Puna Operation; Chinchillas Mine
Usually the standard modus operandi for juniors doing a financing revolves around three things if they can get the money: take it, take it and take it. Golden Arrow Resources (GRG.V, GARWF.US, G6A.FSE) realized that raising the money in very negative sentiment in Q4, 2018, with tax loss selling projected to have significant impact last year for most companies and probably dragging along everything with it until mid December, wasn’t the smartest thing to do. The share price was walked down by interested parties at the time, and management got requests for lower and lower unit prices, but they weren’t with their backs against the wall, so they decided to wait and cancelled the financing. The 25% owners of the Puna JV with operator SSR Mining, based on the ramping up open pit Chinchillas Mine and the almost depleted Pirquitas Mine in the Jujuy province in Argentina, hoped for better times around the corner.
And sure enough, things started to turn in January, and Golden Arrow launched another attempt on February 12 at a slightly lower unit price of C$0.30 (was C$0.35). Golden Arrow closed the first tranche of the non-brokered private placement through the issuance of 11,051,611 units (common share plus full 2 year warrant @C$0.40) for gross proceeds of $3,315,483 on February 22, 2019. On March 5, 2019, it closed the second tranche through the issuance of 1,290,367 units for gross proceeds of $387,110. Finally, the company closed the third and final tranche of 3,462,034 units for gross proceeds of $1,038,610 on March 22. In total, Golden Arrow issued 15,804,012 units for gross proceeds of $4,741,203 in this round. Despite the full warrant (would have loved to see a half warrant), in my view C$4.74M is a very decent result these days for a junior producer with a small market cap of about C$30M.
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
A part of this placement was arranged through finders, and for the last tranche, finder's fees of $6,650.70 were paid in cash to parties at arm's length to the company. In addition, 22,169 non-transferable finder's warrants are being issued. Each finder's warrant entitles a finder to purchase one common share at a price of $0.40 per share for two years from the date of issue, expiring on March 21, 2021. In total for this private placement (PP), finder's fees of $60,090.73 were paid and 196,302 finder warrants were issued. According to management, this accounts for a percentage of 7% in cash and 7% in warrants. The proceeds of the financing will be used for general working capital.
Golden Arrow Resources has, after the closing of the recent financing, C$7M in cash at the moment according to management, and no long term (LT) debt. As a reminder, the company has been drawing down from a short term US$10M 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. Management confirmed to me that they will make a final payment of C$2.3M in March, and hereby will have completed their mandatory capex payment obligations.
As of March 26, Golden Arrow Resources has a share price of C$0.295 and a market cap of C$34.74M, with 117.77M shares outstanding, and fully diluted 131.3M. All options and warrants are out of the money at the moment. The average daily volume has come down from almost 300k shares but is still a liquid 100,064 shares.
Share price GRG.V, 3 year period (Source: tmxmoney.com)
The worst is behind Golden Arrow it seems, as a combination of negative sentiment, upcoming tax loss selling, lower metal prices and an upcoming private placement weighed heavy on the share price in the last quarter of 2018. As the company has paid off their share of capex for Puna, it can concentrate now on receiving growing cash flow from the ramping up operation at Puna, as a bonus hoping for a rising silver price, and repaying short term credit facility before year end of next year. Let’s have a quick look at the production figures and forecast of Puna now.
Highlights from SSR Mining's news release dated January 15th, 2019 include (figures are on 100% basis):
"In 2018, Puna Operations produced a total of 3.7M ounces of silver, 8.8M pounds of zinc and 3.1M pounds of lead. Silver sold for the year totaled 3.8M ounces."
"In December ore was sourced exclusively from Chinchillas and achieved a 3,605 tonnes per day milling rate."
"Puna is expected to produce between 6.0 and 7.0M ounces of silver at cash costs of between $8.00 and $10.00 per payable silver ounce sold."
"As previously announced, the completion of certain Chinchillas project infrastructure carries over into 2019 with remaining investment of approximately $9 million expected to be incurred in the first quarter. The project remains on budget."
The Chinchillas PFS uses a mine plan based on 4,000tpd throughput, so the Puna operation is already close to reaching this. As a reminder, the nameplate capacity of the Pirquitas plant is 5,000 tpd, and represents one of the options to meaningfully increase cash flow. The total production of 3.7Moz Ag is according to plan and exactly the midpoint of the SSR forecast of 3-4.4Moz Ag for 2018, as the processing of Pirquitas stockpiles was expected to bring in around 1Moz Ag per quarter, and this came to an end in November 2019, when the switch to just Chinchillas ore was made. Net earnings to Golden Arrow were marginal as cash costs of stockpile processing were predominantly above the current silver price. When Chinchillas is fully operational, I expect cash costs to go down considerably.
As a reminder, the PFS outlines an average annual production during a 8 year life of mine (LOM) at a 4,000tpd throughput of 6.1Moz Ag, 35M lb Pb and 12.3M lb Zn, which is 8.4Moz AgEq. This is based on 81Moz AgEq reserves. As the total resource stands at 203Moz AgEq, and nameplate capacity of the Pirquitas plant is 5,000tpd, there are options to increase the life of mine and revenues/cash flow. With a 5,000tpd throughput, annual production could go to 10-10.5Moz AgEq. Adding 40Moz AgEq by converting Chinchillas resources is another option, and besides this there is the Pirquitas high grade underground resource which could add another 10Moz AgEq when developed. With this expansion scenario, the life of mine could increase to 12 years.
The jury is still out in Argentina about the proposal 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 longlasting 35% this year). As mentioned in my last article, for example Yamana has expressed great difficulties with it, this would have serious impact on foreign mining investments again, and also negatively impacts the Chinchillas NPV. The PFS has been based on the old corporate tax of 35%, so the net effect on economics would be a 7% tax increase. According to my models, this would result in a 12-15% decrease of post-tax NPV.
As this proposal still is a proposal, and a vehemently opposed one by mining companies operating in the country, it seems appropriate to show the sensitivities again without the additional taxes. I changed the green colored cells, as the silver and lead prices have increased since my last article on the company. As can be seen, a positive NPV is arising slowly now, so a valuation doesn’t have to be solely extrapolated from break up values and exploration projects anymore.
An 8 year base case scenario leads towards the following hypothetical sensitivity table:
This results in the following hypothetic NAVs per share, on a 25% basis and 117,77M shares:
Silver has relatively more leverage on the NPV and NAV per share, being the majority of revenues of course. For the expanded 12 year scenario, this generated these two hypothetical tables:
It will be clear why there is a lot of potential for share price upside for Golden Arrow, as the expansion scenario shouldn’t cost a great deal, as the plant is already functional at 5,000tpd if desired. Besides the underground development it would mainly be an increase in total opex, as open pit mining increases by 20%. Even better would be increasing metal prices of course. But first up is the ramping up of Chinchillas to the 8y scenario at 4,000tpd, let’s see if SSR can make this work flawlessly within a short timeframe. I have no doubt about this as their reputation as operators is very robust, and recoveries so far have been excellent.
As Golden Arrow Resources is also quite busy to launch New Golden Explorations as their exploration spin-out, I was wondering what their plans would be regarding timelines of listing it, acquiring new assets and planning exploration programs. Management had this to say about these subjects: “A spin-out is being considered but market conditions will need to improve first. We are on the hunt for good advanced properties and are looking forward to plan our programs for the new Chilean acquisitions”.
Golden Arrow did the right thing not to raise at any price, but wait out the hard times, as they rightfully anticipated for better times around the corner. They had to throw in full warrants, but they raised no less than C$4.74M which is considerable for a small junior in any circumstances. Besides this, dilution will still be limited as the total share count will be 117,77M shares outstanding, which is not much for a producer, courtesy of the JV with SSR Mining of course. I am curious to see what part of cash flow comes the way of Golden Arrow Resources, based on a NAV per share basis things might look good. For the record, I didn’t sell any shares in order to participate in the last round of financing to get warrants, but bought more in the third tranche as it is my conviction silver play, which has some catching up to do compared to others these days. In my view cash flows could very well take care of this.
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, please subscribe to my free newsletter on my website www.criticalinvestor.eu, in order to get an email notice of my new articles soon after they are published.
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.