The management of Sierra Madre Gold and Silver (SM.V) has always said they wanted to grow the company. Shortly after coming out of the gate with the former Cream Minerals’ Tepic silver project, Sierra Madre added La Tigra, from Grupo Mexico, to its asset base. The team continued to be on the lookout for promising assets and this culminated in Sierra Madre announcing last week it entered into an agreement with First Majestic Silver (AG, FR.TO) to acquire its past-producing La Guitarra silver mine. The mine was in production until 2018 and was put on care and maintenance by First Majestic and has been maintained by a skeleton crew ever since.
This deal means the project is being reunited with Chairman Greg Liller, who used to be the CEO of the company that owned the project and that was later acquired by First Majestic. This likely means there may be more than meets the eye here as there may be some ‘unfinished history’ with Liller likely still interested in testing his exploration theories.
As the La Guitarra project comes with a permitted mine and mill, this acquisition has the potential to jump-start Sierra Madre’s production plans.
The acquisition of La Guitarra
Before diving into the most recent exploration results and drill results on Sierra Madre’s existing two projects, we should discuss the company’s newest asset. After about a decade, Greg Liller (currently Sierra Madre’s Chairman but formerly Genco Silver’s CEO) is being reunited with an old Genco Silver project.
The company is purchasing the La Guitarra project from First Majestic Silver which has spent quite a bit of blood, sweat and tears (~$100M) on the asset in the past decade after it acquired Genco Silver in 2012.
The rationale for acquiring La Guitarra is quite straightforward: it is the right type of asset in the right jurisdiction and the added bonus is Liller’s history and experience with the asset. Not only is La Guitarra a past-producing asset, there actually is a fully functioning crushing, grinding and flotation facility still on site. The processing plant has a capacity of up to 500 tonnes per day and this will help Sierra Madre to (hopefully) rapidly bring La Guitarra back into production.
The acquisition comes with a historical resource estimate containing almost 17.5 million ounces of silver-equivalent across all categories with about 7.45 million ounces in the measured and indicated resource categories while the remaining 10 million ounces are in the inferred category.
La Guitarra is a silver-gold mine (no base metals) and the silver-equivalent calculation consists of approximately 2/3rds of silver in the measured and indicated resource category while the pure silver represents about 80% of the silver-equivalent ounces in the inferred resource category. While the gold grades are relatively low (1.22 g/t in the measured and indicated category and 0.71 g/t in the inferred category), they will provide a nice by-product cash flow.
First Majestic Silver put the mine on care and maintenance in 2018 as it was no longer profitable, but the company has actually spent a lot of effort in trying to prove up the value at La Guitarra. Since acquiring Genco Silver in 2012, First Majestic completed almost 130,000 meters of drilling in just under 700 diamond drill holes in the subsequent seven years.
It is perhaps strange to see all this drilling (and the additional drilling completed before First Majestic even acquired the project) resulted in less than 20 million ounces of silver equivalent across all resource categories.
We raised this issue with Greg Liller and apparently virtually all of the drilling completed by First Majestic Silver was production and confirmation drilling with very few meters budgeted for actual exploration drilling. The company expects to publish an updated resource estimate in the fourth quarter using the combination of recent drill data and information from historic drill databases. Without drilling any additional holes, the total tonnage of the resource could increase resulting in an increased gold and silver resource. This will still be just the first stepping stone towards fully exploring La Guitarra, as Liller is dying to explore the eastern side of the project. That was his plan over a decade ago before he left Genco Silver and in these past fifteen years minimal exploration was conducted in that area.
While we have an initial historical resource estimate soon to be updated with a NI43-101 compliant estimate, the main element of this acquisition likely isn’t the resource but the infrastructure. There is a permitted (and working) mill on-site while the tailings facility is fully permitted for an additional capacity of over 5 million tonnes (at this moment, the combination of inferred and indicated resources doesn’t even host 5 million tonnes).
According to the Sierra Madre principals, the mill is in good condition. Everything was tested before signing the agreement and the management estimates the total cost to refurbish the mill to be less than US$2M. Considering the mill and mine are fully permitted it should be relatively fast, easy and cheap to bring la Guitarra back into production.
The acquisition terms
Sierra Madre is acquiring La Guitarra in an all-share deal valued at approximately C$45M. Sierra Madre will issue just over 69 million shares at a deemed price of C$0.65. Unfortunately, this also means the transaction will be classified as a reverse take-over so Sierra Madre will likely remain halted in the foreseeable future. First Majestic will have the right to distribute the shares it owns in excess of 19.9% in Sierra Madre to its own shareholders. First Majestic will also be issued a 2% Net Smelter Royalty, of which half can be repurchased by Sierra Madre for US$2M in cash.
Sierra Madre also plans to raise C$10M on the back of this deal. The definitive terms of financing haven’t been announced yet but we can likely expect the financing to be priced at the same level of the deemed value of the share payment to First Majestic (C$0.65). We know the Sierra Madre management is quite allergic to warrants so we expect them to focus on a straight share financing.
Upon the completion of the financing, the share count will likely increase to approximately 150 million shares while Sierra Madre will have in excess of C$17.5M in the bank, allowing it to move forward on all fronts this year.
Drilling is going well on both Tepic and La Tigra
Sierra Madre is simultaneously advancing its two Nayarit projects, Tepic and La Tigra.
Tepic
At the flagship Tepic project, the company released excellent drill results earlier this month. Sierra was able to release the assay results from four more holes and all four holes encountered mineralization. Hole 14 was a very interesting one as it encountered two distinct zones of mineralization. At a depth of just 20.1 meters downhole the drill bit intersected 6.35 meters containing 352 g/t silver and 0.96 g/t gold for a total silver-equivalent grade of 656 g/t while just a little bit deeper, at a depth of just 61.5 meters down-hole, another 6 meter interval was encountered this time with an average grade of 470 g/t silver-equivalent. That interval was predominantly carried by a narrower but much higher grade zone of 2.3 meters containing 1,070 g/t silver equivalent (consisting of almost 800 g/t silver and just under 3.8 g/t gold).
As all four holes encountered mineralization, Sierra Madre’s drill program is very consistently hitting the veins at Tepic exactly where it expects to hit them. That by itself is an art as you can see the average width of the mineralized intervals is just 1.5-6.3 meters so it wouldn’t be too difficult to actually miss the mineralized zones. An additional bonus is the good understanding of the structures as Sierra Madre claims the true width is expected to be at least 90% of the reported intervals.
La Tigra
Subsequent to completing the Tepic drill program, the (two) drill rigs have now moved to the La Tigra project where a maiden drill program is ongoing. Although the rig has already started drilling, Sierra Madre reported on the assay results of an underground trenching program at La Tigra where 154 channel samples were taken from the Level 200 area of the El Tigre mine.
The company also completed a few more surface trenches at La Tigra which also yielded good grades (although mainly gold-dominant).
La Tigra is currently being drilled by two rigs but one of those will soon be swapped out for a bigger rig better suitable for drilling at depth. Meanwhile, the team will work on the 300 level of the historical mine to complete an additional channel sampling program and to further define and refine drill targets.
Just a few weeks ago, Sierra Madre reported the assay results from the first three holes drilled on the project. All three holes intersected mineralization with varying results but there is one common theme: the mineralization comes very close to surface. In hole 001 for instance, drilled on the El Camino zone, mineralization starts at surface with 4.5 meters containing 0.92 g/t gold-equivalent within a wider interval of 9 meters containing 0.58 g/t gold-equivalent. The grade is low, but the strip ratio on this particular section would be zero.
Hole 002, drilled on El Tigre North, encountered 5.1 meters containing 2.52 g/t gold-equivalent (including 2.3 meters of 3.99 g/t gold-equivalent) while the third hole of this drill program intersected a thick interval of 32 meters at the El Tigre mine.
The 32 meter interval contains an average grade of 1.05 g/t gold-equivalent which was fueled by a series of narrower but higher grade intervals such as 4 meters of 3.04 g/t gold-equivalent and 4.45 meters of 2.82 g/t gold-equivalent.
This means the average grade in the 23.55 meters outside of these higher grade zones was just under 0.38 g/t gold-equivalent. That’s low but as the mineralization starts at surface, it would very likely meet the cutoff grade for an open-pit gold-silver deposit like this one. Also keep in mind the original expectation for the La Tigra project was to encounter mineralized areas that are about 10 to 12 meters in thickness so encountering a 32 meter interval is great while the two 4 meter intervals are good enough as well. And keep in mind these are just the very first three holes drilled at La Tigra and as Sierra Madre’s surface exploration program has confirmed, there is a 3.5 kilometer long structural corridor at La Tigra which will now likely be systematically drill-tested.
One of the rigs at La Tigra has now moved back to Tepic which means both exploration projects will now be drilled simultaneously.
The La Tigra exploration results have been very satisfying and there’s little doubt the company will continue to make the payments to earn full ownership of the project as it staked even more concessions in close proximity to La Tigra.
As per the La Tigra option agreement, a next tranche of US$112,500 is due in June (and December) of this year and there’s no reason for Sierra Madre to walk away. We now fully expect the company to complete its earn-in agreement and make all cash payments to the vendors when they are due. Keep in mind the US$1.5M in total payments are payments related to the right to explore. This doesn’t mean Sierra Madre will end up with full ownership of the property after making all cash payments.
One of the additional requirements is for Sierra Madre to complete a NI43-101 compliant resource estimate on La Tigra. If that estimate contains in excess of 1 million ounces gold, non-equivalent in measured and indicated categories, the vendor has the right to form a 51/49 joint venture with Sierra Madre with SM owning the 49% stake. And in any case (independent from reaching the resource threshold) the vendor may elect to transfer full ownership of La Tigra to Sierra Madre in return for a 2.5% NSR (of which the first 1.5% can be repurchased for US$1.5M and a subsequent 0.5% can be repurchased for US$1M).
Sierra’s financial position is still pretty strong
The financing to be completed on the back of the La Guitarra acquisition should not be seen as a sign of weakness but as a sign of strength. Sierra Madre raised quite a bit of cash when it went public and as of the end of the first quarter, the company still had a positive working capital position of approximately C$9M, with about C$8.7M in cash. And as the acquisition agreement for La Guitarra does not include any cash payments, Sierra Madre’s cash position would have been sufficient for all the planned activities this year.
The C$10M financing should be seen as taking advantage of an opportunity. It’s easier to raise equity when it’s attached to a special event and buying a past-producing mine with infrastructure on-site is an excellent example of such an event.
Sierra Madre also still has about 1.95 million warrants in circulation that are expiring in October. These warrants have an exercise price of C$0.50 and will bring in an additional C$975,000 when they are exercised.
Conclusion
Sierra Madre Gold and Silver has said from the beginning it didn’t want to be a one-trick pony and that it had plans to grow the asset base. Just two months after completing its listing in Q2 2021, Sierra Madre already added the La Tigra project as secondary asset. Identifying good assets and negotiating acquisition terms takes time, but the acquisition of La Guitarra could be worth the wait. It will now be up to Sierra Madre’s technical team to do where the First Majestic people failed: making sure La Guitarra becomes a profitable silver mine. This acquisition has the potential to jumpstart Sierra Madre’s development plans.
While the company will remain halted for the foreseeable future as the transaction with First Majestic Silver is being completed, exploration activities on both La Tigra and Tepic will obviously continue and Sierra Madre Gold and Silver will likely be able to continue to work on all three fronts.
Disclosure: The author has a long position in Sierra Madre Gold & Silver. Sierra Madre is a sponsor of the website. Please read our disclaimer.
