TSXV: AGX | OTC: AGXPF
Location: Peru
Commodities: Silver, Gold, Lead, Zinc
Level of Risk: High
Potential Return: High
Caution: This is a production and development story in Peru, deemed a high-risk venture. However, I am willing to allocate an appropriate amount of my portfolio to this company because, if they execute, this could very well become a top-performing silver junior in the sector.
The Groundwork
Gold broke $2,100, but at the time of writing, neither silver nor the junior mining and exploration companies have caught up. Silver juniors may be the most depressed stocks in the whole sector.
Silver X Mining is a Peruvian-based silver producer with a market cap of approximately C$36 million. This article will explain what you get for that price and why you should consider them if you are looking for a leveraged play to benefit from the imminent move in the metal.
They are a turnaround story. Negative cash flow from operations prompted management to implement a 56-day pause last year in Q3 to reset. They have now provided operational results from Q4 of last year after the restart, and it looks promising. However, the market is still awaiting the financial results. This article intends to show you how they are currently positioned and why this might be the right time to consider them.
Introduction to Silver X
The Huachocolpa mining district in Peru's Huancavelica province, where Silver X Mining owns a +20,000-hectare land package, is renowned for its gold, silver, lead, zinc, and copper epithermal veins, primarily found within Cenozoic volcanic rocks.
The company’s land package comprises over 200 mining concessions, some of which were previously owned by Buenaventura, Pan American Silver, and Peruvian Metals. The extensive size of the properties and the abundance of anomalies enable the company to assert that the Nueva Recuperada project is a silver district. To date, over 500 mineralized veins have been identified.
The company is a silver producer, with current production sourced from their Tangana Mining Unit. The mill boasts a capacity of 720 tpd, yet it is currently processing under capacity. Commercial production was achieved in January 2023, and the mine is currently yielding silver, gold, lead, and zinc.
Despite a successful ramp-up to commercial production in 2022, the company encountered some challenges in 2023. This led to operations being halted from July 26, 2023, to September 19, 2023.
This decision was made by management as the mine required a complete reset. Q3 of 2022 marked their best quarter in terms of AISC and profit, but operational costs have steadily increased since. Coupled with an unexpected drop in grades, the Tangana Mining Unit ceased being cash flow positive. At least the veins they were targeting at the time.
In the July 26 news release announcing the commencement of the operational pause, the company provided a summary of the objectives they aimed to accomplish during that period and beyond, once the mine resumed operations.
– 50% metal throughput increase, 20% cost reduction.
– Accelerated in-fill drilling program.
– Reduction of headcount, rationalization of mine operations, reinforcing its strategic alliance with the main mine contractor
– Wide implementation of sublevel stoping mining method and mill maintenance program
– Negotiation with local communities for the extension of social agreement for a minimum of 10 additional years
Many of these objectives were promptly addressed. Approximately one third of the staff was cut, and on November 16th, Silver X announced the extension of their social agreement with the local Huachocolpa community for another 12 years.
“This extension of our agreement with the Huachocolpa community is a requirement to increase our production capacity from 720 tonnes per day to 2,220 tonnes with an additional 1,500 tpd mill as outlined in the Preliminary Economic Assessment (PEA) published on February 14, 2023.” - Jose Garcia, President & CEO of Silver X
That is another aspect of this story. It's a tale of growth, where the mill currently operates under capacity. Once, and hopefully if, the Environmental Impact Assessment (EIA) is approved, the company holds the potential to ramp up to a 2,220 tpd operation. However, even if approved, the focus will more likely be on the Plata Mining Unit before considering construction of a larger 1,500 tpd mill.
I am firmly planting my flag in Silver X and argue that Q3 of 2023 will mark their rock bottom. We will see if this statement ages like fine wine or spoils like forgotten milk. Regardless, I’m drinking it. It is either a story of a mine closure, or they get their operations sorted out and emerge as a shining example of resilience in the industry.
Silver X’s Financials
Before delving into the exploration and expansion potential, the crucial aspect to consider with Silver X is to examine their financials and operating results, with the most recent financials being from Q3 of 2023.
It's insightful to examine the Q3 financials, especially when juxtaposed with Q3 of 2022, which marked the company’s peak performance. However, Q3 of 2023 presents a less favourable picture, with an operating loss of US$811,498.
Working Capital is calculated by subtracting Current Liabilities from Current Assets:
US$6,260,733 - US$21,270,703 = - US$15,009,970
Thus, the operational pause led to a negative working capital of approximately US$15 million, primarily due to accounts payable and accrued liabilities.
Looking at their current assets, as of the end of September, they only had US$613,377 in cash.
On November 28, 2023, Silver X announced that Triple Flag restructured their royalty, resulting in gross proceeds of US$2.42 million. In their Q3 interim financial statements under note 18, US$1,670,000 was in cash, while the remaining US$750,000 went toward outstanding royalty payments. It's likely that the cash portion from the royalty restructure was allocated to current liabilities and operating expenses.
Notably, Triple Flag merged with Maverix Metals. Maverix originally held a 3% NSR on part of the Tangana Mining Unit. With this new deal, the 3% NSR now spans the entire Tangana Mining Unit. Prior to the restructure, Triple Flag conducted a site visit to the Nueva Recuperada Silver District, affirming their confidence in the project and demonstrating their willingness to invest further in it.
To just go off on a little tangent. It’s worth mentioning the other royalties on the property.
Peru imposes a sliding scale NSR on all precious and base metal production of 1% on all gross proceeds from production up to US$60,000,000, a 2% NSR on proceeds between US$60,000,000 and US$120,000,000 and a 3% NSR on proceeds in excess of US$120,000,000.
This image was pulled from the October 31, 2022 Preliminary Economic Assessment (PEA) and provides a great overview of the royalties and on which claims. Now this map obviously does not factor in the restructured royalty from Triple Flag. The new royalty covers the entire Tanaga Mining Unit, so I circled what I believe is the Tangana Unit, based on this picture below.
It's also worth noting that the company has frequently provided shares in exchange for debt payments, with the last instance announced on February 1, 2023, where they issued 6 million shares at an issue price of C$0.499 per share. The current share price is hovering around C$0.22 and there will be a four month hold period on those newly issued shares.
Taking a closer look at current liabilities, let's refer to the table from note 9 to see what these include.
The main distinction between trade payables and accrued liabilities lies in the nature of the obligation. Trade payables stem from purchases made on credit, whereas accrued liabilities result from expenses that have been incurred but not yet paid.
I want to take a brief moment to touch on Peru, as many of you may perceive this company as even more high-risk due to its operations in this country.
Having lived in Peru for over a year now, and with a wife who is a born and raised Peruvian, I've gained a deeper understanding of the local business landscape. It's important to note that the vast majority of the workforce operates informally, which contrasts significantly with my experiences in Canada.
While prompt payment is universally desired, it's worth noting that having current liabilities of 19 million dollars may not be as alarming here, where payment delays of months are more commonplace. While not the ideal system, it has been interesting to observe the nuances of business practices in Peru.
So will the company need to do another financing or seek debt?
I believe so, yes.
They may be seeking more capital based on Silver X's announcement on February 27, 2024, regarding their intention to develop the Plata Mining Unit. This, in my opinion, is a strategic use of capital, especially considering they are currently processing under capacity.
The hub-and-spoke method provides flexibility, enabling them to focus on the high-grade and more confident sections. Part of the reason for the operational pause was the mining of lower-grade ore.
Moreover, having two mines operational allows for a more reliable stream of cash flow, especially during underground workings development or further infill drilling.
Silver X’s Operational Results
Okay, time to review the operational results.
The numbers speak for themselves. In the last eight quarters, Q3 of 2022 was the only period where Silver X recorded a net gain. However, if you refer to the light grey box in the picture above, you'll notice that in 2022, the company’s operations were profitable over 6 months. Additionally, examining the black box, you'll see that they were just shy of profitability for the nine months leading up to Q3 2023.
I wanted to include the following operating metrics to drive home a point. After spending time analyzing the financials, you might wonder, 'Why would anyone want to speculate in this company?'
Referring to the top of the table, you'll notice the comparison of the third quarter in 2022 versus 2023. Remember, 2022 marked the company's best quarter in the last eight.
So, what's different between then and now?
1. In Q3 of 2022, the company processed 31,409 tonnes of ore, compared to only 15,826 tonnes in Q3 of 2023, a difference of 49%. The metals sold also comprised a different mix.
2. For instance, there were 2,205 ounces of gold sold in Q3 of 2022, versus only 394 ounces in Q3 of 2023. However, considering the difference in ore processed, let's calculate how much metal was extracted per tonne of ore processed for the two quarters.
3. The average realized price for the four commodities increased in value over the year, except for zinc.
When examining the two tables above, it becomes evident how crucial rock quality is in mining operations. Specifically, the profitability of Silver X was notably impacted by the quantity of gold in the ore.
But that is also where the opportunity lies. While precious metals comprise around 65-75% of the rock value, there is room for higher-grade ore. It's evident how quickly the rock value can change the economics with even a small increase in the precious metals' price or quantity.
With this information in mind, I can now delve into the Q4 operational results, which were released on February 1, 2024. Here's where you need to read between the lines, especially given the recent market volume.
You'll notice that volume has increased in the stock since that news release. While the average trading volume is around 240,000 shares, recently there have been several days where it reached closer to a million.
So what do I see when I read these production highlights?
We know that the company’s best quarter had an average head grade of 15.49 oz AgEq/t, while the worst quarter was 9.07 oz AgEq/t. With Q4 2023 showing an average head grade of 9.78 oz AgEq/t, we can anticipate that the rock value will not be outstanding, but the economics can still be significantly better than Q3. This is due to the increase in ore processing and the apparent achievement of a solid cost reduction in Q4.
I just wanted to resurface this chart above. The market punished Silver X for having an AISC of US$33.50 per ounce and frankly, not being profitable. They are a results driven story as you can see by their stock chart below.
After they provided guidance on their Q4 operations, you can see an aggressive move from their lows of C$0.16 to C$0.22. I believe the market will soon reward them further upon confirmation of the actual financial results. We know that the ore processed is up 193% from last quarter, and with their cost reduction efforts, the AISC should be significantly lower.
To summarize:
Average head grade: Up 🔺
Ore Processing: Up 🔺
AISC: Down 🔻
One other aspect to consider regarding operational performance moving forward, is the change in Chief Operating Officers (COOs). The team is crucial, and the COO plays a significant role in an operating mine. On June 1, 2023, the company appointed Enrique Garay as COO, bringing nearly 30 years of experience as a senior exploration and mine geologist. But a mine geologist may not have been the right fit for a COO.
Following the restart of operations announced on September 19th, Silver X appointed Freddy Mayor Zevallos as the new COO and General Manager. With over four decades of experience as a mining engineer and significant roles at operations in Peru, including as General Manager at Hochschild Mining and Vice President for Bolivia at Glencore, Mayor's return to Silver X's leadership is noteworthy. It's particularly significant as he previously served as Silver X’s General Manager from 2019 to 2021, bringing a wealth of experience and intimate knowledge of the company's operations.
What’s Next?
We understand that the team is becoming leaner and ore processing is increasing. However, it's crucial to consider the quality of that ore. And it looks like Silver X is in agreement with that statement, having announced that the Plata Mining Unit is next in their line of sight.
Silver X has strategically divided the vein systems within the Nueva Recuperada Silver District into two main units for logistical and operational efficiency: the Tangana Mining Unit in the north and the Plata (formerly Esperanza) Mining Unit in the south.
Located 10 km from the Recuperada site, the Plata Mining Unit boasts some of the highest-grade silver veins in the district.
On June 2, 2022, Silver X provided the market with an updated resource estimate for the Nueva Recuperada Silver District. The three vein sectors highlighted within the red box above are situated within the Plata Mining Unit. It is also worth referring back to the royalty map because you can see that there appear to be no royalties on the Plata Mining Unit, except the national one.
With gold already making significant moves, I personally believe that silver will soon follow suit. As Silver X strives towards profitability by processing ore at Tangana, I foresee a significant boost to their bottom line once they ramp up to the full capacity of 720 tpd and begin supplementing it with ore from the Plata Mining Unit.
Conclusion
Silver X may not be my largest holding, but it's one of my favourite silver stocks. I aim to be leveraged to the price of silver, and low-margin producers stand to benefit the most if silver truly starts to move.
The team at Silver X is dynamic, as evidenced by their tough decision to shut down operations and evaluate necessary changes. We're currently witnessing a period of change, with confirmation that Q4 saw increased average head grades and ore processed, as well as a reduction in costs.
I anticipate operations will continue to improve, and the real payday will come when silver breaks out—a scenario many analysts and experts are predicting, especially considering gold's recent breakout.
This is truly an execution story, being valued justifiably based on operational improvements. I believe we reached the lowest point in Q3 of 2023 and that Silver X has the potential to turn things around and become a profitable company.
Disclosure: I have a beneficial long position in the shares of one or more of the companies discussed in this article, either through stock ownership, options, or other derivatives. I wrote this article without external assistance, and it expresses my personal opinions. I was not compensated for this article, and I have no business relationship with any company whose stock is mentioned in this article.
