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Successful Junior Miner Sees Cash Flow

Source: Michael Sheikh   01/13/2022

Michael Sheikh explains what makes Guanajuato Silver Co. a unique opportunity and takes a look at five…

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This article was originally published by The Gold Report

Source: Michael Sheikh   01/13/2022

Michael Sheikh explains what makes Guanajuato Silver Co. a unique opportunity and takes a look at five other companies 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 last year enhancing its cash flow. Junior miners aren’t supposed to have cash flow, so that makes Guanajuato a very special exception that mining investors should pay keen attention to. 

Despite the exceptional operational success, the stock hasn’t really moved too much over the past year. This price stagnation could change as the company ramps up its production, continues in its exploration projects, and potentially makes some moves in the local area to take on some new mining projects that could synergize with their existing sites.

Junior mining used to comprise smaller operational mines but in recent decades the actual mining has largely been left to large-scale operations and thus bigger companies. There’s a ton of capital expenditures required for mining and for years companies can raise money and spend it while only really trying to prove whether there’s an economic mineral deposit to be mined later.

For instance, Kinross Gold Corp. (K:TSX; KGC:NYSE) recently acquired a junior miner called Great Bear Resources Ltd. (GBR:TSX.V; GTBDF:OTCQX) for $1.4 billion upfront, but various estimates suggest the company will need hundreds of millions—up to $700 million—in capex to build infrastructure and become fully operational.

And this comes only after spending years on-site and millions of dollars on exploration.

For any junior miner, $700 million is a daunting number especially when many have market capitalizations much lower than that.  Most junior miners have a simple plan to get acquired by a larger mining behemoth. For instance, Discovery Silver Corp. (OTCMKTS:DSVSF) recently announced the results of its preliminary economic assessment (PEA), which “positions Cordero [their project] as a Tier 1 silver asset.”

According to the company, the project would require “modest development capex of $368 M.”

But for Guanajuato, it’s a different story. The company acquired an already existing mine with onsite bulk material processing equipment for an aggregate of about $20 million (plus $50 million in milestones) after accounting for some improvements made to the facilities. And now they’re already producing from the existing shaft. To have an operational mine with such a low capital cost and a short time to production is truly a testament to the excellent allocation of invested capital.

But to understand the management’s excellent decision making and execution to date as well as catalysts that could continue to move shares much higher, one has to understand the history of the company and what the company can do with mergers and acquisitions, or business development in the future.

The History

Guanajuato Silver completed the purchase of its mining assets from another larger silver mining company just 8 months ago, in April of 2021. The asset had previously been purchased from AuRico (now Alamos Gold Inc. (AGI:TSX; AGI:NYSE)) for $200 million by Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) before being closed down after producing part of the mine.

Endeavor had plans to increase production from the mine, but as they churned through the wide parts of high-grade mineral, they could not continue to justify mining such tonnage with a declining average grade of silver and gold. And so they suspended El Cubo operations in 2019. In the end, their rationale for closing it was tied to the operational efficiencies of their mining equipment on site. The remaining mineralization of the mine consisted of a thin vein that is only 4.5ft wide but rich in mineralization. The industrial drum cutters used in the mine, as well as the mine plan, usually cut a path that is, for instance, 12 ft wide which introduced a lot of excess rock for processing. This lowered the grade of the ore to the point that it was not cost-effective to mine. Guanajuato Silver addressed this challenge by utilizing a cut and fill technique along with resue mining. The resue mining works by cutting a path along the vein and then removing the ore vein afterward to reduce the amount of rock outside the vein. 

Guanajuato decided to take over the project as their revaluation of the deposit showed that the high-grade mineralization was simply narrow in some areas, such that high-quality tonnage could be mined at a narrower width. But this supply wouldn’t and couldn’t bring the El Cubo processing equipment to maximum capacity. So, Guanajuato is supplementing that production with production from their other mine nearby called El Pingüico. And work is being done to see if the bulk materials from both can be mixed together as they potentially come from the same overall geological vein structure or fracture, thus having similar mineral properties allowing for the same process to be used to extract the gold and silver.

The great thing for Endeavor was that they got to remain somewhat exposed to the project without having to manage it, through part ownership of Guanajuato Silver. Currently, they’re the largest shareholder at over 10% ownership. This also is a testament to the legitimacy of Guanajuato Silver’s endeavors.

The El Cubo Site

The El Cubo site Guanajuato purchased is really something special. The area has hundreds of years of history as a mining hub and has a vibrant town close by. This means it’s easy to hire experienced local mining talent, which both ensure operations run seamlessly and that the local community and government support the company as operations are led by Mexican nationals and the company can help bring wealth into the area. In fact, Guanajuato is working with about 100 Mexican nationals in its operations.

Map of Guanajuato and Notable Mining Sites Nearby

The above map depicts the town of Guanajuato near two main mineral deposits—the Veta Madre (the “Mother Lode”), and another potentially anastomosing/contiguous (coming from the same fault, or branching from the same vein further down in the ground) region, the Villalpando Vein.

The company has mines at its sites, El Pinguico and El Cubo. The company’s current plan is to use existing stockpiles at El Pinguico (low grade at surface and medium grade underground) to use up excess capacity at their processing equipment at El Cubo mine while they ramp up El Cubo to its own max capacity.

Both sites together still probably won’t keep the processing line at max capacity, so Guanajuato recently announced that they’re taking silver and gold mineralized material from third parties:

“James Anderson, Chairman and CEO, said, ‘It is GSilver’s intention to use the approximately 20,000 tonne per month of excess capacity at the El Cubo mill to profitably process mineralized material from various potential sources in the Guanajuato area. Whether the business arrangement is designed as toll milling, raw material purchasing, or profit sharing, if it serves to contribute to our bottom line and helps to expand our presence in the 480-year-old mining camp of Guanajuato, then we will pursue it.’”

guanajuato silver
Stockpile at El Pinguico

Projecting High Rates Of Return

Guanajuato engaged an engineering firm to do a preliminary economic assessment of El Pinguico and El Cubo.

And this is really where it becomes clear that the Guanajuato Silver team are excellent capital allocators and will be able to drive strong returns.

Although their mines were active decades ago and some of the resources were depleted, there are other resources not mined yet and a significant amount of unexplored territory where there is possibly a large amount of medium and high-grade silver.

In fact, Guanajuato just released some encouraging drilling results from El Cubo.

The company’s economic assessment showed a projected internal rate of return (IRR) of 105%, which is extremely high. This is because the sizeable production the company is managing was made possible with such small capital investment in such a short period of time. Another competitor, Discovery Silver Corp (OTCMKTS: DSVSF), reported “excellent project economics” with a projected IRR of only 38% (but a higher NPV). The difference is that Guanajuato’s project basically will be able to finance aggressive exploration without significant dilution of the stock. And this exploration and any resources proved from it are not included in the PEA, just the El Pinguico stockpiles and preliminary El Cubo resources.

Potential Central Mexico Consolidation

Guanajuato might also use their cash flows for potential consolidation in the area. With excess capacity at El Cubo, it might make sense to either continue collaborating with other companies running smaller operations in the area or to revive old operations that are currently defunct.

The key thing to keep in mind, however, is that Guanajuato is unlikely to perform any M&A outside Mexico so that they can stay focused and continue executing in a timely and cost-effective manner, something quite uncommonly seen in small-cap companies. Really, any M&A should in some way synergize with existing strategies and operations.

Conclusion

Guanajuato Silver is really only priced based on its existing project. Should the company perform additional M&A or any exploration that would provide it with additional inferred or indicated resources, which could cause a rerating of shares sharply to the upside. With their main two projects existing along the “mother lode” that was the source of a gold rush 500 years ago, continuing strong operations until decades ago, and a new understanding of the geological complexes in the area, Guanajuato has unseen optionality for investors looking to capitalize on its programs before they are obviously proven. The company has been executing flawlessly and now is in a position of strength as it works toward steady, cash flow positive production. The only thing investors don’t know is whether Guanajuato will acquire a new project or use the money to explore existing claims. But since the management team has proven themselves to be prudent and savvy, this should be of no concern.

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Disclosures:

1) Michael Sheikh: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Company Name/None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies referred to in this article: None.  Funds controlled by Name of Company hold shares of the following companies mentioned in this article: Guanajuato Silver Co. I determined which companies would be included in this article based on my research and understanding of the sector. 

2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

4) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.  

 

 

 

( Companies Mentioned: AGI:TSX; AGI:NYSE,
OTCMKTS:DSVSF,
EDR:TSX; EXK:NYSE; EJD:FSE,
GBR:TSX.V; GTBDF:OTCQX,
OTCMKTS:GSVRF; TSX.V:GSVR,
K:TSX; KGC:NYSE,
)

tsx
nyse
otcqx
ax
tsxv
gold
silver
tsx-agi
alamos-gold-inc
alamos gold inc
tsx-edr
endeavour-silver-corp
endeavour silver corp
tsxv-gbr
great-bear-resources-ltd
great bear resources ltd

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Royal Bank of Canada Reiterates “C$8.00” Price Target for Alamos Gold (TSE:AGI)

Royal Bank of Canada set a C$8.00 price objective on Alamos Gold (TSE:AGI) (NYSE:AGI) in a research report released on Wednesday morning, BayStreet.CA…

Royal Bank of Canada set a C$8.00 price objective on Alamos Gold (TSE:AGI) (NYSE:AGI) in a research report released on Wednesday morning, BayStreet.CA reports. The firm currently has a sector perform rating on the stock.

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AGI opened at C$8.83 on Wednesday. Alamos Gold has a twelve month low of C$8.30 and a twelve month high of C$11.33. The company has a quick ratio of 1.87, a current ratio of 3.35 and a debt-to-equity ratio of 0.13. The company has a 50-day moving average price of C$9.51 and a 200 day moving average price of C$9.62. The company has a market cap of C$3.46 billion and a PE ratio of -142.42.

Alamos Gold (TSE:AGI) (NYSE:AGI) last released its quarterly earnings results on Wednesday, October 27th. The company reported C$0.13 earnings per share for the quarter, missing the consensus estimate of C$0.14 by C($0.01). The company had revenue of C$249.32 million for the quarter, compared to analysts’ expectations of C$282.06 million. As a group, sell-side analysts expect that Alamos Gold will post 0.56 earnings per share for the current year.

The company also recently declared a quarterly dividend, which was paid on Tuesday, December 21st. Stockholders of record on Tuesday, December 7th were paid a $0.031 dividend. The ex-dividend date was Monday, December 6th. This represents a $0.12 annualized dividend and a dividend yield of 1.40%. Alamos Gold’s dividend payout ratio (DPR) is -153.23%.

About Alamos Gold

Alamos Gold Inc, together with its subsidiaries, engages in the acquisition, exploration, development, and extraction of gold in North America, Canada, and Mexico. It also explores for silver and precious metals. The company’s flagship project is the Young-Davidson mine, which includes contiguous mineral leases and claims totaling 5,587 ha located in Northern Ontario, Canada.

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Raymond James Brokers Cut Earnings Estimates for Barrick Gold Co. (TSE:ABX)

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A number of other equities research analysts also recently weighed in on the stock. National Bank Financial raised their target price on shares of Barrick Gold to C$30.00 and gave the company a “sector perform” rating in a research note on Friday. decreased their price target on shares of Barrick Gold from C$32.00 to C$31.00 in a research note on Wednesday, November 17th. KeyCorp began coverage on shares of Barrick Gold in a research note on Friday, September 24th. They set a “hold” rating on the stock. UBS Group reissued a “buy” rating and set a C$25.00 price target on shares of Barrick Gold in a research note on Friday, October 15th. Finally, National Bankshares lifted their price target on shares of Barrick Gold from C$29.00 to C$30.00 and gave the stock a “sector perform” rating in a research note on Friday. Four research analysts have rated the stock with a hold rating, eight have issued a buy rating and one has given a strong buy rating to the stock. Based on data from MarketBeat.com, the stock presently has a consensus rating of “Buy” and an average price target of C$31.92.

Shares of ABX opened at C$24.32 on Friday. The firm’s 50 day simple moving average is C$23.99 and its 200 day simple moving average is C$24.52. The company has a market capitalization of C$43.27 billion and a P/E ratio of 17.13. The company has a debt-to-equity ratio of 16.06, a current ratio of 4.05 and a quick ratio of 2.85. Barrick Gold has a 1-year low of C$22.30 and a 1-year high of C$30.65.

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The company also recently announced a quarterly dividend, which was paid on Wednesday, December 15th. Stockholders of record on Tuesday, November 30th were issued a $0.111 dividend. This represents a $0.44 annualized dividend and a dividend yield of 1.83%. The ex-dividend date was Monday, November 29th. Barrick Gold’s dividend payout ratio is 25.35%.

Barrick Gold Company Profile

Barrick Gold Corporation engages in the exploration, mine development, production, and sale of gold and copper properties. It has ownership interests in producing gold mines that are located in Argentina, Canada, Côte d’Ivoire, the Democratic Republic of Congo, Dominican Republic, Mali, Tanzania, and the United States.

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Cameco Company Profile

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