After eighteen months plus a day of eager anticipation, Silver Standard Resources (TSX:SSO) (NASDAQ: SSRI) gave Golden Arrow Resources (TSX:GRG, OTCQB: GARWF, Frankfurt:GAC) the good news on March 31 that it has approved a joint venture that is nothing less than transformative for the aspiring junior.
With approval in place, Golden Arrow will jump to producer with a 25 per cent stake in Silver Standard’s Pirquitas mine in Argentina, get a hefty payday of $15 million representing its share of profits from the mine since Oct. 2015, and a clear and efficient path to production for the Chinchillas project it’s been developing for years.
The Deal
The terms of the innovative deal has the two companies creating a new joint venture, owned 75 per cent by Silver Standard and the rest by Golden Arrow, that will hold both the Pirquitas and Chinchillas projects that sit about 42 kilometres apart by road.
The deal works well for both companies, since the open-pit Pirquitas mine is out of ore and running on stockpiles, while the Chinchillas project will need the mill, processing plant, and other equipment that will soon be hungry for more material as those stockpiles dwindle later this year.
Silver Standard gains control of a nearby promising deposit without a major cash buy, while Golden Arrow gets a fast track to production and gives shareholders the potential upside of future mining profits or a silver price rally.
“This is a landmark achievement for our company,” stated Golden Arrow CEO and Chairman Joseph Grosso. “As Golden Arrow transitions an exploration discovery into a mining operation, our shareholders stand to benefit from this profile and strengthened financial position.”
Silver Standard chief executive Paul Benson said the deal will extend the life of the Pirquitas operation well into the next decade, and opens the potential of future underground mining at Pirquitas as well.
"Forming the joint venture is an excellent result due to the outstanding cooperation by our partner Golden Arrow, the Argentine government and many within Silver Standard,” said Benson.
Chinchillas
Chinchillas has come a long way since Golden Arrow snagged it in 2011 for what amounted to $1.87 million in cash.
The company started drilling the Tertiary-aged diatreme volcanic complex soon after, and kept hitting more silver and other metals in the 1.5-kilometre diameter basin filled with volcanic breccias and tuffs.
By the time Silver Standard came around in 2015, Golden Arrow had already established an indicated resource that amounted to 104 million ounces of silver equivalent.
Since then, Silver Standard has been busy working through a more than $13-million work program to prove up the resources, advance permitting, and move the project to the prefeasibility stage.
Golden Arrow released the results of that prefeasibility study at the end of March, along with the news of the deal.
The study outlines an open-pit mine that could produce the silver equivalent of 8.4 million ounces a year over an eight-year mine life at cash costs of $7.40 per oz. silver, with processing done at the existing 4,000-tonne-per-day Pirquitas processing plant.
After-tax, the mine yields a 29% internal rate of return and a $178-million net present value, using a five per cent discount rate and metal prices of $19.50 per ounce silver, $0.95 per pound lead and $1.00 per pound zinc.
Thanks to the existing infrastructure at Pirquitas, Silver Standard thinks it can have Chinchillas shipping ore by the second half next year after a Q3 2017 construction start, while also keeping total capital costs to $81 million, including a $16-million contingency.
Bringing in bulk tonnage from Chinchillas would also open the potential of tapping into higher grade underground veins at Pirquitas, which Silver Standard had decided not to develop alone but could help boost the overall head grade at the mill and allow for more production all around.
And the seamless mine transition would also mean job opportunities for the many locals employed at Pirquitas, keeping the operators in favour with the local communities as they move ahead with permitting.
Argentina
The deal with Silver Standard goes a long way to de-risking Chinchillas for Golden Arrow, but the project is still exposed to the uncertainties of Argentinean governments that seem to change mining policies swiftly and dramatically.
Fortunately for the companies involved, the government has swung to a much more investor-friendly stance of late, lifting currency controls and some import restrictions, removing export duties on mineral concentrates, and renewing its relationship with the International Monetary Fund.
Silver Standard gave evidence of that changing position when it closed the deal with Golden Arrow, saying that it had resolved a dispute with the government over past export duties from its Pirquitas mine.
The company says it entered into a tax moratorium, which converts the tax liability to Argentine pesos, and has agreed to pay about one billion pesos, or roughly $67 million, over 60 months. Once paid, all liabilities related to historical export duties and interest will be gone.
"Resolving the outstanding export duty dispute with the Argentine tax authorities provides us with the certainty required to exercise our option on the Chinchillas project,” said Benson of the news. “We are now moving forward to focus on making Chinchillas a successful mine development that extends the life of our Pirquitas operation well into the next decade.”
The Chinchillas project also benefits from sitting in the relatively mining-friendly Jujuy province in northwest Argentina where Pirquitas has been operating.
Golden Arrow leadership also knows well how to navigate the country, with the key players in the company all part of the Argentine-focused Grosso Group.
Joseph Grosso is in charge of both Golden Arrow and the Grosso Group, and has been active in Argentina since it opened to investment in 1993 and named the country’s Mining Man of the Year in 2005.
He’s joined by geologist Brian McEwen as VP exploration and development with more than 30 years of experience; geologist David Terry as a director with more than 20 years of experience; Darren Urquhart, CFO and corporate secretary with more than 10 years experience; and Nikolaos Cacos, VP corporate development & director, with more than 20 years of management expertise in the mineral exploration business.
Over the years, the group discovered the Gualcamayo project that Yamana Gold now mines, became involved in a legal battle over who rightly discovered the Navidad silver deposit now owned by Pan American Silver, and turned Chinchillas into a major resource.
The Grosso Group also runs two other Argentinean businesses - Blue Sky Uranium Corp. (TSX-V:BSK, OTC:BKUCF) and Argentina Lithium & Energy Corp. (TSX-V:LIT, OTC: PNXLF).
Golden Arrow’s now joint venture partner Silver Standard also has, of course, extensive experience in the country, having already put a mine into production there and operated it since 2009.
The two companies are now working together to put Chinchillas into production, with an environmental report submitted last September that sets in motion permitting for mine development.
Looking ahead
Golden Arrow’s joint venture with Silver Standard is a significant turning point for the company, but it’s not the guaranteed payday of buyout.
Along with country risk, the company is still exposed to swings in the price of silver, which can be good or bad depending on the direction.
The prefeasibility study assumes $19.50 per ounce, which seemed reasonable last summer as the metal hovered at over $20 an ounce, but a little more hopeful with silver sitting closer to $18 an ounce.
The company’s share price is only somewhat tied to the precious metal, climbing up to a brief peak of $0.95 last summer on the OTCQB as silver rose before slowly retreating to around $0.50 in recent weeks, but still up significantly from the $0.14 it was trading at the beginning of 2016.
The deal with Silver Standard gave the company an obvious boost, with the stock popping C$0.11 or about 21% on March 31 to $0.64 for a market cap of about $51.2 million with 97 million shares outstanding.
Adding in warrants and options in brings the fully diluted count to 111 million, with the company saying about half of shares tied up with insiders and people linked to them, and Silver Standard holding another five per cent stake.
The company added some of those shares last year with three rounds of financing, leaving it with about C$8 million as it headed into 2017.
Some of that money will go towards Chinchillas as it’s now very well placed to go into the construction phase later this year, but the company still has several other projects it’s looking to advance.
In Argentina’s Catamarca Province, the company holds the 8,760-hectare Antofalla project, with a 100% earn-in opportunity with low initial commitments, and similarities to Chinchillas.
The company is working through a $2-million exploration program covering geochemical sampling to delineate drill targets for an upcoming 3,000-metre drill program, while also doing some remote sensing and IP/resistivity geophysics.
Further down the road, Golden Arrow could also move forward on projects in La Rioja and San Juan province, with total holdings in the country amounting to over 200,000 hectares, while the company is also keeping an eye out for new opportunities.
But Chinchillas is no doubt the one to watch for Golden Arrow, with its rapid timeline to production, a partner with deeper pockets and local proven experience, and promising economics. One of the biggest uncertainties of the deal has been removed with the Silver Standard deal complete, now the partners just need to deliver what they’ve promised.
This deal no certainly significantly reduces the risks and the potential for rewards with a fast track towards production. Golden Arrow’s market cap of around C$75 makes this near term junior producer with a first class Joint Venture partner makes this a company maker alone, outside of the upside of the Antofalla project exploration program underway. These conditions make Golden Arrow my favorite near-term silver junior producer.
The coming cash-flow to exploration upside makes me a buyer at these current prices and with prospects for higher silver prices in the coming year+, will make Golden Arrow an exciting silver junior stock investment, an outperformer among its peers.
- Peter Spina, President of SilverSeek.com
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