In October, we flew to Peru to visit Silver X Mining (AGX.V), the vehicle used to take Minera Recuperada and MMTP public. We were first introduced to the flagship project and the people behind the private company in 2019 and in those past 2.5 years, the company has been able to advance the project on a shoestring budget.
The going-public transaction included a substantial capital raise priced at C$0.60 but unfortunately, the share price hasn’t traded at that level a single day since the completion of the transaction. In fact, the share price is currently trading about 45% lower than the financing price. This could perhaps be an opportunity as the current enterprise value is just C$32M, and Silver X has enough cash in the treasury to fund its growth plans.
Silver X is now an ‘execution’ story. The next 12 months will be very important to see if the company can meet its own production and profitability targets.
The Tangana District: very prolific and in continuous production for decades
During 2017-18, MMTP, the private company acquired by OroX to form Silver X Mining, was able to secure the ownership of the Tangana and Esperanza mining concessions owned by Minas Buenaventura and Pan American Silver. The deal also included a very valuable piece of real estate as MMTP acquired the 600 tonnes per day processing plant and ancillary facilities as well. The plant was reopened in 2018 after Buenaventura placed it on care and maintenance in 2014 and in 2019 and 2020, it processed third-party rock.
The Recuperada project (the entire region is dubbed the Nueva Recuperada mining district by Silver X) is located about 225 kilometers southeast of Lima, but the actual driving distance is closer to 500 kilometers. It’s pretty easy to fly into Ayacucho from Lima (there are several flights per day) and from Ayacucho it’s a relatively easy three hour drive. About 1.5 hours are on paved and well-maintained roads, the final 1.5 hours are on dirt roads where the average speed is substantially slower.
The closest town to the mine site is Huachocolpa, which is approximately 8 kilometers away and located between the processing plant and the Tangana and San Antonio mines. Silver X is currently mining the San Antonio vein (at an altitude of just over 4,200 meters). This narrow vein with an average width of less than a meter is currently successfully mined by Silver X and the rock is being processed in the Recuperada plant.
We should consider the San Antonio mining operations to be the ‘warming up’ phase before the mining operations at Tangana ramp up. Ultimately, more rock will come from the Tangana mine, once Silver X will open more underground faces to get the mineralized rock out. Mining widths will always be narrow (estimated at 0.8-1.2 meters) but mining narrow veins is the bread and butter of Peruvian miners as they tend to be very skilled.
The exploration activities at Tangana have zoomed in on the abundance of veins. The Tangana 1 and 2 veins are currently being prepared for production, but the company has big plans for that area. A cross-cut towards the Cauca vein (where the company recently released assay results from a surface sampling program) should be completed in December and this will provide an additional source of mineralized rock. Eventually, the company will expand the Tangana operations towards the recently acquired Tangana West area.
The mill is currently running below capacity but the combination of San Antonio, Tangana 1&2 and the Cauca vein should be sufficient to rapidly increase the throughput towards nameplate capacity. This also means we shouldn’t expect too much from the company’s financial results in the next few months (the year-end financials will be filed in April 2022), but 2022 will be an important year for Silver X as it will try to establish its profitability.
The recent exploration programs unveiled there’s more than meets the eye in the Nueva Recuperada district
Silver X Mining is currently in the middle of a substantial 25,000 meter drill program. This will help to increase the confidence level in the known and existing resources while it should also result in a substantial resource expansion further down the road.
It goes without saying a sizeable chunk of the exploration program will be focusing on confirming the mineralized zones actually are where they are expected as this will further de-risk the mine plan and near-term production anticipation.
It’s also encouraging to see the company will also drill to expand the resources. As the anticipated throughput will increase to 720 tonnes per day in 2022 and up to 2,500 tonnes per day in 2024/2025, Silver X will have to expand its resource base as the market generally likes to see a resource underpinning a 10 year mine life. This doesn’t mean the entire resource should be easily convertible into a reserve. These types of vein deposits tend to have a reserve life of 4-5 year on a rolling basis, simply because it would be too expensive to drill it out from the get-go. It’s better to establish a reliable resource and complete an infill drill program as the mining activities advance.
The current resource contains 7.3 million tonnes at an average grade of 131 g/t silver, 3.17% lead and 2.04% zinc. Interestingly, copper and gold values were not withheld in the resource calculation. We know there’s copper and gold in the system so this could provide an interesting kicker to Silver X
The resource currently hosts just under 31 million ounces of silver, 513 million pounds of lead and 377 million pounds of zinc for a total silver-equivalent resource of 68.3 million ounces.
While the Silver X management didn’t want to go on record on the potential resource growth, we think it should be doable to increase the total tonnage and amount of contained ounces by 50—75%. The first drill results should be published soon and Silver X expects to publish an updated resource estimate in the second half of next year. Getting to 9-10 million tonnes after accounting for depletion since the previous resource estimate would be a good result.
But it should be clear that a resource update will still be the first step in proving up the value of the Tangana District. There are plenty more veins to be explored on the property and a dedicated exploration program could unlock additional value. However, once the existing resources are underpinning a mine life of 6-10 years, the resources and reserves would only have to be replenished on a rolling basis.
The expansion to 720 tonnes per day is imminent, with more to come
The Nueva Recuperada plant currently has a capacity of 600 tonnes per day and while this would be sufficient if Silver X Mining would only be mining one or two veins, the company obviously has bigger plans. In Peru, it’s relatively easy to expand the throughput of a plant by about 20% as that’s a relatively straightforward process. This permit was recently granted, and Silver X is now working on upgrading the mill to a daily throughput of 720 tonnes per day.
This should happen very fast (it really is a matter of weeks) and at a low cost considering the required upgrade mainly consists of installing a new crushing circuit and some flotation cells. The new crushing circuit had already been delivered on site when we visited the plant, so the company’s promise to fully commission the upgraded circuits by the end of the year aren’t just hollow words.
This means that from January next year on, Silver X will likely be immediately able to process rock at a rate of 720 tonnes per day. It shouldn’t be too difficult to feed the mill as by the time the upgrade to 720 tonnes per day will be completed, Silver X should have opened up access to several veins. Hauling ore from Tangana 1 and 2 seems to be obvious, but Silver X should also already have access to the Cauca vein by the end of this year.
This makes an average processing rate of 720 tonnes per day very realistic for next year. When asked what the anticipated mine production rate would be once Tangana 1 & 2 and Cauca will be mined, CEO Garcia figured it shouldn’t be too difficult to mine at a rate of over 1,000 tonnes per day. That’s a clear positive for two reasons. First of all, this means the mining activities shouldn’t be a bottleneck. Even if there are some temporary disruptions when for instance new faces have to be opened up, it should be easy enough to build up inventory ahead of a temporary lower mine production. In other words, there will be some flexibility.
Secondly, the higher mine production rate could pave the way for one of two scenarios. Silver X could perhaps look into ‘upgrading’ the mined rock ahead of hauling it to the mill. That could have two potential benefits as Silver X could save money on transportation expenses as fewer tonnes would actually have to be transported to the mill (but operating a concentrator or ore sorter would obviously require some operating expenses). But secondly, this also opens the opportunity to ship some of the rock to third-party facilities. The nearby Kolpa silver-polymetallic mine has a mill with a capacity north of 1,000 tonnes per day but isn’t running close to capacity while there are other potential toll milling facilities nearby.
In any case, Silver X is in a comfortable position as accessing more veins will de-bottleneck the project and further de-risk the business plan.
The throughput increase to 720 tonnes per day is just the start. Silver X has initiated the permitting process to further increase the throughput to 2,500 tonnes per day but as this is a more sizeable change to the permits that are currently in place, Silver X basically has to start a new permitting program. That’s now ongoing and will likely take about two years. A decision could be expected by the summer of next year and an upgraded plant could be operational in 2024. It’s not entirely clear where the new plant would be located (as the environmental impact assessment will cover the entire Tangana and Esperanza mining units) and although expanding the existing mill would perhaps be the easiest option, Silver X is likely keeping all options open, especially as it will also apply for permits to expand the tailings facility by 8 million cubic meters.
There still are a lot of moving parts and we’ll likely find out more when the company officially submits its Environmental and Social Impact Assessment report to the authorities in 2022, but one thing is obvious. Silver X wants to increase the scope of its mining and processing operations as fast as possible.
Also keep in mind that applying for permits to boost the throughput to up to 2,500 tonnes per day doesn’t mean Silver X will ‘have’ to build a 2,500 tonnes per day plant. It could for instance opt to build a concentrator at Tangana to reduce the amount of rock that would actually be hauled to the processing plant. We think that in the next twelve months, a lot of trade-off studies will cross the CEO’s desk.
Conclusion
Silver X Mining is an ‘execution’ story. The team of CEO Garcia deserves praise for navigating through the difficult COVID-waters and now it’s up to them to deliver on their promises. The treasury is very healthy after the C$14M capital raise at C$0.60 in April and Garcia sounded adamant when he said the company wouldn’t have to raise more cash anytime soon.
Silver X anticipates generating an EBITDA of around $10M next year and this cash flow will likely be used to aggressively explore the Tangana District. Silver X has more irons in the fire with the Esperanza mining unit located to the southeast of the processing plant and the Coriorrco gold project. But we think the near-term value will be unlocked by the Tangana district so a smooth start-up of the mining activities and mining rates that satisfy the 720 tpd processing plant’s hunger for rock would be preferred.
2022 will be a pivotal year for Silver X Mining as the company should be reaching a cash flow positive stage which will be very helpful to self-fund the expansion to 2,500 tonnes per day. While generating a positive cash flow will be important in 2022, the assay results from the exploration program will be equally important and we can expect a continuous news flow.
Disclosure: The author has a long position in Silver X Mining. Silver X is not a sponsor of the website. We paid the airfare to Peru ourselves.
