RE: Objective Capital Research
https://www.sohoresources.ca/pdf/Objective_Capital_Update_July2011.pdf
Soho Resources has emerged from the recession with renewed vigour. Price chart (C$)
The company intends to press ahead with development of its Tahuehueto
polymetallic project in Durango, Mexico, where Soho has delineated a
substantial mineral resource of gold, silver, zinc, lead and copper in several
zones along a large principal structure. A preliminary economic assessment last
year yielded robust economics and Soho recently commenced data collection to
support a prefeasibility study for a potential open pit and underground mine at
Tahuehueto. Although Tahuehueto remains Soho’s focus, the company acquired
the Jocuixtita silver project in Sinaloa, Mexico, in 2009. Soho intends to continue
exploration at Jocuixtita concurrently with development of Tahuehueto.
UPDATE
• Soho has a substantial mineral resource delineated at Tahuehueto
Previous drilling by Soho allowed the company to delineate a significant
mineral resource at Tahuehueto. The project currently hosts a measured
and indicated, NI 43-101-compliant mineral resource of 7.38 million tonnes,
averaging 2.1 grams of gold and 35 grams of silver per tonne, as well as 2.01%
zinc, 1.06% lead and 0.28% copper. The deposit hosts a further inferred
resource of 4.87 million tonnes, averaging 1.06 grams of gold and 31.8 grams
of silver per tonne, as well as 2.26% zinc, 1.23% lead and 0.23% copper.
Potential for further discovery remains excellent. Accordingly, we model an
additional 7.0 million tonnes of hypothetical mineralisation into our model.
• Soho has commenced prefeasibility data collection at Tahuehueto
Soho has recently commenced data collection in preparation of a prefeasibility
study of Tahuehueto that will be based on a model that includes both open pit
and underground mining. We previously noted the potential for conducting
open pit mining and are encouraged to see the company’s preliminary
economic study (PEA), completed last year, incorporate an open pit design at
El Creston. The prefeasibility study will pursue the potential for open pit mining
further, including a possible second open pit at the Cinco de Mayo zone.
Hypothesised metals prices
SOHO
PEA
Current
Spot
Objective
Model*
Gold 965.81 1490.75 1031.40
Silver 15.38 35.08 15.00
Zinc 0.88 0.95 0.91
Lead 0.95 1.11 0.64
Copper 2.92 3.98 2.57
* 10-year average in constant 2011 dollars
Soho Resources Corp (SOH.V)
Current fair value of equity
Expected value C$90.3m
Value per share C
.47
Derisked upside potential*
Our core scenario C$1.10
Our optimistic scenario C$1.59
Our pessimistic scenario C
.68
Maximum potential C$2.28
*potential assuming projects reach permitting
Company details
Quote
Shares
- TSX SOH.V
- Frankfurt SQ8.F
- OTC QX SOHFF
Hi-Lo last 12-mos. (C$) 0.15 - 0.04
Shares issued (m) 187.5
Fully diluted (m) 218.8
Market Cap’n (C$m) 20.6
Website: www.sohoresources.ca
Analyst:
Will Purcell
will@objectivecapital.co.uk
objectivecapital 2
Expected fair value of Soho Resources
Scenario
Risked
mineable
resources
(m tonnes)
Tahuehueto
property
value
(US$m)
SOH
Valuation
(US$m)
Value
per share
(C$)
Base case outlook 8.0 105.4 88.2 0.47
Value for scenarios of further exploration success
Full proved up 13.9 143.6 121.7 0.65
Optimistic outlook 11.8 140.4 119.0 0.63
Pessimistic outlook 5.2 79.0 66.3 0.35
Value with no further exploration success
Current resource estimate 4.4 87.1 73.3 0.39
Notes:
- ‘fully proven up’ scenario assumes that current mineable resource
estimates are upgraded to ‘Proven’ status
Commodity assumptions
Gold prices are assumed to be mean reverting based on
Historic long run real level at current prices 710 US$/oz
Avg time to revert to mean 8.0 years
Volatility 25%
Inflationary price growth 2.5%
Expected gold price (inflation-adjusted) (US$/oz)
Components of Soho Resources’ entity value
Tahuehueto property
US$105.4m
Shareholders
US$90.3m
US
.48 per share
C
.47 per share
Options and warrants
US$11.2m
Fair value summary (US$m)
Scenario Base Pessimistic Optimistic
Property portfolio
- Tahuehueto 105.4 79.0 140.4
- Jacuixtita 1.5 1.5 1.5
Total 106.9 80.5 141.9
Less: overhead 6.1 6.1 6.1
Expected value of portfolio 100.8 74.4 135.7
Add: other investments 0.0 0.0 0.0
Add: starting cash + new funds 0.7 0.7 0.7
Total current value for firm 101.5 75.1 136.4
Less: bank & other debt 0.0 0.0 0.0
Total value to equity claims 101.5 75.1 136.4
Less: warrants and options 11.2 7.3 15.9
Ordinary equity holders 90.3 67.8 120.5
Value per share (US$) 0.48 0.36 0.65
Value per share (C$) 0.47 0.35 0.63
Sensitivity to market assumptions …
Long run real gold price (US$/oz) 660 685 710 735 760
Value (C$/share) 0.44 0.46 0.47 0.49 0.50
Change in value (%) -6% -3% +3% +6%
Time for gold price to revert to mean (years) 6 7 8 9 10
Value (C$/share) 0.43 0.45 0.47 0.49 0.51
Change in value (%) -9% -4% +4% +8%
Volatility of gold price (%) 20% 25% 30% 35% 40%
Value (C$/share) 0.45 0.47 0.49 0.52 0.55
Change in value (%) -3% +4% +10% +16% +16%
Interest rate (%) 2.9% 3.1% 3.3% 3.5% 3.7%
Value (C$/share) 0.48 0.47 0.46 0.45 0.44
Change in value (%) +2% -2% -4% -7% -7%
Sovereign risk premium (years) 0.00% 0.50% 1.00% 1.50% 2.00%
Value (C$/share) 0.53 0.50 0.47 0.44 0.42
Change in value (%) +12% +6% -6% -11%
Tahuehueto valuation (US$m)
Scenarios for exploration success Base Optimistic Pessimistic
Net value of production 387.9 387.9 387.9
Expected mining success* 72% 88% 59%
Expected net value of production 278.5 343.2 229.6
Add: tax shield on depreciation charge 20.5 20.5 20.5
Less: development & operational capex 86.6 86.6 86.6
Value of mining operations 212.3 277.0 163.5
Probability of putting into production** 54% 54% 54%
Expected value of deposit 114.6 149.6 88.3
Less:
- expect pre-development costs*** 4.4 4.4 4.4
- further exploration costs **** 4.8 4.8 4.8
Expected value of project 105.4 140.4 79.0
effective risk haircut 64% 54% 73%
Ownership 100% 100% 100%
Soho Resources’ share 105.4 140.4 79.0
* portion of reserve/resource expected to be converted to a mineable
resource, probability-weighted for our confidence they will be proven-up
** probability of successfully completing pre-feasibility, full feasibility and
required permitting and actual construction in realistic timeframe
*** shown as expected value of being incurred after allowing for likelihood
of reaching each development stage
**** present value
Tahuehueto sensitivities to operating assumptions …
Change in Gold & Silver recovery rate (%) -5% -2% 0% 2% 5%
Value (C$/share) 0.39 0.44 0.47 0.50 0.55
Change in value (%) -16% -6% +6% +16%
Operating Costs (US$ per milled tonne) 38 40 42 44 46
Value (C$/share) 0.50 0.47 0.44 0.41 0.38
Change in value (%) +7% -7% -13% -20%
Increase in Capital Cost (%) +0% +10% +20%+30%+40%
Value (C$/share) 0.47 0.45 0.44 0.42 0.40
Change in value (%) -4% -8% -11% -15%
Other property
US$1.5m
Soho Resources
Equity Value
US$101.5m
(after overhead and cash)
3 objectivecapital
The PEA indicated an internal rate of return of 31 percent and a 27-month
payback, based on capital costs of US$89.1m. The PEA projected cash flow
over the life of the project at US$184.2m, or US$109.6m when discounted
at 5%. The study contemplated a processing rate of 2,750 tonnes per day, in
excess of our 2,000-tonne-per-day estimate as a result of the open pit plan.
These economics were achieved using conservative metal prices considerably
lower than currently prevail, although they are in line with our own estimate.
The potential for higher metals prices provides significant upside potential.
The PEA generated particularly robust economics at current metals prices.
According to Soho management, the IRR rises to 56 percent and the net
present value, discounted at 5%, rises to US$300m, with capital cost payback
within 1.5 years, using spot metal prices as of February 16, 2011.
• Prefeasibility drilling has commenced at Tahuehueto
Soho recently recommenced work at Tahuehueto. The company envisages
a drill programme designed to provide infill drill data as well as geotechnical
information for the prefeasibility study. The company will employ one drill but
plans to add a second when funds permit.
The drilling and data collection phase of the prefeasibility programme will take
an estimated four months. The engineering and analysis of the data will require
a further four months, leaving Soho potentially in a position to complete its
prefeasibility study in early 2012.
• New infrastructure could provide an added boost to a Tahuehueto mine
The Mexican government is constructing a new paved, two-lane highway that
connects northwestern Durango State with Tamazula and Culiacan, and to
the Pacific coast via a more direct and easier route than previously existed.
Soho’s previous plan involved transport of its concentrate over a 185-kilometre
gravel road requiring extensive upgrading, thence another 400 kilometres to
a Penoles smelter in Torreon. The new route will pare nearly 200 kilometres
from the distance and require significantly less capital cost. Further, the new
route, via Topio, has the added bonus of putting Tahuehueto within closer
reach of Durango’s power grid, which is currently about 30 kilometres distant.
Soho had initially contemplated acquiring power from Tepehuanes, nearly
200 kilometres distant.
What Soho could be worth - now and in the future
Source: Objective Capital
objectivecapital 4
• Successful fundraising will be key to timely advancement of Tahuehueto
Although the recession forced Soho well off its timetable, the company has
been able to successfully raise exploration funds. Early this year the company
sold 30.58 million shares at C
.10, with insiders accounting for 4.76 million
shares. The placement was well received within the financial community, with
investment bankers purchasing another 3.2 million shares for their accounts.
Soho requires more cash within the next several months, if it is to stick to its
prefeasibility timetable. Management indicates that successful completion of a
private equity placement sufficient to cover costs of the study is an immediate
priority. The reception received by Soho’s previous placement provides some
comfort the company will be able to raise the necessary funds. Further, the
company’s cash requirements are modest in the short term.
• Soho is proposing a C
.4m budget for its Jocuixtita silver project
In mid-2009, Soho acquired a second prospective precious metals property
in Mexico, at Jocuixtita, in Sinaloa, Mexico, through the staged payment of
US$1.0m in cash and stock over six years. Several due diligence channel
samples collected on the property yielded assays of up to 867 grams of silver
per tonne, with encouraging levels of gold, lead and zinc. The samples suggest
silver accounts for 50% of the potential rock value at Jocuixtita, with zinc and
lead also major contributors.
Soho has commenced its first phase of exploration at Jocuixtita. The proposed
programme includes geological mapping of exposed mineralisation and
drilling, commenced in late May, at two main zones, La Salvadora and El
Carmen. These features, the sites of Soho’s due diligence grab samples, lie 700
metres apart along a 3,000-metre structure. The budget for the proposed first
phase of the 2011 exploration programme is C
.4m.
• Our valuation has increased despite major shifts in its individual components
Clearly, the recession exerted a powerful negative influence on all resource
companies and Soho placed its projects on care and maintenance.
Nevertheless, the requirement to fund the company through and in the
immediate wake of the recession resulted in significant shareholder dilution.
Since mid-2009, the company’s shares outstanding rose nearly 50%, from
125.9 million to 187.5 million shares, with a further potential overhang
of 31.2 million share purchase options and warrants. This dilution has a
correspondingly direct negative impact on our valuation.
The US dollar has weakened against its Canadian counterpart by approximately
15 per cent since our previous valuation of Soho in mid-2009. The company’s
revenues and most of its expenses are valued in US dollars, whilst its stock
trades in Canadian dollars, with a resulting negative impact on our valuation.
This is partially mitigated by lower interest rates.
5 objectivecapital
On June 22, Soho arranged a non-brokered private placement of up to
15 million shares priced at C
.10. One-half share purchase warrant
will accompany each share, exercisable at C
.13 during the first year
and C
.175 during the second year. The funds to be raised are to cover
continuing prefeasibility data collection at Tahuehueto, to expand a drilling
programme at Jocuixtita from 2,000 metres to 3,000 metres, and for general
corporate expenses.
All other major factors appear positive. Metals prices have risen substantially
since mid-2009 and are at or near new all-time highs. Although we model all
metals prices as reverting toward their long-term, inflation-adjusted means, our
model now reflects significantly higher metals prices than earlier.
In particular, the price of gold, which has averaged US$1,450 per ounce this
year, is more than double the long-term inflation-adjusted mean of US$710
per ounce. Although we see nothing material to suggest a quantum shift in the
gold market that would prevent the price reverting toward its long-term mean,
the lengthy mean time to revert and comparatively low volatility rates suggest
continuing inflation could keep the real price the long-term average (US$710)
when expressed in current dollars. In fact, our modelling suggests the price will
remain above US$1,100 per ounce when expressed in future dollars.
Further, should metals prices hold near current levels or continue to rise, the
value ascribed to Tahuehueto would increase significantly.
We have decreased our capital cost estimate from US$150m to US$100m,
based on the company’s PEA, which incorporates contract mining, negating the
need to procure and maintain a substantial fleet of surface and underground
vehicles and equipment. Further, the PEA treated all underground development
as an operating expense, reducing capex further. Our estimate nevertheless
reflects a greater degree of conservatism than the PEA assumed.
Our operating cost estimate has declined from US$50 per tonne to US$40
per tonne to reflect the impact of open pit mining versus the previous model,
which assumed mining would be entirely by underground methods.
• Our valuation of Soho rises to C
.47 per share
Based on these developments, our base-case valuation of Soho Resources
increases from C
.35 to C
.47 per share, a quite encouraging result given
the substantial shareholder dilution incurred since mid-2009. In fact, our more
optimistic assessment, which assumes higher probabilities of exploration
success, increases to C
.63 from C
.44 per share.
Further, the upside potential of Soho becomes apparent at future stages
of development. Assuming success at all stages through feasibility and
permitting, our base-case and optimistic assessments rise to C$1.10 and
C$1.59 respectively, compared with our earlier estimates of C
.85 and
C$1.22 respectively.
objectivecapital 6
Risked mineable resource assumptions
Reserves Probability Tonnes (m)
Proven 90% 0.0
Probable 50% 0.0
Total 0% 0.0
Resources Conversion Probability Tonnes (m)
Measured 80% 90% 3.3
Indicated 80% 50% 4.1
Inferred 80% 10% 4.9
Hypothesised 80% 0% 7.0
Total 80% 28% 19.2
Mineable resource Tonnes (m)
Mineable resource 15.4
Risked mineable resource Tonnes (m)
Current classification 4.4
Scenarios for exploration success
- base case 8.0
- optimistic case 11.8
- pessimistic case 5.2
Notes:
- mineable resource have been estimated as reserves plus the portion of resources that would be
expected to convert to reserves considering deposit type and likely grade variability
- risked mineable resource refers to the various classes of resource/reserve weighted by their
assumed confidence level
Proforma Tahuehueto property profit and loss
Year ending February
Proforma P&L (US$m) ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20
Gross revenues 0.0 0.0 122.1 169.1 159.0 144.1 143.3 130.4
Operating costs 0.0 0.0 41.3 68.6 68.7 67.9 69.1 68.4
Operating profit 0.0 0.0 80.8 100.5 90.3 76.2 74.2 61.9
Depreciation 6.0 6.0 7.3 8.4 8.5 8.5 8.6 8.7
Administrative costs 0.0 0.0 0.9 1.7 1.8 1.8 1.9 1.9
EBIT -6.0 -6.0 72.5 90.4 80.1 65.8 63.7 51.4
Assumptions
Capital costs (US$m) 60.0 40.0 1.3 2.4 2.5 2.5 2.6 2.7
Tonnes ore mined (millions pa) 0.0 0.0 0.7 1.0 1.0 1.0 1.0 1.0
Payable metal
- Gold (000 oz) 0 0 38 54 52 47 47 43
- Silver (000 oz) 0 0 782 1,117 1,073 983 983 894
- Zinc (000 lb) 0 0 33,163 47,376 45,481 41,691 41,691 37,901
- Lead (000 lb) 0 0 17,714 25,306 24,294 22,269 22,269 20,245
- Copper (000 lb) 0 0 4,005 5,722 5,493 5,035 5,035 4,577
Source: Objective Capital
7 objectivecapital
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Objective Capital
Will Purcell
Will has been involved in the resource sector
for 30 years in a variety of roles. Since the
late 1990s, he has been active in assessed
mineral resource investment projects. Will has
a B. Math degree from the University of
Waterloo in Ontario.
About our relationship with Soho Resources Corp
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Financials
Profit and loss
Year ending February (C$m) 2009E 2010E 2012E 2013E 2014E 2015E
Revenues — — — — — 119.3
COGS — — — — — (41.3)
Gross profits — — — — — 78.0
Administrative Costs (1.3) (1.4) (1.4) (1.4) (1.5) (1.5)
EBITDTA (1.3) (1.4) (1.4) (1.4) (1.5) 76.5
Depreciation & amortisation (0.0) — — (5.9) (5.9) (7.1)
EBIT (1.3) (1.4) (1.4) (7.3) (7.3) 69.4
Interest 0.0 (0.0) 0.1 (3.2) (7.9) (7.5)
EBT (1.3) (1.4) (1.3) (10.5) (15.3) 61.9
Tax paid — 0.5 0.5 3.6 5.2 (21.1)
Earnings (1.3) (0.9) (0.9) (6.9) (10.1) 40.9
Dividends — — — — — —
Retained earnings (1.3) (0.9) (0.9) (6.9) (10.1) 40.9
Cashflow statement
Year ending February (C$m) 2009E 2010E 2012E 2013E 2014E 2015E
EBIT (1.3) (1.4) (1.4) (7.3) (7.3) 69.4
Depreciation 0.0 — — 5.9 5.9 7.1
Stock-based Compensation 0.3 — — — — —
Gains & Writedowns (0.0) — — — — —
(Increase) decrease in receivables 0.1 — — — — (17.9)
(Increase) decrease in inventory (0.0) — — — — (5.0)
Increase (decrease) in payables 0.1 — — — — 6.2
Net cash from Ops (0.9) (1.4) (1.4) (1.4) (1.5) 59.9
Tax paid — 0.5 0.5 3.6 5.2 (21.1)
Dividends — — — — — —
Net interest recieved (paid) 0.0 (0.0) 0.1 (3.2) (7.9) (7.5)
New equity 1.3 0.7 10.0 40.0 40.0 5.0
New (deposits) borrowings — — — 90.0 30.0 (50.0)
Capital expenditure (0.8) (0.5) (5.0) (58.6) (39.1) (1.3)
Net cash from financing 0.5 0.7 5.5 71.7 28.2 (74.8)
Net increase (decrease) in cash (0.4) (0.7) 4.1 70.3 26.7 (14.9)
Balance sheet
Year ending February (C$m) 2009E 2010E 2012E 2013E 2014E 2015E
Fixed assets at NAV 20.3 20.8 25.8 78.6 111.8 106.0
Cash 0.3 (0.5) 3.7 74.0 100.7 85.7
Receivables 0.1 0.1 0.1 0.1 0.1 18.0
Inventory 0.0 0.0 0.0 0.0 0.0 5.0
Less Payables (0.7) (0.7) (0.7) (0.7) (0.7) (6.9)
Net current assets (0.3) (1.0) 3.1 73.4 100.1 101.8
Less loans — — — (90.0) (120.0) (70.0)
Capital employed 20.0 19.8 28.9 62.0 91.9 137.8
Represented by
Shares in issue 38.2 38.9 48.9 88.9 128.9 133.9
Add retained profit
Prior periods (16.8) (18.1) (19.0) (19.9) (26.8) (36.9)
This period (1.3) (0.9) (0.9) (6.9) (10.1) 40.9
Shareholders’ funds 20.1 19.9 29.0 62.1 92.0 137.9
Source: Objective Capital
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