We have been following Golden Arrow Resources (GRG.V) for almost two years now and we saw the company transform itself from an early-stage exploration company to an advanced stage developer with in excess of 100 million silver-equivalent ounces on its Chinchillas Silver project. A first Preliminary Economic Assessment estimated the fair value of that project at $98.5M (using a silver price of $22/oz and a discount rate of 8%). However, the company was able to add tens of millions of silver-equivalent ounces to an updated resource estimate which should definitely have an impact on the NPV of the project.
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The background of Chinchillas and the new resource estimate
The project is located in Argentina’s Jujuy province, in the northwestern part of the country. As we reported earlier on, We have been following Golden Arrow Resources (GRG.V) for almost two years now and we saw the company transform itself from an early-stage exploration company to an advanced stage developer with in excess of 100 million silver-equivalent ounces on its Chinchillas Silver project. A first Preliminary Economic Assessment estimated the fair value of that project at $98.5M (using a silver price of $22/oz and a discount rate of 8%). However, the company was able to add tens of millions of silver-equivalent ounces to an updated resource estimate which should definitely have an impact on the NPV of the project.
The background of Chinchillas and the new resource estimate
The project is located in Argentina’s Jujuy province, in the northwestern part of the country. As we reported earlier on, Golden Arrow Resources was able to get this property on the cheap by making less than $2M in payments over four years, as well as committing $1.2M upon the start of commercial production. So basically a $3M ‘bet’ on the Chinchillas land package turned out to what could be one of the best value-enhancing moves in the history of the mining sector in South America.
The project is located in the so-called Bolivian Tin-Silver-Zinc belt which hosts several large mines of which the Pirquitas mine of Silver Standard Resources (SSO.TO; NYSE:SSRI) is probably the most widely known name. This mine produced 8.2 million ounces of silver in 2013 and having an operating silver mine just down the road from Chinchillas will definitely be helpful as it means Golden Arrow won’t have to take the first mover’s disadvantage into account. In fact, the Pirquitas mine might close earlier than expected, and if this would happen before the production start at Chinchillas, Golden Arrow could be able to hire very experienced miners for its own project.
The maiden resource estimate at the project was completed in May of last year, and revealed a total resource of just over 100 million silver-equivalent ounces in the ground, which was much better than we were expecting. A first PEA was based on this resource estimate, but VP Exploration Brian McEwen and his technical team didn’t waste any efforts and immediately went back on the ground for another drill program. This additional drill program has resulted in another (quite substantial) resource increase to almost 165 million silver-equivalent ounces, consisting of 112.5 million ounces of silver and 1.14 billion pounds of zinc and lead using a cutoff grade of 40 g/t AgEq.
The greatest advantage of the resource at Chinchillas is that even if you’d use a much higher cutoff grade like 80g/t AgEq, the project would still contain in excess of 125 million silver-equivalent ounces, of which roughly 90 million ounces would be pure silver. The average silver-equivalent grade would increase by 30% in the indicated category and 42% in the inferred category. This could mean that even if the silver price would remain below $20-22/oz, the company should be able to mine the higher grade zones first to improve the economics of the project.
The influence of the updated resource on the NPV calculation
You might think that adding another 55 million silver-equivalent ounces and 22 million ounces of pure silver isn’t that big of a deal, but we can assure you it’ll have a sizable impact on the calculation of Golden Arrow’s Net Present Value on Chinchillas.
If we use the same production cash costs (excluding silver and zinc credits) as in the original PEA, the netback per produced ounce of silver was roughly $11/oz at a $22 silver price. This means that if the production could get extended with a few years from 12 years to 18 years, this additional amount of ounces would have to be incorporated in the NPV of the project.
At an annual production of 5 million ounces of silver at a cost of $11/oz (again, excluding the base metals by-product credits), the pre-tax and pre-capex undiscounted cash flow would be $55M per year. Using a discount rate of 8% (which is the discount rate used in the PEA), a cash flow of $55M in year 13 would have to be discounted by a factor of 2.71 and would have a value of $22M. The disount factor would increase to 3.99 in year 4 but would still add $13.5M to the NPV. Taking a sustaining capex of $7.5M and a tax rate of 35% into consideration, these numbers would change to $11.3M in year 13 and $7.75M in year 18.
If we add up all discounted numbers, the NPV of the project could be revised positively to the tune of $56M. Keep in mind this is just a back-of-the-envelope calculation, but it shows you how important this resource increase could be for the project, and we are estimating the NPV of the project to be roughly $150M at this point.
Why the market is wrong about Argentina’s risk perception
We have the impression the main (and even only) thing holding Golden Arrow back is the perceived risk of investing in Argentina. The main complaint about the country is the unreliable legal framework, and investors are pointing to the nationalization of YPF a few years ago. And yes, whilst we generally agree that the regime of Christina Fernandez Kirchner has pulled off some ‘unorthodox’ tricks, let’s not forget that a compensation of $5B was offered to Repsol which was accepted by the latter.
That nationalization mainly happened because Repsol was allegedly neglecting its Argentinean business, and Argentina decided to step in to protect the interests of its citizens. As a silver mine won’t be of ‘national interest’ like for instance a large oil business is or the operator of the power grid, the risks of a forced expropriation are close to zero, and we definitely believe the country risk is overstated.
A good example is for instance Orocobre (ORL.TO), a soon-to-be lithium producer, has had a very smooth permitting process without any interference. In fact, the province of Jujuy (which is the province where Golden Arrow’s Chinchillas project is located as well) has an 8.5% stake in the project and thus is incentivized to move it forward. This is a scenario we are also expecting to happen with Golden Arrow further down the road. It’s not unlikely GRG will have to sell a stake in Chinchillas as well, but if that’s what it takes to get a smooth and fast permitting process, it will definitely be worth it. And again, the province didn’t just ‘take’ that 8.5% stake, the original partners on the project can first recoup the capital expenditures of that 8.5% stake before making payouts to the province.
Conclusion
Golden Arrow’s resource update is impressive and this could actually increase the net present value of the project by 50%. As there’s still the additional potential to increase these resources as the deposit remains open in most directions. And if that isn’t good enough yet, there’s a very big chance Golden Arrow might be sitting on a potentially very large low-grade zone as well, as the company has an exploration target of 100-160 million tonnes grading 1-1.25 oz AgEq/tonne on its land package as well.
This means that Golden Arrow Resources is perfectly positioned to build a silver mine which will be viable at a silver price of $20-22/oz, but that there’s an additional leverage to the silver price as it could potentially have between 250M and 350M silver-equivalent ounces on the land package. As the mineralization remains open in all directions, we wouldn’t even rule out there might be as much as half a billion silver-equivalent ounces on the Chinchillas project.
Disclosure: Golden Arrow Resources Corp. is a sponsoring company. Please see our disclaimer for current positions.
