RE:Seeking Alpha article Thales42,
I didn’t dismiss this author at all. In fact, I took this piece very seriously, because the author got you to conclude that Americas Silver is not cash flow positive and is burning cash at current low commodity prices! That conclusion is incorrect IMHO.
So let’s break apart Simple Digressions arguments one by one.
First argument: San Rafael is not performing according to the PFS initial estimates:
“Note that the head grades and recoveries reported at the Los Braceros mill (a processing facility treating the San Rafael ore) have been substantially lower than initial estimates planned for the first year of operations and disclosed in the preliminary feasibility study for San Rafael. The only positive exception is the recovery ratio for silver, which has been higher than estimates (50.8% vs. 47.6%).”
“Now, lower head grades and recoveries result in lower production. Let me take zinc as an example. Over the last three quarters of 2018, the mine processed 395 thousand tons of ore, producing 24.0 million pounds of zinc. However, applying initial estimates for zinc (head grade and recovery of 3.93% and 83.8%, respectively), the mine was supposed to deliver 28.7 million pounds of zinc. Taking into account that this year Americas Silver has been selling zinc at an average price of $1.37 per pound, the company has "lost" revenue of $5.4M (assuming the "payability" ratio of 84.6% for zinc). In my opinion, it is quite a lot of money (to remind, in 2018 YTD the total revenue delivered by two operating mines was $49.5M).”
“Further, I realize that the company encountered a number of technical problems at San Rafael (unplanned mill repairs), but these issues have nothing to do with the head grades and recoveries. Hence, I have lost my initial enthusiasm for this operation.”
The problem with this argument is that it ignores the mine plan which called for production from the low grade areas first with development arriving at the Main Zone in month 12. And guess what, the underground development has reached the Main Zone which contains 2.33 million tons of ore grading 4.79 g/t zinc, 2.08% lead, and 65 g/t silver which are increases of 36 percent, 50 percent, and 50 percent respectively for zinc, lead, and silver. So why is Simple Digressions making these arguments at this point in time? And to add to that point, Simple Digressions leaves out the fact that the first year production assumption for San Rafael was 1400 tpd, and the plant is already running at close to 1800 tpd, months ahead of schedule.
If base metal prices stay at current levels of $1.15/lb of zinc, 87 cents/lb of lead, and if silver stays at $14.50, then USAS makes a profit of $1.92 million USD in Q4 or about 4 cents per share EPS. That is with zinc grades rising to 4 percent and lead at 1.8 percent. If they get into average grade Main Zone ore, then the expected profit would increase to $3.84 million USD or 9.2 cents per share EPS.
Those numbers assume that Galena loses $1.1 million USD per quarter, and that the metal prices stay where they are now.
The second argument was that USAS didn’t include the $6 million dollar payment to Hochschild in current financial liabilities. My understanding is that Hochschild agreed to defer that payment, and use the money to advance development projects. So this is a non issue.
Third argument: USAS is cash flow negative. True this quarter, only because of a $3.3 million USD derivative pricing adjustment due to the drop in metal prices from the previous quarter. USAS has been cash flow positive both in Q1 and Q2 2018, and given the increasing ore grades in the Main Zone, it is unlikely that we will see a derivative pricing adjustment large enough to make cash flow go negative in future quarters.
Fourth argument was that Galena burns $6.80 USD for each silver equivalent ounce sold. So let’s check the math: AG Equivalent silver sales year to date = 1.609 million ounces AgEq Galena Loss YTD = $3.748 million USD, so that works out to $2.32 USD per ounce. That is not as bad as Simple Digressions makes it out to be, but it is a valid point. IMHO, a higher priority should be placed on fixing and improving existing operations.
Simple Digression’s last and most valid point about the funding required to bring Relief Canyon into production –Where does the money come from? However, I don’t see Americas Silver having any difficulty in finding a funding source for $22 million USD, and I see the acquisition of Pershing Gold as the first step in USAS becoming a precious metals producer. The move into the gold space is welcome and long overdue.
The larger issue with Relief Canyon is the negative cash flow for the first year of operation. Would it not make more sense to spend $8 million USD and have a 1000 tpd copper flotation circuit at Los Braceros processing 120 Zone ore and making $10 million in profit per quarter 6 months from now. Then use the cash flow from 120 zone and San Rafael to fund Relief Canyon.