2nd try Bayhorse Silver Inc. (TSXV: BHS / OTC: KXPLF / FRA: 7KXN) – Maiden Resource Estimate Confirms Very High Grade Silver
Sector/Industry: Junior Resource www.bayhorsesilver.com
Market Data (as of November 13, 2018) Current Price C$0.11 Fair Value C$0.68 Rating* BUY Risk* 4 52 Week Range C$0.09 - C$0.27 Shares O/S 78,143,605 Market Cap C$8.60 M Current Yield N/A P/E (forward) N/A P/B N/A YoY Return -53.2% YoY TSX -18.2% *see back of report for rating and risk definitions. * All figures in C$ unless otherwise specified.
Highlights Bayhorse Silver Inc. (“company”, “BHS”) has made significant advancements since our initiating report in April 2018. The company had put its 100% owned Bayhorse Silver mine back into production earlier this year. In September 2018, the company announced a maiden inferred resource estimate of 292,300 short tons at 21.65 opt for 6.33 Moz of contained silver. The estimate’s tonnage was 76% higher than the historic resource estimate. The project was also assigned an additional exploration target of 200,000 to 250,000 tons, at 10 to 20 opt, for 2 Moz to 5 Moz of contained silver. The company has extracted 1,200 tons of bulk sample for test work. Results from four metallurgical samples returned high-grade silver ranging between 91.2 oz – 186.2 oz. BHS is using ore-sorting and Dense Medium Separation technology to upgrade material to over 160 opt for direct shipping At the end of Q2-2018, the company had a working capital of -$1.36 million. Since then, the company raised $0.60 million, and is currently pursuing a $0.50 million financing. Financing is critical at this point, for further advancement.
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Key Developments
Since our initial report in April 2018, the company has completed the following:
an initial NI 43-101 resource estimate extracted 1,200 tons of bulk sample for test work completed an all-weather surface storage area for mineralized material constructed a raise up into mineralization commenced the processing of extracted mineralized materials through an ore-sorter
Since taking over the project in 2014, the company has spent US$6.10 million on the Bayhorse Silver mine rehabilitation work, testing, and acquisition / commissioning of equipment, to bring the mine back into production. The mine, located in Baker County in eastern Oregon, is the state’s only silver mine. The property is easily road accessible. It is approximately 12 km north of Huntington, and 55 km northwest of Ontario, Oregon (population of 11,366 as per the 2010 census). The mine site is connected to the local power supply grid. The company currently trucks water to the mine site, and intends to drill a water well at the mine site.
Property Location
Source: Company
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Maiden Resource Estimate
In September 2018, the company announced a maiden inferred resource estimate of 292,300 short tons at 21.65 opt / 673.4 gpt for 6.33 Moz of contained silver, based on a 7.5 opt cut-off grade. Considering the company spent US$6.10 million to bring the mine back to production, the initial resource estimate reflects a cost of under US$1 per contained silver ounce.
The following table shows the resource estimate at various cut-off grades.
Inferred Resource Estimate
US$15 per oz silver / 90% recovery / underground mining and processing cost of US$100/ton Source: Company
The estimate was based on 364 channel / drill hole samples. Although there is significant copper and zinc mineralization, historic data were not sufficient to add copper or zinc to the resource estimate. The resource was estimated across a strike of 800 ft (245 m), width of 200 ft (60 m), and a thickness of 23 ft (7 m). Mineralization on the project is primarily epithermal and occurs within fracture-controlled veins and replacements of sulfide and sulfosalt mineralization. The technical report also suggested an additional exploration target of 200,000 to 250,000 tons, at 10 to 20 opt, for 2 Moz to 5 Moz of contained silver.
High grade, silver/copper mineralization from 900 feet inside the Bayhorse Silver Mine
Source: Company
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Sample Results Confirming High-Grade
The maiden estimate was 76% higher than the historic estimate (1981) of 166,208 tons grading 17 to 20 opt, at the same cut-off grade of 7.5 opt, containing 2.83 Moz to 3.32 Moz silver.
The company’s immediate objective is to expand the inferred resource, as well as evaluate the potential for gold mineralization at depth, through a drill program,
On November 13, 2018, the company announced that results from four metallurgical samples, taken from a 50 kg channel sample, returned high-grade silver ranging between 91.2 oz – 186.2 oz. Results are shown below; note the high grades of copper, zinc and antimony. Sampling Results
Source: Company
In September, the company had announced results of 26 of 60 channel samples sent for assaying. Results of the remaining will be announced over the coming weeks.
one sample graded 313 oz/t (9,735 g/t) one sample graded 115 oz/t (3,570 g/t) one sample graded between 20 oz/t (630 g/t) and 30 oz/t (943 g/t) three samples graded between 10 oz/t (311 g/t) and 20 oz/t (630 g/t) five samples graded between 5 oz/t (155 g/t) and ten oz/t (311 g/t) the remainder assayed under 5 oz/t (155 g/t).
Source: Company
Metallurgical samples are to be submitted to three smelters in China to establish pricing agreements for the mine’s concentrates. Historically, mineralized rock was shipped to the Bunker Hill smelter in Idaho, and the Tacoma smelter in Washington. According to management, in recent years, the majority of smelters in the U.S. have closed down, including Tacoma and Bunker Hill, limiting the availability of U.S. smelters, making China a cost effective option.
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Process Improvements
In June 2018, the company announced that a two stage leaching process on a 25 kg sample grading 25.6 opt (796 gpt) achieved almost total recovery (99%+) of silver. This is a very positive development as we had used a recovery rate of just 80% in our initial valuation models.
A key benefit of being a historic producer is that the project has three underground workings, each of which has a portal – namely the upper, intermediate and lower levels. The upper and intermediate levels, leading into the silver rich Sunshine stope and the Big Dog stope, respectively, are accessible via recently rehabilitated portals, where mineralization can be extracted.
Primary Adits
Source: Company
To upgrade mineralization to direct shipping material, the company is planning to use oresorting and Dense Medium Separation (DMS). An ore-sorter was acquired and installed in late 2017. Management believes these two technologies, by significantly removing waste rock, can potentially upgrade material from 20 opt to over 160 opt. The technologies not only lower processing costs, but also require no water, and are environmentally friendly.
Ore-sorting basically involves the separation of the material that contains valuable content from the waste. In 2017, the company had announced that ore-sorting on 3,275 kg (average grade of 2.78 opt) of samples showed a 86% reduction in ore size, and increase in grade to 7.64 opt (275% increase). Tests were conducted using a Steinert X-Ray Transmission Ore-Sorter (XSS) that the company purchased in 2017 for $0.8 million.
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Market Outlook
Steinert X-Ray Transmission Ore-Sorter
Source: Company
DMS removes waste through a gravity concentration technology. Testing conducted in 2016, on a 136 kg sample from the Bayhorse Silver mine, showed an upgrade of 8 times from a head grade sample assaying 3.9 opt. Approximately 90.9% of the material was rejected using DMS. The resulting 9.1% showed grades of 31.1 opt silver, 5.63% copper, and 4.67% zinc. The optimum separation size was estimated to be between 1 mm and 25 mm.
A typical 20 opt rock is likely to undergo the following upgrading process:
An ore-sorter first rejects up to 80% of the waste, resulting in an increase in grade from 20 opt to 80 - 100 opt.
The resultant concentrate is then sent to a DMS – which removes another 80%-90% of waste rock; implying a potential for further improvement in grade to over 160 opt.
We believe that a key positive of ore-sorting, and DMS, is that the company can potentially mine and process ore with a significantly lower cut-off grade.
The strong U$ has impacted prices of most of commodities this year. Zinc suffered the most (down 23% YTD), followed by silver (down 15%), and copper (down 13%). The TSXV is down 17% YTD.
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Source: FRC / Multiple Sources
The following chart shows the YoY decline in silver prices.
Silver Price ($ per oz)
Source: moneymetals.com
We expect commodity prices to strengthen over the next 12 months from a weakness in the U$, driven by slower expected U.S. GDP growth in 2019, impact from tariff’s imposed on Chinese goods, as well as a potential for China to reduce its exposure to U.S. treasury holdings.
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Financials
At the end of Q2-2018 (ended June 30, 2018), the company had cash and working capital of $21k and -$1.36 million, respectively. We estimate the company had a burn rate (cash spent on CAPEX, operating and investing activities) of $294k per month in the six months ended June 30, 2018. According to management, the company’s current burn rate is approximately US$150k per month for mine operations. The following table summarizes the company’s liquidity position:
Source: Company Data
The working capital deficit was primarily because of approximately $1 million in accounts payables / accrued liabilities, and $0.35 million as current portion of the $1.02 million outstanding convertible debentures (12% p.a.). Maturity dates are shown below:
Source: Company
Subsequent to the quarter-end, the company raised $0.60 million of a US$1.10 million convertible debenture financing (12% / 3 years / conversion price of $0.125 per share).
Subsequent to the quarter-end, in July 2018, the company also raised $0.47 million by issuing 4.65 million units at $0.10 per unit. Each unit consisted of a common share and half warrant (exercise price of $0.15 for 2 years).
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Stock Options and Warrants
Valuation & Rating
The company is currently completing a debenture financing for $0.50 million. The current cash position is $0.20 million, and working capital is -$1.19 million.
The company currently has 6.82 million options outstanding (weighted average exercise price of $0.17 per share), and 30.71 million warrants (weighted average exercise price of $0.24 per share). None of the options or warrants are currently in-the-money.
The mine is operating under permitting exemptions, which allows for a production rate of up to 300 tpd. The company is currently mining at 100 tpd, and subject to financing, expects to increase production to 200 tpd by February 2019. Currently, over 1,200 tons of mineralized material has been extracted from the mine to date. Management intends to process this mineralized material by mid December 2018.
Management estimates CAPEX of approximately US$0.4 million to upgrade to a 200 tpd operation. In addition, working capital needs for 2019 are another $3.1 million to mine, and process, 60,000 tons of mineralized material.
Our Discounted Cash Flow model is based on the new resource estimate and 50% of the exploration potential, as shown below:
Source: FRC
Our base-case valuation on BHS is $0.68 per share versus our previous estimate of $0.62 per share.
Source: FRC
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2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Risks
The following table shows our valuation’s sensitivity to key inputs. At the current silver price of US$14/oz, our models indicate a valuation of $0.31 per share.
Source: FRC
We are reiterating our BUY rating on BHS. We expect multiple near-term catalysts for the share price as the company ramps up production and starts to generate cash-flows. Note that the CEO, Graeme O’Neil, owns 7.25 million shares, or 9.3% of the total, which aligns management and investors’ interest.
We believe the company is exposed to the following key risks (not exhaustive):
The value of the company is highly dependent on silver prices. The project does not have a NI43-101 compliant economic assessment. Exploration and development risks. The company may not be able to delineate the resource we used in our valuation models. Exchange rate risks. Access to capital and potential share dilution.
We rate BHS shares a risk of 4 (Speculative).
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