Why Did Silver Standard Resources Acquire A Small Stake In..
Why Did Silver Standard Resources Acquire A Small Stake In Golden Arrow Resources?
On June 4, Silver Standard Resources (NASDAQ:SSRI) announced the acquisition of an 8% stake in Golden Arrow Resources Corporation (OTC:GARWF). It is not a big deal at present but, in my opinion, this transaction could be a starting point for much closer cooperation between both companies. In this article, I would like to discuss a number of factors standing behind this announcement. Let me start from a short description of both players.
Silver Standard Resources
Silver Standard Resources used to be a medium-sized silver producer, but after the acquisition of the Marigold Mine in 2014, the company Today produces more gold than silver.
Currently, SSRI owns and operates two mines:
- Pirquitas – It is an open pit mine located in the Province of Jujuy, northern Argentina. Pirquitas’ Mineral Reserves (as of December 31, 2014) comprise of 40.8 million ounces of silver (of which 2.8 million ounces is stockpiled) and 59.4 million pounds of zinc. Mineral Indicated Resources (inclusive of Mineral Reserves) are estimated at 97.8 million ounces of silver. In 2014, the Pirquitas mine produced 8.7 million ounces of silver, which means life of mine of 5 years.
- Marigold – It is an open pit mine located in Humboldt County, Nevada, USA. This operation was acquired from Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX) in 2014. Marigold’s Mineral Reserves comprise of 2.32 million ounces of gold. Mineral Resources (inclusive of Mineral Reserves) are estimated at 4.16 million ounces of gold.
Golden Arrow Resources
Golden Arrow Resources is a mineral explorer focused on identifying, acquiring and advancing precious and base metal discoveries in Argentina. Currently, the company is developing its flagship project, Chinchillas, located in Jujuy, Argentina. The Chinchillas’ Indicated Resources are estimated at 72.3 million ounces of silver; additionally, the deposit comprises of 40.2 million ounces of silver classified as Inferred Resources.
Although both companies did not disclose any details of the possible cooperation, it is rather obvious that in the case of Pirquitas and Chinchillas such cooperation would make sense for both players. Below I discuss the main factors standing behind this thesis:
Pirquitas and Chinchillas are close to each other
Both properties are located in the province of Jujuy, Argentina. The close vicinity of Chinchillas and Pirquitas has been confirmed in the Preliminary Economic Assessment (PEA) Update prepared for Golden Arrow. Let me cite this document (page 128):
“Silver Standard Resources Inc.’s Pirquitas silver-zinc mine is located 30 kilometers to the southwest of the Chinchillas Project in Jujuy province.”
In my opinion, because Chinchillas is so close to Pirquitas, it is possible that part of the Chinchillas operations (mainly processing) could be performed at the Pirquitas site. If I am right, the capital expenditures on construction of the Chinchillas mine could be largely reduced.
Both properties share similar geologic characteristic.
It is much easier to develop and operate a property which you know very well. SSRI, with its big experience in operating Pirquitas, is an ideal candidate for an operator of Chinchillas. Let me cite the PEA once again:
“As outlined in Section 8, Pirquitas and Chinchillas share some geologic characteristics. The host rocks and mineralization in the Mantos and Socovon Basement zones at Chinchillas are similar in style to the Pirquitas deposit mineralization. As such, the Pirquitas deposit provides an important exploration model for the Chinchillas Project.”
Chinchillas will be an open pit mine – similar to Pirquitas
Mineralization at Chinchillas starts at surface. What is more, the mineralized zones are flat and extended. The core silver mineralization is located in the co-called Silver Mantos Zone. According to the PEA:
“Shallow disseminated silver mineralization occurs within clay altered pyroclastic breccias and tuffs. This is concentrated in layers or “mantos” that average greater than 20 meters in thickness and aresituated between the surface and 200 meters depth. Recent drilling highlighted a significant new mantos zone at depth (165 to 195 meters) that remains largely unexplored and open to expansion.”
This feature, plus the expected low strip ratio of 2.4:1 (defined as waste rock/ore) is the leading factor favoring open pit operations.
Mineral Resources at Pirquitas and Chinchillas are similar in size
The Chinchillas resources comprise of 72.3 million ounces of silver, while Pirquitas has 97.8 million ounces of silver. Therefore, both operations should be of a similar scale.
The Chinchillas project is economically attractive
The table below presents the project’s basic economic measures:
source: Preliminary Economic Assessment Update (page 123)
As the table shows, using base case metal prices of $22 per ounce silver, the project should generate an after-tax NPV of $225.5 million (discount rate of 8%). At such a silver price, an internal rate of return (IRR) is estimated at 24.3%.
What is more, even at much lower prices of silver, the project should generate a positive NPV. For example, at the silver price of $17 per ounce, NPV should stand at $90.2 million (IRR of 14.9%).
Apart from that, Chinchillas should be a low-cost operation – according to the PEA, the Chinchillas mine should produce silver at cash cost of $9.22 per ounce.
Silver Standard is able to finance Chinchillas’ construction
According to the PEA, pre-production capital needs are estimated at $237 million (pre-stripping, mining capital costs, process plant, infrastructure). It is a lot of money and Golden Arrow does not have sufficient capital to finance construction of Chinchillas. At the end of the first quarter 2015, the company had only $0.44 million in cash. Because Golden Arrow does not operate any mine, in 1Q 2015, the company reported a negative cash flow from operations of $1.6 million.
As for Silver Standard – as of March 31, 2015, it had $175.6 million in cash and $91.5 million in marketable securities. Apart from that, the company had $30.0 million in other current financial assets (it is mainly an equity stake in Pretium Resources (NYSE:PVG)). It means that liquid or quasi-liquid assets are standing at $297.1 million. Additionally, even in such an unfriendly, low silver price environment, in 1Q 2015, Silver Standard was able to generate $31.7 million in cash flow from operations (excluding working capital issues). It means an annual cash flow from operations of $126.8 million. Because in 2015 the company plans to spend $55 million ($30 million in capital expenditures and $25 million in capitalized stripping costs) on exploration and development, therefore free cash flow should be around $70 million.
Looking at these figures, I am sure that Silver Standard is able to finance construction of the Chinchillas mine.
Silver Standard Resources probably aims at acquiring Golden Arrow
Currently, Silver Standard has an 8% stake in Golden Arrow. In my opinion, SSRI will probably try to gain control over Golden Arrow through acquisition of at least 50% of Golden Arrow’s shares in total. Simply put, if SSRI would be interested in acquiring the Chinchillas property only, it would not buy a minority stake in Golden Arrow.
On the other hand, a simple speculation to buy Golden Arrow shares and then sell it at higher prices does not make any sense. Golden Arrow is not able to finance the Chinchillas construction on its own. Therefore, acquiring an 8% stake in the company, which is not able to go ahead with its flagship project, does not change anything.
Therefore, the only sensible solution for SSRI is to acquire a much greater stake in Golden Arrow. Please note that Golden Arrow has quite a big portfolio of other projects located in Argentina – these projects could be of some interest to SSRI as well.
Summary
In my opinion, the acquisition of Golden Arrow’s shares by Silver Standard is a starting point for a takeover of Golden Arrow by SSRI. Through this acquisition, Silver Standard expressed its interest in the Chinchillas property, which is a flagship project of Golden Arrow. This property bears many similarities to the SSRI flagship silver operation, the Pirquitas mine. Apart from that, Chinchillas offers attractive economics for any silver mining company. Last but not least, Silver Standard Resources is able to cover the Chinchillas construction costs.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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