part of
a cash bleeding loss making operation, which would be a negative, even in a
rising metal price environment, as investors turn to those companies last.
The relative increase of stocks that are already making profits is often less
than these neutral leveraged plays, as these stocks often are priced at a
premium as most investors turn to those first in difficult times.
After having analyzed the potential of Chinchillas for the company, let's
have a brief look at the exploration projects.
5. New Gold Explorations
New Gold Explorations is a newly created, fully owned Canadian subsidiary,
and contains all exploration projects, encompassing about 200,000 hectares of
prospective ground in Argentina and Chile. The plan behind it is to do a
spin-out at some point when the time is right, to avoid further dilution of
Golden Arrow shares and create a standalone explorer. Not too long ago this
was planned for this quarter, but it has been postponed until the early part
of next year, as Golden Arrow decided to wait in order to avoid too much
dilution when raising the necessary cash now. Golden Arrow is busy acquiring
interesting projects for New Gold, for now most are early stage but
management is also looking at more advanced projects, and is seeking JV
partners for those.
The latest addition is the Indiana gold-copper project in Chile.
Interesting part here is that this project has a historical resource estimate
of 600 Koz AuEq (3 Mt @ 2.8g/t Au and 1.6% Cu). It is a near surface deposit
of vein type mineralization, with ramps for underground access for
exploration. The agreement involves a US$15 million staged payment over four
years, with minimal obligations the first year.
Nearby is the also recently acquired Atlantida project, also in Chile, and
also with a historical resource estimate, this time 427 Mt @ 0.43% CuEq. The
deposit type is porphyry style at depth combined with a higher-grade skarn
near surface. Terms include a US$6 million staged payment spread out over
four years with minimal first year payments. Management believes that both
deposits have significant upside potential, also because sampling returned
good values, on average 0.51 g/t gold and 0.49% copper. In my view, an
average grade of 1.1–1.2% CuEq is needed for a big UG porphyry deposit in
order to be economic, but a higher-grade starter pit could lower this grade
considerably.
A project that has been a while longer in the portfolio of Golden Arrow is
the Antofalla project, which management believes to have strong similarities
with Chinchillas for geology. It has been with the company for quite some
time now, and has seen quite a bit of drilling, but it didn't provide the
same exploration success as Chinchillas yet.
Antofalla project; Catamarca Province, Argentina
Golden Arrow owns more exploration projects in Argentina, often located on
structures that contain existing, large resources (Los Helados, Filo del Sol,
Gualcamayo, Famatina, Cerro Casale, etc), but these projects are all
early-stage grassroots, which have seen limited drilling only besides rock
sampling, trenching, ground magnetics, and time domain IP.
Mogote project; San Juan Province, Argentina
As all exploration projects need a lot of work and payments, it is too
early to assign much value to them. Management and geologists are convinced
of large upside potential in at least two or three of the projects, and is
eager to explore these.
6. Conclusion
In my mind Golden Arrow represents one of the safest leveraged plays on
the silver price, as one of the best operators around, SSR Mining, is
handling the Puna Operation as part of their JV. Cash flows are around the
corner, management has normalized spending, and the share price has hit rock
bottom after a sell recommendation by an influential newsletter and a failed
attempt by management to raise cash. Call it a blessing in disguise or not,
but the upside on higher metal prices is considerable from now on, but the
company has also other ways to add value while waiting for silver to start
rising. I am an interested shareholder.
Access road Pirquitas Mine
I hope you will find this article interesting and useful, and will have
further interest in my upcoming articles on mining. To never miss a thing,
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The Critical
Investor is a newsletter and comprehensive junior mining platform,
providing analysis, blog and newsfeed and all sorts of information about
junior mining. The editor is an avid and critical junior mining stock
investor from The Netherlands, with an MSc background in construction/project
management. Number cruncher at project economics, looking for high quality
companies, mostly growth/turnaround/catalyst-driven to avoid too much
dependence/influence of long-term commodity pricing/market sentiments, and
often looking for long-term deep value. Getting burned in the past himself at
junior mining investments by following overly positive sources that more
often than not avoided to mention (hidden) risks or critical flaws, The
Critical Investor learned his lesson well, and goes a few steps further
ever since, providing a fresh, more in-depth, and critical vision on things,
hence the name.
Disclaimer:
The author is not a registered investment advisor, currently has a
long position in this stock, and Golden Arrow Resources is a sponsoring
company. All facts are to be checked by the reader. For more information go
to www.goldenarrowresources.com and read the company's profile and official
documents on www.sedar.com, also for important risk disclosures. This article
is provided for information purposes only, and is not intended to be
investment advice of any kind, and all readers are encouraged to do their own
due diligence, and talk to their own licensed investment advisors prior to
making any investment decisions.
[NLINSERT]
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