Successful Junior Miner Sees Cash Flow


Michael Sheikh explains what makes Guanajuato Silver Co. a novel alternative and takes a have a look at 5 different corporations that caught his eye.

Guanajuato Silver Co. (OTCMKTS:GSVRF; TSX.V:GSVR) is a junior miner that has had arguably unprecedented operational success over the past yr enhancing its money stream. Junior miners aren’t alleged to have money stream, in order that makes Guanajuato a really particular exception that mining traders ought to pay eager consideration to. 

Regardless of the distinctive operational success, the inventory hasn’t actually moved an excessive amount of over the previous yr. This value stagnation may change as the corporate ramps up its manufacturing, continues in its exploration tasks, and doubtlessly makes some strikes within the native space to tackle some new mining tasks that might synergize with their present websites.

Junior mining used to comprise smaller operational mines however in current a long time the precise mining has largely been left to large-scale operations and thus larger corporations. There’s a ton of capital expenditures required for mining and for years corporations can increase cash and spend it whereas solely actually attempting to show whether or not there’s an financial mineral deposit to be mined later.

As an illustration, Kinross Gold Corp. (Ok:TSX; KGC:NYSE) lately acquired a junior miner referred to as Nice Bear Sources Ltd. (GBR:TSX.V; GTBDF:OTCQX) for $1.4 billion upfront, however numerous estimates recommend the corporate will want tons of of hundreds of thousands—as much as $700 million—in capex to construct infrastructure and grow to be absolutely operational.

And this comes solely after spending years on-site and hundreds of thousands of {dollars} on exploration.

For any junior miner, $700 million is a frightening quantity particularly when many have market capitalizations a lot decrease than that.  Most junior miners have a easy plan to get acquired by a bigger mining behemoth. As an illustration, Discovery Silver Corp. (OTCMKTS:DSVSF) lately introduced the outcomes of its preliminary financial evaluation (PEA), which “positions Cordero [their project] as a Tier 1 silver asset.”

In response to the corporate, the challenge would require “modest improvement capex of $368 M.”

However for Guanajuato, it is a completely different story. The corporate acquired an already present mine with onsite bulk materials processing gear for an combination of about $20 million (plus $50 million in milestones) after accounting for some enhancements made to the services. And now they’re already producing from the prevailing shaft. To have an operational mine with such a low capital price and a short while to manufacturing is really a testomony to the superb allocation of invested capital.

However to know the administration’s wonderful determination making and execution up to now in addition to catalysts that might proceed to maneuver shares a lot greater, one has to know the historical past of the corporate and what the corporate can do with mergers and acquisitions, or enterprise improvement sooner or later.

The Historical past

Guanajuato Silver accomplished the acquisition of its mining property from one other bigger silver mining firm simply 8 months in the past, in April of 2021. The asset had beforehand been bought from AuRico (now Alamos Gold Inc. (AGI:TSX; AGI:NYSE)) for $200 million by Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) earlier than being closed down after producing a part of the mine.

Endeavor had plans to extend manufacturing from the mine, however as they churned by means of the large components of high-grade mineral, they may not proceed to justify mining such tonnage with a declining common grade of silver and gold. And they also suspended El Cubo operations in 2019. Ultimately, their rationale for closing it was tied to the operational efficiencies of their mining gear on website. The remaining mineralization of the mine consisted of a skinny vein that’s solely 4.5ft large however wealthy in mineralization. The economic drum cutters used within the mine, in addition to the mine plan, normally lower a path that’s, for example, 12 ft large which launched lots of extra rock for processing. This lowered the grade of the ore to the purpose that it was not cost-effective to mine. Guanajuato Silver addressed this problem by using a lower and fill method together with resue mining. The resue mining works by slicing a path alongside the vein after which eradicating the ore vein afterward to cut back the quantity of rock exterior the vein. 

Guanajuato determined to take over the challenge as their revaluation of the deposit confirmed that the high-grade mineralization was merely slim in some areas, such that high-quality tonnage may very well be mined at a narrower width. However this provide wouldn’t and couldn’t deliver the El Cubo processing gear to most capability. So, Guanajuato is supplementing that manufacturing with manufacturing from their different mine close by referred to as El Pingüico. And work is being performed to see if the majority supplies from each could be combined collectively as they doubtlessly come from the identical total geological vein construction or fracture, thus having comparable mineral properties permitting for a similar course of for use to extract the gold and silver.

The good factor for Endeavor was that they received to stay considerably uncovered to the challenge with out having to handle it, by means of half possession of Guanajuato Silver. Presently, they’re the most important shareholder at over 10% possession. This is also a testomony to the legitimacy of Guanajuato Silver’s endeavors.

The El Cubo Web site

The El Cubo website Guanajuato bought is de facto one thing particular. The realm has tons of of years of historical past as a mining hub and has a vibrant city shut by. This implies it’s straightforward to rent skilled native mining expertise, which each guarantee operations run seamlessly and that the area people and authorities assist the corporate as operations are led by Mexican nationals and the corporate may also help deliver wealth into the world. In reality, Guanajuato is working with about 100 Mexican nationals in its operations.

Map of Guanajuato and Notable Mining Websites Close by



The above map depicts the city of Guanajuato close to two predominant mineral deposits—the Veta Madre (the “Mom Lode”), and one other doubtlessly anastomosing/contiguous (coming from the identical fault, or branching from the identical vein additional down within the floor) area, the Villalpando Vein.

The corporate has mines at its websites, El Pinguico and El Cubo. The corporate’s present plan is to make use of present stockpiles at El Pinguico (low grade at floor and medium grade underground) to make use of up extra capability at their processing gear at El Cubo mine whereas they ramp up El Cubo to its personal max capability.

Each websites collectively nonetheless in all probability gained’t maintain the processing line at max capability, so Guanajuato lately introduced that they’re taking silver and gold mineralized materials from third events:

“James Anderson, Chairman and CEO, stated, ‘It’s GSilver’s intention to make use of the roughly 20,000 tonne per thirty days of extra capability on the El Cubo mill to profitably course of mineralized materials from numerous potential sources within the Guanajuato space. Whether or not the enterprise association is designed as toll milling, uncooked materials buying, or revenue sharing, if it serves to contribute to our backside line and helps to increase our presence within the 480-year-old mining camp of Guanajuato, then we’ll pursue it.’”

guanajuato silver
Stockpile at El Pinguico

Projecting Excessive Charges Of Return

Guanajuato engaged an engineering agency to do a preliminary financial evaluation of El Pinguico and El Cubo.

And that is actually the place it turns into clear that the Guanajuato Silver workforce are wonderful capital allocators and can have the ability to drive sturdy returns.

Though their mines had been lively a long time in the past and a number of the assets had been depleted, there are different assets not mined but and a big quantity of unexplored territory the place there’s presumably a considerable amount of medium and high-grade silver.

In reality, Guanajuato simply launched some encouraging drilling outcomes from El Cubo.

The corporate’s financial evaluation confirmed a projected inner fee of return (IRR) of 105%, which is extraordinarily excessive. It’s because the sizeable manufacturing the corporate is managing was made potential with such small capital funding in such a brief time frame. One other competitor, Discovery Silver Corp (OTCMKTS: DSVSF), reported “wonderful challenge economics” with a projected IRR of solely 38% (however the next NPV). The distinction is that Guanajuato’s challenge mainly will have the ability to finance aggressive exploration with out important dilution of the inventory. And this exploration and any assets proved from it are usually not included within the PEA, simply the El Pinguico stockpiles and preliminary El Cubo assets.

Potential Central Mexico Consolidation

Guanajuato may also use their money flows for potential consolidation within the space. With extra capability at El Cubo, it would make sense to both proceed collaborating with different corporations operating smaller operations within the space or to revive previous operations which are at present defunct.

The important thing factor to remember, nevertheless, is that Guanajuato is unlikely to carry out any M&A exterior Mexico in order that they will keep centered and proceed executing in a well timed and cost-effective method, one thing fairly uncommonly seen in small-cap corporations. Actually, any M&A ought to in a roundabout way synergize with present methods and operations.

Conclusion

Guanajuato Silver is de facto solely priced primarily based on its present challenge. Ought to the corporate carry out further M&A or any exploration that would supply it with further inferred or indicated assets, which may trigger a rerating of shares sharply to the upside. With their predominant two tasks present alongside the “mom lode” that was the supply of a gold rush 500 years in the past, persevering with sturdy operations till a long time in the past, and a brand new understanding of the geological complexes within the space, Guanajuato has unseen optionality for traders trying to capitalize on its packages earlier than they’re clearly confirmed. The corporate has been executing flawlessly and now could be ready of power as it really works towards regular, money stream optimistic manufacturing. The one factor traders don’t know is whether or not Guanajuato will purchase a brand new challenge or use the cash to discover present claims. However for the reason that administration workforce has confirmed themselves to be prudent and savvy, this must be of no concern.

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Disclosures:

1) Michael Sheikh: I, or members of my fast family or household, personal securities of the next corporations talked about on this article: Firm Title/None. I personally am, or members of my fast family or household are, paid by the next corporations talked about on this article: None. My firm has a monetary relationship with the next corporations referred to on this article: None.  Funds managed by Title of Firm maintain shares of the next corporations talked about on this article: Guanajuato Silver Co. I made up my mind which corporations can be included on this article primarily based on my analysis and understanding of the sector. 

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