Analyst draws a “Golden Arrow” for a rising silver major in Argentina
On the very eve of the deal’s final confirmation, investors started to get nervous that it would not close. This was a case of “O, ye of little faith” because the deal as concocted back in late 2015 was not only synergistic but a win-win for all concerned. As it happened the delay was merely hours in length and the transaction was confirmed with the simultaneous release of the details of the PFS, so we now have a more complete picture of how the project is likely to evolve.
Taking advantage of the way the wind was blowing it carved out a deal with Silver Standard in late 2015 with the goal of potentially combining the mature Pirquitas mine of the large company with the evolving Chinchillas deposit held by Golden Arrow Resources Corporation (TSXV: GRG | OTCQB: GAWWF). This pooling of two projects in relatively close proximity in the north-western province of Jujuy made eminent economic sense. The funds that will be received as “back money” from Pirquitas revenues since October 2015 will go substantially towards reducing the required commitment of GRG to the Chinchillas CapEx thus alleviating dilution fears that are usually associated with a minebuild.
Now that the pooling of assets in confirmed we shall look at how the combined assets might work together in light of the PFS which was announced on the same day as the definitive deal.
The Pooling of Assets
Production is over the hill at Pirquitas and its best chance of extending its own mine’s life and gleaning extra value out processing infrastructure at the mine is a combination with another up and coming project. Without an extra source of feedstock, a decision on whether to shutter it was needed imminently. The obvious solution was to cut a deal with Golden Arrow and ramp up Chinchillas with a stream of Silver (and Zinc) ore directed towards Silver Standard’s processing facilities at Pirquitas.
Anticipating this risk/opportunity, in October 2015, Golden Arrow Resources and Silver Standard entered into a business combination agreement for the joint development of Golden Arrow’s Chinchillas project and “an agreement to combine the producing Pirquitas Mine and the Chinchillas project, located approximately 35 kilometres apart in Jujuy Province of Argentina, into a single new operation.” The joint venture will be 75%-owned by Silver Standard and 25%-owned by Golden Arrow.
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In consideration for granting Silver Standard the rights to conduct pre-development activities, it agreed to pay to Golden Arrow some $2mn
This “back-money” is estimated to amount to around US$15mn and will go a long way towards covering Golden Arrow’s share of the upfront CapEx of Chinchillas.
Managing the JV
To deal with the logistics of the Joint Venture the company is establishing a production committee, which will include veteran mining engineer, Alf Hills, which will monitor progress at the two sites, compliance with the JV conditions and other budgetary, construction and production issues.
Alf Hills has over 35 years of international mine evaluation, development and operational experience. From 2006 to 2013, he was the CEO and a director of Kobex Minerals Inc. and its predecessor company, International Barytex Resources. Prior to that he spent 26 years with the Placer Dome group where amongst other management roles he was the Vice President – Evaluations and was involved with the Cortez Hills Project. In the first instance, he will be an advising consultant to Golden Arrow. He will then be appointed to represent Golden Arrow on the board of the recently announced Joint Venture NewCo.
The Pre-Feasibility Study
The confirmation of the joint venture with Silver Standard coincided with the announcement of the result of the pre-feasibility study. This study evaluated the development and construction of an open-pit mine and supporting infrastructure, which will supply ore to the Pirquitas processing facilities at 4,000 tonnes per day over an eight-year active mining period. A tailings storage facility will be located on the Pirquitas property and is included in the capital cost estimate.
The ore will be transported approximately 42 kilometers to the Pirquitas processing facilities. Haul trucks, loading equipment and drills at the Pirquitas mine will be transferred to Chinchillas providing substantial costs savings on equipment and infrastructure and providing a shorter timescale to production.
The Pirquitas processing facility will process ore from the Chinchillas project using standard crush, grind and flotation at a rate of 4,000 tonnes per day. Minor modifications to the Pirquitas plant are expected. The plant is expected to produce a silver/lead concentrate and a zinc concentrate. The two concentrates will be shipped internationally to smelters for processing.
Thus the metrics for the proposed operation are very attractive with:
- Average annual Silver equivalent production of 8.4 million ounces over an eight-year mine life
- Within the Silver equivalent production there is Lead production of 35mn lbs per annum and Zinc production of 12.3mn lbs per annum
- Operating margins based on cash costs of $7.40 per payable ounce of silver sold over the life of mine
- Post-tax net present value of $178 million using a 5% discount rate (using metal prices of $19.50 per ounce silver, $0.95 per pound lead and $1.00 per pound zinc)
- Attractive post-tax internal rate of return of 29%
- Low capital intensity based on initial capital expenditures (shown below), including owner’s costs and contingency, estimated to be $81 million
The path to near-term production at Chinchillas is expected to be relatively short with construction planned to begin in the third quarter of 2017, subject to permitting, followed by ore delivery to the Pirquitas mill in the second half of 2018.
Short-circuiting the Mining Lifecycle
We repeat here one of the industry’s favorite charts. Conventional wisdom has it that the mine building phase is when a stock goes into a slump after the euphoria of discoveries and resource building. In the case of Golden Arrow it has gone straight from being a junior with an “oven-ready” PFS, to being a producer as 25% owner of Pirquitas. Nit-pickers would claim the PFS is on a different property to the producing one but that is sophistry indeed as Chinchillas has been the “possibility that has triggered the reality” in spurring Silver Standard to undertake this pooling of interests.
The mine build period is a usually a downtime for developers because risks become higher and dilution sets in at potentially crippling levels. In the case of Golden Arrow the risks are massively reduced by all the processing infrastructure being in place already and tried and tested and the team at Silver Standard being veteran minebuilders in Argentina, and most particularly Jujuy. Figuratively speaking “they wrote the book” when it comes to mining in these parts. There is little need for dilution either as Golden Arrow comes out of the gate with the “back-money” from October 2015 and a significant share of the Pirquitas cashflow immediately to self-finance the Chinchillas mine build.
These two factors alone are sufficient to totally negate fears of a “construction phase” slump because the potential rationales therefore do not exist at Golden Arrow.
The combination of the assets of Golden Arrow and Silver Standard is a classic “win-win” situation with the synergies accruing to both sides from substantially extending the life of Pirquitas and maximizing the value of its infrastructure by adding Chinchillas to the mix and shortcutting the timeframe to production while massively reducing the CapEx involved.
In one transaction Golden Arrow has leapfrogged into producer status overnight and secured itself a substantial part of the residual production value (and immediate share of the revenues) at Pirquitas and brought much closer the pipeline value of Chinchillas, which would otherwise have been a long and expensive slog to production.
With this transaction confirmed Golden Arrow will become THE upcoming silver major in Argentina. The market seems to have not grasped the revenue potential of the transaction over and beyond the estimates of the PFS (particularly in light of much stronger Zinc prices) and neither have investors factored in the possibilities inherent in the significant unexplored extent of the Chinchillas deposit and the array of other potential projects that Golden Arrow has in its quiver. In light of these “hidden” aspects of Golden Arrow, we reiterate our 12-month target price of CAD$1.45.
To read the Hallgarten Research Report on Golden Arrow, click here
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>