Chris Marchese
Chief Mining Analyst, GoldSeek & SilverSeek
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While there are a dearth of primary silver producers and even fewer quality companies, the same can’t be said of the next generation of primary silver producers. With the exception of Pan-American, Hochschild, Hecla, Fortuna, Fresnillo and arguably First Majestic Silver, there are essentially only a couple to no other high-quality primary silver producers (meaning no other companies derive at least 65% of total revenue from silver-equivalent production (silver and gold) and at least 40%-45% +/- from silver, now or in the future (inclusive a company’s advanced development projects), and have an all-in sustaining cost (AISC) profile per ounces of silver in the lowest quartile or bottom 40-50% on the industry cost curve (which may exclude First Majestic Silver for the time being).
One can make a reasonably strong argument companies like Coeur, SilverCorp, and Buenventura belong in this group but these may or may not meet the definition of high-quality primary silver producers, as they are on the border (Silvercorp doesn’t derive more than 60% from silver-equivalent production, and Buenaventura doesn’t derive >40% of total revenue from silver). Regardless, even if we expand the number of high-quality silver companies to eight, it still a very small group. It is very understandable that many companies which were previously high-purity primary silver producers were basically forced into acquiring or building gold-assets as the latter have had much higher margins, which generally speaking was a smart move.
The next generation of silver producers consists of six companies (which would nearly double the number of quality primary silver producers), which are all high-grade and will be low-cost producers when in production. This group of companies primarily fall near the same area on the Life Cycle of a Mine (Mining company for a single asset company) diagram (see below), in that production decisions, for the most part have either been made or will be made in 2020 (although this could be moved back due to forced-liquidation caused by COVID-19, which have roiled markets and may continue to do so). In other words, many of these companies are found near the red circle.
Of these six companies, one is nearing production (expected Q3 2020, although commercial production won’t be achieved until 2H 2021) in MAG Silver, and another is earlier stage but because of the truly amazing drill results, can be fast-tracked to production, providing permits can be received in a timely manner in New Pacific Metals.
By the end of the last bull market in silver (2011), there was a larger number of primary silver producers (relatively speaking), which have since gone onto destroy significant shareholder value via dilution and continuing to operate it assets while losing money, breaking even, or generating very marginal returns, leading to depletion such as was the case with Endeavour Silver, Great Panther (which was eventually forced to become a primary gold company), Defiance silver, among others.
The next generation consists of MAG silver, SilverCrest Metals, Alexco Resources, Aurcana, Bear Creek Mining, and New Pacific Metals. In addition to MAG silver achieving first production in mid-2020, Alexco and Aurcana are likely to reach production in 2021, with first production at Bear Creek’s Corani project expected to be 2024 (due to a 3-year buildout), and New Pacific Likely 2026-2027 +/-1 year. As previously mentioned, these could be moved out several quarters due to recent developments in the global economy. Ordinarily, I wouldn’t have included New Pacific on this list, but its Silver Sands Project is very likely sitting on somewhere between 1b-2b+ oz. of silver.
MAG Silver (Tier-I Asset, Mexico): MAG Silver is arguably the most exciting Canadian silver exploration and development company in the world due to its 44% JV interest (along with Fresnillo at 56%) in the world-class Juanicipio Project in Mexico. The management team is outstanding and its Chief Exploration Officer, Dr. Peter Megaw discovered the Juanicipio vein via MAG’s first drill hole. Once in production, Juanicipio will be the lowest-cost primary silver mine of scale in the world, with LOM all-in sustaining costs (AISC) of $5/oz, although given the recent price action in base metals, it would be closer to $6.00 +/- $0.25. If base metal price recover, or gain roughly half of what they lost in the recent downturn, AISC may still be $5/oz. or lower as MAG and Fresnillo haven’t included a copper circuit in a technical report and there is a fair amount of mineralization in the “Deep Zone”.
Only approx. 5% of the Juanicpio property has been properly explored, and in all likelihood, within the next one to three years, investors will fully realize just how much value can be added. As it stands now, production over the first six years is projected to average 16-17m oz. Ag, and roughly 9-10m oz. (on a 100% basis) over the life of mine as the majority of the bonanza grade silver is nearest surface. When that is mined out, the mine becomes more base metal rich in addition to slightly higher gold grades. Initially, silver grades will average 450-550 g/t Au, dropping off to 180-220 g/t after the initial 6-years.
But this is unlikely to be the case given the vast exploration upside and the ability for it to find material quantities high-grade silver (>=300 g/t Ag). In fact, roughly 18 months ago, I was talking to management at a conference in a one-on-one meeting, and the company plans to build a second 4ktpd mill beginning after year 4 or 5. In this scenario, even if the company wasn’t able to delineate more bonanza grade silver, silver output wouldn’t see anywhere near the dramatic fall in silver output had it stuck with a 4ktpd operation. While the limited exploration drilling has taken place over the last two or so years, new veins have been identified that are higher grade, and while not bonanza grade, still higher grade than the “Deep Zone”. In the event that an additional 2ktpd mill is added, average annual production will still be robust.
The following graphics illustrate the impact building a second 4ktpd mill. As MAG enters the “Deep Zone”, the veins do become much wider, and this in addition to management’s comments, make a 6-8ktpd operation very likely beginning in year six or so. These numbers represent the 44% attributable production (these have different scales, and excludes any exploration upside).
To get a better idea of just how profitable this project will be, using an $8.00/oz. silver price deck, still yield and after-tax internal rate of return (IRR) of 15%. It is improbable silver prices will remain at such depressed prices as it is trading at now (especially given the physical demand in light of recent events), and using a $17.90/oz. silver price deck, the after-tax internal rate of return (IRR) is 44%. At depth, in the Deep Zone, there is also copper byproduct which hasn’t been included in any technical study, which of course would put further downward pressure on costs.
Using a long-term silver price deck of $18.20/oz. and base metal price similar to those in the most recent technical report, the Net Asset Value (NAV) is approx. $8/share. Given the significant exploration upside in addition to the likelihood of adding a copper circuit and an additional 4ktp mill (or even a 2ktpd mill), it is appropriate to apply as much as a 2.50x multiple. If we also assume realistic silver prices over the medium and long-term of $22-$24/oz. (which is still relatively conservative), an appropriate valuation would be to apply a 2.5x NAV multiple, which would yield a fair value of $20-$30/share. For the time being, until production is achieved and ramped up and silver prices of sub $18.50 prevail, a reasonable price target is $16/share.
MAG does have another quality asset, though nothing comparable to Juancipio in Cinco de Mayo, in which only initial limited drilling was undertaken as Juancipio clearly became the focus. Foregoing the advancement of Cinco de Mayo has also allowed MAG to maintain a tight share structure under 87m share issued and outstanding on a fully diluted basis. Capital costs are running marginally higher than initially envisioned, so MAG might have to raise additional capital via equity or debt, however the start of production will now be nearly two quarters earlier than planned and in turn, this will defer some capital investments until 2021, as the operation ramps up. But if financing is needed, the company is best off obtaining a $30m-$50m or so line of credit. The longer-term future of MAG is unknown as there have been rumblings of it becoming a dividend vehicle, though when in production It will likely have a low-cost of equity, allowing it to acquire assets or companies relatively cheaply but on the other hand, it would also make an ideal takeover target for the likes of Fresnillo or Pan-American.
Bear Creek (Tier-I Asset, Peru): The company recently announced very exciting news, that being that it has started putting together a financing package to build its world class Corani silver-lead-zinc project. It will likely consist of $400m of senior secured debt (the company has engaged BNP Paribas and Societe Generale to arrange this facility), some equity, and in my opinion, a small silver stream, which will allow it to bridge the $200m gap between capital requirements and senior secured debt financing. This is the most logical path as its cost of equity is extremely high at this point in time and raising the remaining capital via equity would cause the company to essentially double its share count. In other words, selling a silver stream would be extremely dilutive. Beyond that, it has a good relationship with Wheaton Precious Metals (which also holds a 13.20% interest in the company). As with any development company in this environment, putting together a financing package may be delayed but only time will tell.
In late 2019 (November), Bear Creek released the results of an updated feasibility study, which improved the economics of the project. The After-Tax NPV and IRR increased by 31% (+$126m to $531m) and 52% (from 15.1% to 22.90%), a 33% reduction (1.2years) in the payback period, and lower AISC. Over the first 3 full years of production, AISC is expected to be roughly $1.36/oz. (using silver and base metal prices from the FS), with an initial 15year mine life. Planned daily throughout increased +20% (and in turn average LOM silver production to 9.6m oz. from 8m oz.) without an increase in initial capital investment. The LOM AISC will be roughly What MAG Silver’s will be (at today’s metal prices), between $5-$6/oz. Corani is highly leveraged to both the silver price and zinc and lead prices. For example, using long-term metal price decks of $18/oz. Ag, $0.95/lb. Pb and $1.10/lb. Zn, the after-tax NPV is estimated at +$531m.
COVID-19, while not directly responsible for the severe market sell-off, did prick the equity bubble (among other bubbles) and revealed how truly fragile the financial system still is and has put the US into recession several quarters earlier than otherwise would have been the case. In the 2H of 2019, it became clear there were issues in the global financial as seen through what was going on the in the repo-market as well as the fact the FED starting to cut rates while the economy was experiencing so called “robust economic growth”. This will prevent base metal prices from returning back to levels used in this feasibility study (FS), potentially even by the time Corani reaches production, so its cost structure (due to being base metal rich), it likely to be higher than outlined in the FS. If this is the case, it is fair to assume, that over the first 3-years of production, AISC will be closer to between $2.10-$2.75/oz. (up from $1.36/oz.) and life of mine AISC would be closer to $5.25-$6.50/oz. (up from $4.55/oz.). Nonetheless, this will be an excellent silver play notably a single-asset company with a near-world class silver operation in Peru.
New Pacific Metals (Tier-I Asset, Bolivia): The Silver Sands project is the most exciting silver exploration project in the world, with a maiden resource estimate (MRE) due out in Q2 (though it might be delayed at this point) and it is anticipated to be between 300-400m+ oz. Ag. I fully expect, when all is said and done, that New Pacific will delineate somewhere between 1b-2b+ oz. Ag. Mineralization has been very near-surface with an estimate strip ratio (waste: ore) of less than 1.4:1 (though nothing official and this is based on talking with management and of course subject change), making what is looking to be a resource grade of 80-105 g/t Ag, quite high-grade for an open-pit silver mine with a low strip. I also expect average annual production to be very significant, when fully optimized. To date, the company has reported favorable metallurgical tests, with recovery rates >85%.
I did some early consulting work for the company and quickly had the feeling the Silver Sands would be a big project. But looking at the project now, I severely underestimated the size of the deposit. Initially I thought there was a strong possibility the deposit would have at least 500m oz. (contained). Fast forward to today, I believe a more realistic resource estimate will be ultimately be multiples higher.
The Silver Sands project has delineated a massive silver resource through the drilling of 90,000m in 357 diamond drill holes since late 2017. The company has been actively trying to expand its land package and has been successful thus-far and has two newly acquired concessions located roughly 25km northeast of Cerro Rico (a very large silver operation). The project was composed of four concessions of approx. 3.18 square kilometers. According to the new Mining and Metallurgy Law 535 enacted in May 2014 in Bolivia all temporary special authorizations (ATE’s) must be consolidated to a new 25-hectare sized concessions called “Cuadriculas”, and must be converted to Mining Administrative Contracts with jurisdictional administrative mining authority (AJAM). In late December 2019, the company announced it expanded its Silver Sand land package by acquiring a 100% interest in a special temporary authorization located immediately north of the project by making a one-time cash payment of $200k to arm’s length private owners. The recently acquired consists of six hectares but will total approx. 50 square kilometers once consolidated.
On January 11, 2019, New Pacific announced it had entered into a mining production contract (MPC) with COMIBOL granting the right to carry out exploration, mining, and production activities in the areas adjoining the Company’s Silver Sand Project. The MPC covers an area up to 57 square kilometers, involving two separate areas. New Pacific continues to try an expand its land package and has begun acquiring other assets, such as the Silverstrike project (December 2019).
Bolivia has started to become much more mining friendly and wants to encourage foreign investment as the country is mineral rich. Significant investments by some major players further validate what will be a massive project in a country that has recently been heading in the right direction. Silvercorp Metals holds a 28.9% interest while Pan-American Silver holds a 16.80% interest and Dr. Rui Feng (CEO of New Pacific and Silvercorp) holds a 7.0% interest.
At this point, without a maiden resource estimate (MRE) or technical report (PEA, PFS, or BFS), there isn’t much to discuss except highlighting a small quantity of the absolutely fantastic drill results from its 2019 drill program. What is truly amazing is that New Pacific has only drilled 90,000m in 357 diamond drill holes since late 2017 but has been so successful thus-far. Drill highlights from 2019 include:
· 72.44m @ 279 g/t Ag
· 93m @ 289 g/t Ag
· 48m @ 176 g/t Ag
· 242m @ 87 g/t Ag
· 88.5m @ 120 g/t Ag
· 77m @ 135 g/t Ag
· 54.67m @ 141g/t Ag
· 65m @ 157 g/t Ag
· 64.46m @ 250 g/t Ag
· 208m @ 73 g/t Ag
· 57m @ 354 g/t Ag
· 83m @ 116 g/t Ag
· 76m @ 150 g/t Ag
· 135m @ 240 g/t Ag
Further, the company reported very attractive drill results from its Snake Hole Prospect at its Silver Sands Project. Highlights from the initial 6,000m drill program include 72m @ 279 g/t Ag, 38.4m @ 143 g/t Ag, 11.12m @ 761 g/t Ag.
In part II, SilverCrest Metals, Alexco Resources, and Aurcana will be discussed.
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